Cannabis: Bribery and corruption risks in a new frontier

5 minute read
06 April 2020

The expected significant impact of COVID-19 on Canada's economy represents a perfect storm for the emergence of fraud and other criminal behavior within Canada's growth industries, especially where economic survival is threatened and incentives combined with opportunities may lead to decreased adherence to the "right" way of doing business.

When it comes to being early adopters, innovative, entrepreneurial go-getters are usually the first to pursue new opportunities. While this usually attracts people who are more risk tolerant, it can also create a blind side to possible challenges and pitfalls, especially in industries where companies have to rely on agents or third parties to obtain licenses or undertake operations.

This has been especially true of the legalization of cannabis, where new laws are being tested in an industry which has not traditionally been subject to government oversight and regulation. As in any new industry finding its feet, where the rules may not be clear, there are risks entrepreneurs may fail to follow them.  

Recent experiences in the Unites States may be useful as lessons learned to the cannabis industry in Canada. For example, in late 2019, the FBI announced an investigation into suspected corruption involving Sacramento, California businesses alleging the payment of bribes to city officials in exchange for cannabis license approvals and other favorable treatment. The investigation came about after officials granted eight dispensary permits to a group that includes a Ukrainian-born businessman indicted by the US for allegedly violating federal campaign finance laws.

The California probe comes on the heels of various other US-wide cannabis-related bribery investigations, including charges against a local mayor in Massachusetts for allegedly receiving $600,000 in bribes from four business owners to win support for the issuance of cannabis licenses.

While no similar RCMP or police investigations have been announced in Canada to date, these investigations serve as a good reminder that all Canadians and persons in Canada are subject to Canada's Criminal Code and the Corruption of Foreign Public Officials Act (CFPOA), both of which interdict the payment of bribes or conferring any type of benefit for a public official, whether at home or abroad.

Indeed, since cannabis was legalized in Canada, the industry has pursued new and innovative ways to grow its product, including by seeking opportunities for growth (pun intended) abroad where land is fertile and the costs of production lower than in Canada. Many of these jurisdictions require the company to obtain the proper registrations and introductions, often through the use of a local agent.

While the extractive industry has been familiar with the rules and best practices surrounding the use of agents abroad, this is new territory for many Canada-based cannabis producers.

Agents present unique legal and reputational risks, not the least because companies have often been found guilty of corruption through actions of their agents.

In order to ensure your growing cannabis company does not end up in the crosshairs of an investigation, whether in Canada or abroad, here are a few tips for managing agents in your growing business:

  • Properly vet the agent:
    • they should not be a public official or living with one (e.g. the spouse of a senator);
    • they should provide you with a curriculum vitae that demonstrates that they have the skillset required to perform the tasks assigned to them.
  • Fees should represent market rates: any fees charged by agents should be commensurate with the local economy and paid to them or their bank account directly (not to a third party).
  • Paper the expectations: establish a clear agreement on eligible and non-eligible expenses and all invoices reviewed for legitimate disbursements. Petty cash or other "slush funds" should be avoided.
  • Be clear on your expectations: when is the agent acting on your behalf and what kind of instructions have you given them in terms of their interactions with public officials. Entering into a contract with the agent which includes anti-corruption language and the right to audit their finances makes those expectations clear.

While the above list is not exhaustive, it is a good starting point for mitigating legal and reputational risks when entering a new market and using agents to do so. Your company should also establish an anti-corruption and a gifts and entertainment policy and impose those obligations on employees as well as contractors and agents to ensure a consistent approach to doing business in Canada and abroad.   

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.