Our team, and in particular our colleague Iva Todorova, was recently contracted to provide a opinion on the matter of whether a CBD-related business could be onboarded under the applicable AML legislative framework.
We decided to share our findings, which may be useful for financial institutions, investors and businesspersons that are contemplating about entering the CBD business.
On the legal classification of the “Cannabis oil”. A brief summary of the framework in the EU.
Public opinion on cannabis and cannabis-related product is changing rapidly in the past couple of years. While some countries such as the Netherlands have had a lax outlook on the issue (Netherlands moved cannabis’ categorization into the lesser-dangerous drugs om the 1972), most other countries in the EU still follow a more conservative approach. However, following a decade-long debate, the legalization efforts in the USA and Canada have prevailed, sending cannabis and cannabis-related products in the mainstream.
Because of the way the EU is structured, member states have the final say on the approach towards cannabis-related products and their legality. However, there is the issue of Cannabidiol, a product that has, since its inception, been gaining exponential popularity across Europe, which we will present to you in the present article.
Generally about CBD and THC
Cannabidiol („CBD“) is primarily made from the Cannabis Sativa L. plant, which is a variety of industrial cannabis (hemp)[1]. The cannabis plant is made up of almost 500 different compounds from which around 100 are cannabinoids[2]. Cannabinoid is a group of compounds almost unique to the cannabis plant. However, it depends on the compound if the cannabinoid has psychoactive or non-psychoactive effects[3]. On the one side, CBD is a non-psychotic compound and nowadays can be found in various food products and beverages although it is not always legal[4]. On the other side, Delta-9-tetrahydrocannabinol (“THC”) is psychoactive and therefore in the majority of the countries only very small amount of it is legally permitted. CBD has extremely low levels of THC, which is the reason why it is not considered as dangerous as other components of cannabis.
CBD affects different receptors in the brain that are associated with pain relief, moods and unlike THC is not associated with any “high”[5]. In some of the Member States, it is claimed that products, which contain less than 0.2% THC are permitted. However, there is an enormous misconception about the levels of the compound. In reality, the source plant is relevant and if it is grown with high or low THC content[6].
There are two different types of CBD oil – isolated (which is 100% pure CBD, very rare to be extracted) and full-spectrum that has the oil, the wax, other compounds (such as THC) and the chlorophyll[7]. Consequently, the mentioned classification answers the question why the CBD products must not contain certain amounts of THC in order to be legal.
It is worth mentioning the fact that in the European Union (EU), the cultivation of hemp is allowed provided the variety is registered in the EU’s “Common Catalogue of Varieties of Agricultural Plant Species” and the THC content does not exceed 0.2%[8]. However, the regulations have not yet being harmonized and some countries stay in the “grey area”.
EU legal framework
Regarding the EU legal framework, any food product distributed in the EU that contains CBD must always comply with food legislation, notably Regulation (EU) 2015/2283 on Novel Foods, in addition to the general safety principles.
The status of Cannabidiol and other cannabinoids is stated in the Novel Food Catalogue[9], which although not legally binding, is used as a reference by many authorities in the EU for the purposes of the Novel Food Regulation.
In addition, the industrial hemp falls within a number of EU Directives, including: Council Directive 2002/53/EC on the common catalogue of varieties of agricultural plant species[10] (for fibre plants) and Council Directive 2002/57/EC on the marketing of seed of oil and fibre plants[11].
Legal frameworks in the UK, Latvia and Bulgaria
In the following paragraphs, we will take a closer look into the abovementioned countries’ approach towards CBD. We have picked the UK and Latvia as some of the more liberal examples in Europe and Bulgaria as an example of the more conservative approach.
The UK
In the UK, the legal framework is more complicated. As explained above, the source plant is relevant because when derived from a compliant plant, the THC content of the CBD product should contain less than 0.01% THC[12]. A CBD containing product is controlled under the Misuse of Drugs Act 1971[13] (“MDA 1971”) and the Misuse of Drugs Regulation 2001[14] (“MDR 2001”). Under the MDA 1971, cannabis is listed as Class B drug and in the Schedule 1 of the same act THC is also a controlled substance. While CBD is not listed as a controlled substance, it is illegal to grow hemp since CBD producers need a license from the UK Home Office[15]. In addition, in order to sell CBD oil you need either to be a licensed medical distributor or sell the products as a dietary supplement and the CBD product must be properly labelled according to The Food Supplements Regulations 2003[16].
As a former part of the EU, it is legal to grow hemp approved by the EU in the UK if it does not contain more than 0.2% THC. Additionally, the full-spectrum CBD oils must be made in a way that the THC cannot be easily separated from the oil. Therefore, CBD oil is safe only it has been third-party tested, lists of all ingredients and has been bought from a reputable source.
The requirements for selling of some products that contain CBD depend on the category. For example, cosmetics require Cosmetic Product Report for marketed products according to Regulation 1223/2009[17]; vape products should comply with non-nicotine e-liquid Regulation (The General Product Safety Regulation)[18]. As regards to food and food supplements, from 13th February 2020, new products on the market require a validated submission of Novel Food application by 31st March 2021 and if the companies failed to do after the deadline the CBD oil, food and drinks would be removed from the shops[19].
Investing or onboarding CBD companies is a complicated issue though. UK businesses could potentially be exposing themselves to legal risks dealing with cannabis businesses because of the Proceeds of Crime Act. Businesses, subject to regulatory oversight such as payment service providers, credit institutions and similar could also be penalized for failing to file a suspicious activity report when dealing with such businesses. The issue stems from the Proceeds of Crime Act 2002 and in the absence of explicit guidance from the National Crime Agency, businesses in the UK have to take a risk-based approach in any such cases.
