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.
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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.