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Smoke in our Eyes: Cannabis and Accounting Services

canabisBy Rickard Jorgensen, FCII, ARM, ACIArb.

Coverage for firms that provide services to cannabis growers, dispensaries and related activities has been a frequent question to the CPAGold hotline and our agents.  The marijuana related businesses require the expertise of a skilled CPA and to help pay their (not insignificant) taxes and comply with local business practice.

However, professional liability coverage for CPA firms for claims arising from services to marijuana related businesses has been, and continues to be, a bit of a gray area.

The law concerning marijuana related businesses is in conflict.  Certain States like California, Washington, Colorado have de-criminalized cannabis.  Other States are either following suit or are poised to join the ranks in the near future.

Federal Legal position.

But, the current administration in Washington, DC, has taken a contrary position and the previous Cole memo from the U.S. Department of Justice memo concerning its federal marijuana enforcement policy has now been replaced with a more aggressive position. AG Sessions walked back the feds position (which could best be described as “turning a blind eye”). Most recently, the AG rescinded the Cole memo, which urged federal prosecutors NOT to use department resources to prosecute people and businesses that were compliant with their own state marijuana laws.

As heavily regulated businesses, insurers must be in compliance with both Federal and State laws.  When these laws are in conflict the insurer is in a tough spot.

State Boards

Additionally, in conjunction with NASBA, the AICPA has provided guidance.  A copy of the sample of current board positons is available here.  The consensus is that performing professional services for clients in the marijuana industry does not create a breach of professional rules of conduct and long as the firm is operating within the bounds of State law.  But the conflict between State and Federal law does uncertainty about the creation of an exposure to the CPA for a prosecution for aiding and abetting a criminal enterprise.

The insurance question

Most insurers have been silent about the issue of professional liability coverage for services to marijuana related businesses and rely on the policy wording as written.  However, there are certain exclusions in the policy which may give rise to concern.

The most important exclusion [1] {2] may be:

This policy does not apply to claim(s):

 Based upon or arising out of, or relating directly or indirectly to:

 a. Any insured committing any intentional, dishonest, criminal, malicious or fraudulent act or omission;

The above exclusions will not apply until a final adjudication establishes a., b., or c. above.

NB My underline.

Federal RICO and Anti-Money Laundering (AML) statutes are two immediate threats to CPAs that choose to become service providers marijuana related businesses. CPAs accepting money for their services from an enterprise that is illegal under federal law could be violating federal anti-money laundering laws. That means CPAs could be exposing themselves criminally. AML laws have long arms. Giving business advice, providing tax services, or business management services for owners of cannabis operations could all be considered complicit behavior.

Insurers’ exposure to prosecution

In addition the professional liability insurer, as a risk partner to the CPA faces the same exposure.  Let’s take that one step further: Insurers accepting money for premiums from CPA who were paid with proceeds from cannabis operations could arguably have helped launder the cannabis money – that would be a MAJOR problem for an insurer!

Similar concerns arise with regards to Racketeer Influenced and Corrupt Organizations (“RICO”) Laws. Again, broad reach means insurers could be pulled in right alongside CPAs  and their clients. Would the federal government go so far as to freeze the assets of insurers ensnared in AML or RICO investigations? Probably not, but who would want to be the test case for that?

As of now, the law is just too unsettled to give most insurers and underwriters any comfort, and the risk/reward factors don’t add up.

Hopefully, that provides you with a better understanding of why most insurers have been silent on the issue of professional liability coverage for CPAs  providing professional services to the cannabis industry.

This blog is based upon a series of article by Duane Crone of Mainstreet insurance of Seattle Washington.

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[1]       Hanover 915-0001 02 12 Accountants Professional Liability Policy Form v1.2 10.22.38

{2]       By way of contrast, the fraud exclusion in the CPAGold™ provides defense coverage for criminal acts.  The clause states:

    1. any criminal, dishonest, fraudulent or malicious act or omission, deliberate misrepresentation, or any intentional or knowing violation of law; however, we will defend you under this Policy until it is determined by any trial verdict, court ruling, regulatory ruling or legal admission, whether appealed or not, that you did commit such a dishonest, fraudulent, criminal or malicious act or omission, or deliberate misrepresentation, or intentional or knowing violation of law.  This exclusion does not apply to any of you who did not intentionally participate in committing such act or had no knowledge or reason to believe such an act, omission or violation of law was being committed, and who made proper disclosure after obtaining personal knowledge of such conduct;

NB My underline.

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Jorgensen & Company are not attorneys and do not offer any form of legal advice. Consult with appropriately qualified local counsel for more assistance. Rickard Jorgensen is President and Chief Underwriting Officer for the CPAGold™ program and may be contacted at (201) 345 2440 or rjorgensen@jorgensenandcompany.com