Latvia
In Latvia the levels of THC in foods, dietary supplements and beverages should not exceed 0.2% at any point during production. Hence, Latvia follows the general EU law on industrial hemp. In Article 6 of the Law on the Legal Circulation of Narcotic Drugs and Psychotropic Substances and Drugs and Precursors[20] is stated that it is prohibited to grow hemp (Cannabis sativa subsp. Indica), but the production of hemp (Cannabis sativa subsp. Sativa) for industrial and agricultural purposes is authorized. For the production of industrial hemp seed, only certified or officially tested seed of varieties included in the Common catalog of varieties of agricultural plant species of the European Union may be used[21]. As regards to CBD oil – it is legal because it is not explicitly banned and it is mainly used for therapeutic purposed. In Schedule I of the Regulations regarding narcotic substances, psychotropic substances and precursors to be controlled in Latvia[22]are listed the prohibited and especially dangerous substances and it can be observed that while the cannabis is prohibited as a product that has narcotic effect, the psychotropic substances exclude CBD. In the Latvian Penal Code there are certain provisions connected to dangerous substances but as already stated CBD is not classified as narcotic, psychotropic or psychoactive substance and thus it is not subject to criminal sanctions.
Bulgaria
While it comes of no surprise that the country is one of the most conservative ones regarding cannabis, it actually has one of the more liberal approaches to CBD.
The Bulgarian government has decided to bypass the Novel food classification of CBD and has opted to treat is as a traditional food.
However, the extraction of CBD remains a gray area. The Bulgarian Narcotic Substances and Precursors Control Act[23] regulates the use, import, cultivation, export and control of the cannabis. The latter falls within Schedule I of “Plants and substances with high degree of risk for the public health due to the harmful effect from its abuse, which are forbidden for use in the humane and veterinary medicine”[24]. There is no reference to CBD in Bulgarian laws. The only regulation in this regard mentions THC and allows cultivation of cannabis plants if they are contain less than 0.2% THC, have a license by the Minister of Agriculture, Food and Forestry[25] and are intended for fibers, seeds for animal feed or sowing[26]. Therefore, the production of CBD is not entirely allowed. Bulgaria is highly criticized because of its conservative regulation in the sector and that its missing out on valuable business opportunities connected to CBD products.[27]
Conclusion
To conclude, strict rules and fees apply to the cultivation of industrial hemp and only certain varieties of Cannabis sativa can be grown.
In this sense, be aware and always check the relevant legislation of both the home state and the host state (in case of an international transaction), whether you are in the shoes of a financial institution, which is onboarding a CBD business, or you are a start-up that is trying to start offering such goods to end-clients.
In case you are contemplating starting a CBD business, or you are not sure whether you are exposing your business to legal risks when dealing with CBD businesses yourself, PTR&P’s legal team can help you take the best decision!
[1] Katia Merten-Lentz, “CBD Food and Drink Products in the EU: The Newest Hot Commodity or a Regulatory Headache?” https://www.martindale.com/legal-news/article_keller-heckman-llp_2522553.htm accessed 12 March 2020.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] “Is CBD Oil Legal in UK? CBD UK Laws”, https://cannabisherald.co/cbd-oil/legal-in-uk/ accessed 12 March 2020.
[8] CMS Law, “A legal roadmap for Cannabis”, 2019
[9] https://ec.europa.eu/food/safety/novel_food/catalogue/search/public/index.cfm
[10] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02002L0053-20040418
[11] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02002L0057-20170401
[12] Robert Botkai, “CBD in the UK”, https://wslaw.co.uk/insight/cbd-in-the-uk, 13 February 2020.
[13] http://www.legislation.gov.uk/ukpga/1971/38
[14] http://www.legislation.gov.uk/uksi/2001/3998/contents/made
[15] The Extract, „Is CBD oil legal in the UK? The UK’s CBD law explained”, (last updated on 3rd March 2020), https://www.theextract.co.uk/is-cbd-legal-uk/ accessed on 13 March 2020.
[16] Ibid.
[17] https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A32009R1223
[18] http://www.legislation.gov.uk/uksi/2005/1803/contents/made
[19] “Food Standards Agency sets deadline for the CBD industry and provides safety advice to consumers”, https://www.food.gov.uk/news-alerts/news/food-standards-agency-sets-deadline-for-the-cbd-industry-and-provides-safety-advice-to-consumers , accessed 13 March 2020.
[20] Narkotisko un psihotropo vielu un zāļu, kā arī prekursoru likumīgās aprites likums (Likuma nosaukums 06.06.2019. likuma redakcijā, kas stājas spēkā 03.07.2019.), https://likumi.lv/doc.php?id=40283
[21] Law of 11.05.2006, as amended by Laws of 03.05.2007 and 06.06.2019, which enters into force on 03.07.2019. The new version of the second part enters into force on 01.01.2020. See paragraph 3 of the Transitional Provisions.
[22] https://likumi.lv/ta/en/id/121086-regulations-regarding-narcotic-substances-psychotropic-substances-and-precursors-to-be-controlled-in-latvia
[23] https://www.lex.bg/laws/ldoc/2134654469
[24] https://www.lex.bg/bg/mobile/ldoc/2135758694
[25] https://www.mzh.government.bg/bg/uslugi/izdavane-na-administrativni-aktove/registraciya-razreshenie-otglezhdane-konop/
[26] CMS Law, “A legal roadmap for Cannabis”, 2019
[27] For example: https://www.capital.bg/politika_i_ikonomika/bulgaria/2019/08/23/3954080_drusana_durjava