Matthew Queen, general counsel at Venture Captive Management, discusses the current state of the cannabis market and why now is the perfect time to get involved
About a year ago, to my surprise, I realised that I wanted to become a felon. Not just any felon, I wanted to be a money launderer. Crime pays. The numbers were undeniable: revenues in the cannabis industry were at historic records. Lloyd’s of London exited the cannabis market in 2015 leaving a gaping hole in the market. There was a multibillion dollar industry without any meaningful risk solution. Cannabis was the single biggest opportunity for captive professionals.
Cannabis is a challenge. As the newest drug in the field, there are only a handful of actuaries and underwriters who understand cannabis risks. Moreover, there are more unknowns than knowns. Innovative attorneys are developing new theories of liability to throw at dispensaries, manufacturers, and laboratories. Pricing premiums is hard work. Estimating rates in a black box is even harder. Consequently, the insurance options that are available are very expensive.
Coverage, to the extent it is available, is of dubious value. The courts vary wildly in their interpretation of coverage disputes. Several insurance carriers have denied coverage for any property claims related to cannabis facilities–even where the insurance carrier knowingly insured cannabis-related operations. These cases resolve unpredictably. For example, a state court in Arizona ruled that a cannabis insurance policy was invalid because it violates public policy. The judge went further and opined that all cannabis contracts are void for violating public policy (including employment contracts, vendor contracts, etc.). In contrast, several other federal courts have upheld insurance contracts insuring cannabis companies and landlords renting to cannabis companies as valid agreements. There is no consistency and a good attorney can only get you so far.
This poses the question, if we have a multibillion dollar industry with terrible insurance options, why are there not more captive players in the game? For that answer, we have to look to our fearless leaders in Congress.
Stunting growth
The consequences of the ‘War on Drugs’ echo through the generations. Cannabis is a Schedule I substance under the Controlled Substance Act. This means that cannabis allegedly has a high risk of addiction and no medical value. As a result, cultivating or selling cannabis constitutes a felony. Further, aiding and abetting the commission of a felon is also a felony. The lines around ‘aiding and abetting’ are fuzzy. Are you aiding and abetting the commission of a felony by running the register at a dispensary? How about if you do the dispensary’s taxes? What about if you issue the cannabis company a general liability policy?
Regardless, the threat of incarceration did little to curb cannabis use. Congress upped the ante by passing the Bank Secrecy Act (BSA). The BSA essentially recruited banks to assist in fighting the drug war by requiring banks to monitor customers’ transactions and report suspicious activities relating to drugs. If a financial institution conducts business with a drug dealer, then the financial institution would be liable for money laundering. Cannabis companies, even state legal cannabis companies, fall within the authority of the BSA. Further, insurance companies are considered financial institutions under the act.
Here lies the problem. Cannabis companies struggle to find insurance solutions because the insurance companies decline to expose their operations to allegations of money laundering or aiding and abetting the commission of a felony.
This issue is a significant impediment to the growth of the cannabis industry. Regardless of state law, banking and insurance is a necessity to do business in most states. There are some efforts in California and Washington to create state-solutions, but these are band aids on gaping wounds. The only solution to this problem literally requires an act of Congress.
Cynics say: “Don’t hold your breath” on cannabis federal action, but the times are a-changin’. Recently, Mitch McConnell, the Senate Republican majority leader, indicated that he wanted to see hemp products (cannabis’s kissing cousin) decriminalised. Further, Treasury secretary Steven Mnuchin has publicly expressed support of laws permitting some banking and insurance solutions for the cannabis industry in states where the plant is legalised.
Pass the legislation by the left hand side
Cannabis legalisation is spreading across the USA. Over half of the states have legalised cannabis in some form and a number of these states are in deep red parts of the country.
As more research indicates that cannabis has a number of fantastic medical uses, such as treating pediatric seizure cases, the political will to oppose cannabis shrinks. While total legalisation of cannabis at the federal level remains a pipe dream, the scales are tipped far enough in favour of pot that the government will take action very soon.
The smart money is here: if the Democrats take the House of Representatives in the 2018 midterm elections, then expect some sort of change in the banking and insurance front for cannabis. Predictions are hard, especially about the future, but a significant number of Democrats are running on pro-marijuana platforms and the base heavily supports broad legalisation. A simple rule change permitting cannabis companies to use financial services would be an easy bill to sail through the House to please the liberal base and avoid any serious opposition.
Hindsight may be 4/20
If so, so what? Even assuming cannabis is, in fact, the next great thing, what is the captive insurance industry to do? The reality is that the moment financial regulations loosen up around cannabis the major carriers are going to enter the industry. These players will undercut all competitors to grab market share at any cost. That said, the cannabis companies are more likely to do business with people they know.
Now is that time to get to know the industry, learn the risks, and meet potential clients. It is hard to make a cannabis captive in the current regulatory environment. Even if you can get a client of sufficient size and you convince yourself that you are not concerned about prosecution for money laundering, the banking issues will keep you up at night.
But these issues will fade. The cannabis industry is enormous and California is now on track to become the single largest cannabis market on the planet. Congress will not be able to ignore the pressure from the people, and more importantly, the lobbyists, past 2019. The time to enter the cannabis industry is now. The green economy is primed to explode and will transform large segments of the economy, including pharmaceuticals, alcohol, and recreation
