Cannabis Security Clearances in Canada – Current Issues and Practical Implications for Industry Participants

The factors Health Canada may consider for denying a security clearance are both broad and vague, encompassing a wide variety of law enforcement information, including non-conviction police records and investigations where no charges have been laid.

Moreover, some listed factors contain ambiguities. For example, the Cannabis Regulations hold that Health Canada may consider “associations” with individuals involved in organized crime, fraud, corruption of public officials and counterfeiting or laundering the proceeds of crime. Yet, it is unclear what is meant by an “association.” “Association” could include uncorroborated allegations, distant acquaintances, former colleagues or being “carded” in a high-crime neighbourhood. As detailed below, in Lum v. AG, the Federal Court ruled that Health Canada must now explicitly state how a criminal “association” is linked to an unacceptable risk to public health or public safety when denying security clearances.

If Health Canada intends to deny a security clearance application, the individual applicant is notified and may, within 20 days, make a written representation as to why the security clearance should be granted. As the Federal Court recently made clear, Health Canada has no obligation to follow up with the applicant or permit an applicant to make any subsequent additional written representations.

How long do security clearances take?

The processing time for individual security clearances varies depending on a number of factors. An individual’s geographic location, including country of birth, country of residence, citizenship and history of international travel, can have significant impacts on the RCMP’s ability to gather and verify the necessary information needed to assess an individual’s risk.

Canadian citizens who have lived in Canada most of their lives, who may have held government positions at the municipal, provincial or federal level, or have previously been granted security clearance in another role, are amongst the quickest to receive security clearance - in as little as two to three months.

Foreign applicants and/or any individual who has spent 90 or more days travelling, working or residing in a specific country outside of Canada within the last five years must obtain a foreign police certificate. If a security clearance applicant is a citizen of a foreign country, an out-of-country verification is needed. The foreign applicant must initiate the security clearance by obtaining their fingerprints in their home country and securely transferring them to Health Canada. Depending on the willingness of the country to cooperate, delays in the security clearance process could occur. Additional challenges are associated with individuals with a history of residing in multiple foreign nations. Such individuals who are non-Canadian citizens with convoluted residential/travel histories can experience some of the longer lead times observed - up to a year or more.

Recent Court Challenges

In the past year, at least four cannabis company executives have filed suit against the federal government after being denied security clearances, despite having no criminal record. In all of these cases, applicants were denied security clearance because of “associations” with criminals or criminal organizations.

The first of these cases to be heard at court involved Kan Paul Lum, the owner of Grun Labs, Inc. Though Mr. Lum has no criminal record, a background check revealed that he is also director of 1045158 B.C. Ltd., a corporation in which a co-director’s spouse is a “known Asian organized crime figure.” Health Canada denied Mr. Lum’s security clearance on the basis that Mr. Lum held an association with someone linked to organized crime.

In Lum v. AG, the Federal Court quashed Health Canada’s decision, sending it back to the agency for further consideration. Justice Strickland found that Health Canada’s decision was unreasonable because it failed to disclose how the nature of Mr. Lum’s association with someone linked to organized crime amounted to an unacceptable risk to public health and safety. In other words, Health Canada cannot deny a clearance simply based on an applicant’s association with crime; it must also demonstrate how that association might constitute a risk to public health or public safety.

From this ruling, it appears that Health Canada must explicitly explain the link between the applicant’s activities and/or associations and the increased risk to public health or public safety. If Health Canada does not describe this link, this may provide grounds on which to challenge a federal decision not to grant a clearance.

Practical Implications

Prudent cannabis companies should have a strong understanding of the complex and technical security clearance process and its requirements. Without a security clearance, a cannabis company is unable to legally access the regulated recreational and medical cannabis markets. In this regard, prudent cannabis companies should consider the following:

• Plan ahead and apply early: While the length of security clearances may vary, in some cases, the process can take up to a year or more. Delays could make the difference between a successful market entry and failure.
• Understand the background of key individuals: Prior to applying for security clearances, prudent cannabis companies should know the background of key individuals and perform preliminary background checks where appropriate. If these individuals have prior criminal records, they may have difficulty obtaining security clearances. Those convicted of simple possession of cannabis may apply for a pardon. However, no pardons will be granted for those convicted of possession for the purposes of trafficking or exporting, producing cannabis or equivalent offences under the National Defence Act. Prudent cannabis companies should note that independent police checks are often not as in depth and may not yield the same results as the RCMP assessment in the security clearance process.
• Prepare responses as to why you should be granted security clearance: Individuals should understand the decision-making process behind the granting of security clearances. In the event that Health Canada issues its intention to deny a clearance, individuals should be prepared to provide a compelling written response with evidence as needed. As Lum v. AG demonstrates, applicants may have grounds for a court challenge when Health Canada provides insufficient reasons for denying a security clearance.
• Know the validity period’s end date: For each individual security clearance, Health Canada must establish a validity period of no more than five years. Health Canada determines the length of the validity period by considering the applicant’s risk to public health and public safety. Prudent cannabis companies should determine the validity period for each key individual and re-apply for a security clearance early. If a validity period expires while an individual awaits a renewed security clearance, and if they are not replaced with a security cleared alternate, that individual’s company may be operating outside the scope of its licence, attracting legal and financial risk.
• Obtain security clearances prior to M&A closing: A merger or acquisition transaction will likely change the list of key individuals who require security clearances under the cannabis licence. Prior to closing, purchasers and vendors should ascertain which individuals will require a security clearance and obtain the necessary clearances. If the transaction closes and any key individual’s security clearance is not obtained, the cannabis company will be operating outside the scope of its licence. Security clearance applications should be conducted early in the transaction process. Waiting too long could result in costly delays and possibly, termination of a deal. New licence holders should also provide five days’ notice to Heath Canada regarding the replacement of key individuals with other security cleared individuals, and/or receive Health Canada’s special approval when replacing quality assurance persons or their alternates.

Conclusion

The federal government’s cannabis regulatory scheme attempts to maintain a delicate balance. It proposes to engender a strong legal cannabis regime by encouraging individuals from the illegal market, all while mitigating the risk of involving organized crime and other criminal activity. Cannabis security clearances are where two of Health Canada’s objectives collide, as some key individuals with the requisite expertise are denied security clearances based on direct or indirect associations with organized crime. The security clearance process is both complex and nuanced, giving Health Canada the power to consider a broad and ambiguous swath of factors at its discretion. Through Lum v. AG, the Court has clarified that Health Canada must explain how these factors amount to an unreasonable risk to public health or public safety when denying security clearances. Still, clearances remain necessary for receiving and maintaining cannabis licences and accessing the legal cannabis market. Failure to obtain a clearance on the first attempt will result in long, costly delays, leaving companies at a competitive disadvantage should they eventually reach the legal market. To better ensure success, prudent cannabis corporations should understand all requirements of the security clearance process and prepare accordingly.

*Co-authored by Lucas McCann and Sherry Boodram, CannDelta Inc., with the assistance of Ben Mayer-Goodman, Summer Student at Aird & Berlis.