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.
June 18, 2015
Job seekers hate credit checks. They see it as invasive data collection with only remote relevance to job performance. It has also been argued that credit checks unfairly burden those who have or have had …
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 …
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 …
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 …
October 06, 2015
While Uber may be receiving the lion’s share of the attention on the topic, there has been no shortage of court rulings, IRS audits, and labor decisions on the issue of workforce misclassification. With a …
September 16, 2014
Global sourcing has lots of exciting potential. The recent entry of Alibaba.com onto the global stage along with others such as the FITA Buy/Sell Exchange, Euro Pages and Global Sources seems to presage a new …
November 27, 2014
The Texas Court of Appeals 2013 decision in Nacogdoches Heart Clinic, P.A. v. Pokala raises some puzzling questions about the direction of noncompete law in Texas. It makes sense from a public policy perspective, but …
September 18, 2014
If you are thinking about buying a business, you must have lots of questions. Of course, you should get some help with this process -- from your banker, your attorney, your accountant, and possibly a …
December 16, 2014
Staying compliant with advertising and marketing is simple if you focus on just being truthful and clear with your customers. The rest is just understanding some subtleties on how to navigate the common legal traps in …
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. …
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.