Nasir Pasha, Esq.

Five Rules for Business Transactions in Shades of Grey

Businesses have always faced the question of how much due diligence about a customer is necessary before doing a transaction. Usually, in a business-to-business transaction, that is limited to a credit check for any sizable sale that is financed, or a credit and reference check for any transaction that is payable over time, such as a lease.

But what if an ostensibly legitimate business is a cover for an illegal business?  What is the business risk in leasing office furniture to Al’s Pest Control if Al, himself, poses only minimal danger to insects because he’s a bookie?  What if the transaction is legitimate, but the business client or customer uses it for illegal ends. Service providers, like tax accountants and lawyers have long faced this problem.

Or what if the business is legal under state law, but illegal under federal law?  The latter question just got much more complicated yesterday, with voter approval of recreational marijuana sales in Oregon and Alaska. What is the risk for small businesses in transactions with these enterprises?

There are plenty of arguments, not the least of which is the risk of civil forfeiture, for making the decision to sit out a transaction. Turning business down is a hard choice, however. It’s not why you got into this. For the small business that does not want to pass up opportunity but does want to stay on the right side of the law, here are five rules for minimizing avoidable legal risk.

First Rule:  You do not take CASH PAYMENTS.  Particularly since the expansion of the “War on Drugs” in the ‘80s, the law presumes that cash is the product of illegal activity.  If you take cash, especially in a business-to-business transaction, you may look like a co-conspirator.

Second Rule:  You DO NOT take CASH PAYMENTS.

Third Rule:  Talk to your own business lawyer.  A reasonable business risk in one industry or jurisdiction may not be reasonable in another.

For example, if you manufacture and sell commercial grow lights or sophisticated systems for recycling water in commercial greenhouses nationwide, your enterprise is fairly far removed from the tulips, tomatoes or cannabis that is grown in those greenhouses. The same may be true if your laboratory tests for chemical components in herbs and botanicals or manufacturers and services cashless ATMs.  Nonetheless, it would be a mistake to assume that your risk is nil.  A great deal may depend on your marketing.  Talk to your lawyer to ensure that your choices are targeted and informed.

Fourth Rule:  Remember that the law is pretty good at distinguishing between willful ignorance and actual innocence. Do an amount of due diligence that is reasonable and customary in your industry. Then do a little more. In some jurisdictions, it may be possible to reclaim goods or property seized in a civil forfeiture action, but the burden for proving actual innocence may be quite high.

If everyone in the neighborhood knows that Al runs an illegal bookmaking operation, you will be presumed to know that, too, even if you really had missed the memo. The same is true of your client’s business reputation. If your client and a previous service provider are engaged in suing each other over a situation that may have begun with false representations on the part of the client, stay away.

  • What to do When a Customer Accuses an Employee of Theft

    July 02, 2015

    This is one of those managerial headaches that may make life on a desert island look attractive. You don’t want to lose the customer or expose your business to accusations of wrongdoing, but you also …

  • What Should I Pay My Employees?

    October 21, 2014

    If your small business is about to begin to hire its first employees, you may be puzzled about how much to pay them. If you offer too little, you won’t be able to hire who …

  • How to Avoid Age Discrimination

    November 05, 2015

    Employee Performance Evaluation If you scan through the national newspapers you will find article after article about managers and supervisors who are agonizing over the behavior of employees. Sometimes this agony is brought about by the …

  • Can An Employer Be Held Liable For An Employee's Facebook Post? [e259]

    March 14, 2016

    The guys kick off the week by discussing the lawsuit in Hawaii where an employee posted a defamatory remark about a customer and tried to hold the employer liable. They also discuss the new anti-discrimination and …

  • What to Look for When Buying a Franchise

    March 05, 2015

    Thinking of buying a franchise?  That’s very exciting. For many, franchising is the first foray into owning your own business. As with any business purchase, however, you will want to make sure that you can …

  • Fox News Sexual Harassment Case Highlights the Need for Effective Sexual Harassment Policies and Procedures in the Workplace

    July 26, 2016

    Workplace sexual harassment has been grabbing headlines lately, thanks to charges filed by former “Fox & Friends” co-host Gretchen Carlson against Fox News Chairman and CEO Roger Ailes. Carlson has alleged that Ailes fired her …

  • 6 Habits of Business Owners That Will Get Them Sued

    February 10, 2015

    There are some clients that I know, no matter what advice we give, no matter what we do, they are bound to enter into the courtroom. It is as if they are destined without any …

  • State Mandated Retirement Savings Plans

    July 30, 2015

    Twenty-four states and New York City either are or have very recently considered establishing state run retirement savings plans.  Several of these are modeled on SB 1234, the California Secure Choice Retirement Savings Trust Act. …

  • Nine Legal Strategies to Protect Your Brand

    June 25, 2015

    Perhaps you’re never dreamed of a Google or Facebook-sized business empire – multiple products generating multiple streams of income that seem to semi-magically renew themselves. Something a bit more modest might be fine as well. Whatever …

  • How Much is My Business Worth?

    September 25, 2014

    You have spent a lot of time building your business, but about three to five years ago you began to think about selling, so you have been taking all the necessary steps to position it …

Fifth Rule:  Remain aware of enforcement priorities. Much of law enforcement activity is discretionary. If you ran a hardware store, and the local D.A. had announced an intention to crack down on “tagging,” you would ask for proof of age before selling spray paint to a customer who might be a teenager.

Make the same effort to be aware in a business transaction.  Ample guidance exists, for example, about the U.S. Department of Justice’s eight enforcement priorities with respect to marijuana businesses. As long as you can document your research into your customer’s likely compliance with those priorities, you have a better chance of demonstrating your own innocence.

When dealing with marijuana businesses, you may do business only in those jurisdictions where marijuana sales are legal but, as an additional precaution, you may also want to limit your activities to those states with well-developed regulatory systems, like Colorado.

In the quest to grow your business and get and keep clients, it can be easy to ignore the fact that your client can, in fact, pose a risk to you. Risk avoidance is not a realistic business goal, but risk management is.  With sound legal advice and some rules of thumb relating to method of payment and due diligence about both the client and law enforcement priorities, your business may be able to embrace new opportunities without unnecessary and unwise legal exposure.

Read More