Business

“Expensive Awakenings:” States Step Up Cannabis Compliance and Enforcement

By Willis Jacobson

After cannabis allegedly brought home from work by a Las Vegas budtender ended up in a school attended by one of the budtender’s underage housemates, Nevada regulators were spurred to action.

Although that 2018 incident was self-reported by Gravitas Nevada, the dispensary at the center of the case, the Nevada Cannabis Compliance Board launched its own investigation that culminated last month. Among other findings, the board reported discovering that employees at the dispensary had been falsely reporting packages of gummies as destroyed and that disposal and other tracking information provided by the business was either incomplete or inaccurate.

As a result, the state recommended levying $52,000 in fines against the business, as well as revocation of both its REC and MED licenses and a 10-year ban on reapplying.

While that case is still pending – it is unclear if Gravitas is appealing; a call to a number listed for the business went unanswered Tuesday – it represents how regulators have increasingly flexed their muscle in recent months to catch up with alleged rule-breakers.

Operators should expect that uptick in enforcement activity to continue, according to industry advisers who stress the importance of compliance as the industry’s growth brings on increased scrutiny.

“It takes a lot of time and money to get a license. It’s very easy to lose that license,” said Griffen Thorne, a California-based attorney with the Harris Bricken law firm.

“I think [early on], the agencies were trying to figure out how to do their jobs and how to get people licensed,” he added. “The further down the path we get, the more they’re going to have to do to make sure people follow the rules. From their point of view, if they don’t start ramping up enforcement, it’s a signal that it’s OK to violate the rules.”

‘Compliance as a way of life’

The Gravitas Nevada case is one of several recent examples of the Nevada Cannabis Compliance Board recommending heavy fines and/or revocation of licenses. Regulators with the California Bureau of Cannabis Control also raised eyebrows this year when they accused the Kushy Punch brand of running an illegal manufacturing and distribution operation alongside its legal one.

California regulators are seeking a maximum of nearly $500M in fines in that case.

While that case stands out for its potentially massive financial impact, Thorne said he expects regulators to start targeting smaller operations, as well, for infractions that most might think are mundane.

A dispensary owner who isn’t keeping proper records or whose employee admitted an underage patron might not be persuaded into compliance by those larger cases, Thorne said, because he or she might assume their violations aren’t “that bad.”

“I think it’s a mistake to think like that because we’ve seen instances across [California] where people have gotten in trouble for less than that,” he said.

Jenny Germano, the founder/CEO of Colorado-based ICS Consulting, which provides compliance support for cannabis businesses, said she also expects enforcement to tick up as the industry moves past its “educational” phase.

“I see these new emerging states coming online being tougher right out of the gate because they have the existing context to do so,” she said.

It’s because of that, according to Germano and others, that a commitment to compliance is critical.

Germano, who has been involved as a worker and then later as a consultant in the legal cannabis industry since 2009, said ensuring proper compliance should be atop any cannabis company’s to-do list, as “without compliance, you have no business.”

Chris Cahill, a senior consultant with the BeGreenLegal consulting firm, agreed.

“We stress ‘Compliance as a Way of Life’ as the only way they will survive, just like a pilot sees safety when flying,” he said. “But what we really try to pass along, is that a compliant and well-thought-out workflow gives the client the best chance to be profitable, expand and at the very least stay open for business. The opposite is a hurricane of destruction, sapping all the funds and energy from the operation in an instant.”

‘Expensive awakenings’

Some types of compliance violations are more common than others.

Germano, with ICS Consulting, said she regularly finds issues with inventory management, like not having accurate inventory counts, and problems with measurement variances or wasting methods among dispensaries.

For all license types, she said businesses commonly have outdated or incorrect state-required signage for restricted areas.

“I think a lot of ‘out of compliance’ issues can happen due to something like a change in management or ownership, or a rule change and they have not caught up to it yet because the staff is overwhelmed,” she said. “And I also think lack of training is one of the biggest contributors.”

Cahill, with BeGreenLegal, said most of his clients have been new startups, rather than legacy operators. Those new operators, he said, seem especially motivated to stay compliant, since they typically must expend more time and money to get off the ground than a legacy operator.

Those legacy operators who have been lulled into a false sense of security by the lack of enforcement action to this point, he said, “are going to be in for some rude and expensive awakenings.”

“Habits are hard to break and the new regulations don’t always seem logical, necessary or worth the hassle,” he said.

Thorne, with Harris Bricken, noted that not having compliance “baked into the operational core of a business” can have dire consequences.

In California, for example, a retailer making less than $500,000 in gross revenue per year can be fined up to $5,000 per infraction. A retailer with more than $6M in annual gross revenue can see those fines escalated up to $114,000 per infraction.

That means something as seemingly minor as failing to get a shipping manifest from a supplier can result in five or more individual violations and cost a small business $25,000 or more in fines.

Cannabis businesses also have to be particularly careful, Thorne said, as operators in the industry commonly report their competitors for violations, even if only to gain a competitive advantage.

This means companies need to be wary of former employees turning them in or sharing their noncompliance information with competing companies.

“There’s really no way to mitigate the potential for an enforcement action, except to follow the rules,” he said. 

Thorne encouraged business owners to be proactive about obtaining resources, if needed. He hopes regulators will be more willing to work with operators as they continue to increase enforcement efforts.

“I think the agencies eventually will realize that there’s a lot of businesses out there that are struggling with rules, not because they’re bad people but because it’s complicated and they may not have operated before in a regulated industry,” he said. “Hopefully that’s something the agencies will take into account in future enforcement efforts – the good-faith efforts to mitigate any potential harm.”

“But for the time being, we really don’t know what the future is going to hold,” he added, “so the best path is to just do whatever you can to make sure the rules are followed.”

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