Cannabis business compliance is vital to both a company’s well-being and the industry as a whole. To protect consumers and legitimize the cannabis industry, companies must follow strict guidelines as outlined by their states and local municipalities.
Businesses that do not meet cannabis compliance regulations may lose income and investments, may have to pay hefty fines, and may be forced to destroy their inventory. Some of these budding businesses had to learn the hard way.
California Issues Hundreds of Cease and Desist Letters
Last April, almost 1000 cannabis companies received cease and desist letters from the California Bureau of Cannabis Control (BCC) for failure to acquire the proper permits for cannabis sales and distribution.
Though some simply had to call to confirm their license number was on file, others have been scrambling to attain the proper permits in areas that may not even allow sales or delivery in the first place. Because California state law requires cannabis businesses to gain local approval before issuing state licenses, location really matters.
Banking Restrictions Pose a Problem for Credit Transactions
Cannabis is federally illegal. Banks are federally funded. As such, banks are reluctant to handle any transaction related to cannabis. That’s because banks are required to report any activity that could potentially be related to drug trafficking. This creates problems regarding transactions, employee and vendor payments, taxes payments and employee safety due to the nature of a cash-only business.
However, it’s not just dispensaries and production facilities that face banking hurdles as one Denver-based cannabis consulting firm recently found out. It merely seems working with cannabis companies – not the product itself – was enough for them to have their merchant privileges revoked.
A recent bill proposed by Sen. Jeff Merkley (D-OR) aimed to rectify the problem suggesting that the current system facilitates crime. The bill was declined in June 2018, however, due to concerns regarding confusion between banking institutions and cannabis businesses.
Grey Market Sales Don’t Fly
There are numerous licenses and permits one must attain in order to sell cannabis legally. However, this hasn’t stopped some businesses from trying to move cannabis through a grey area that allows for cannabis exchange without remuneration.
Thinking they’d found a clever way to dodge compliance issues, one Colorado Springs head shop began selling cheap products – say a dollar lighter – at an inflated price then throwing in some “free” weed to thank them for the purchase. The Attorney General stopped the operation and charge the owners for things like tax evasion and money laundering but not before the business walked away with almost $500,000 in illegal cannabis sales.
Tons of Weed Goes Up in Smoke
California’s cannabis industry is evolving quickly which includes its regulatory standards. Last January, the state legalized recreational cannabis sales and modified its testing and packing standards to match. Though companies had six months to get their product up to par, many were unable to do so in time. As a result, many California cannabis companies will have to destroy any remaining, non-compliant product and lose roughly $367 million in the process.
Another problem, of course, is how to dispose of the product while remaining compliant. They obviously can’t burn the weed lest they get the whole town high, so they must lock it in a secured bin where only employees and authorized trash collectors have access to it and must be rendered “unrecognizable and unusable” according to state law. Some cannabis-specific disposal companies also use it to make compost or electricity.
Pot Pesticide Problems in Colorado
People aren’t the only ones who like pot. Pests love the sweet taste of some good ol’ Mary Jane, too, but their presence on plants is problematic for health-conscious consumers. Though state governments are working hard to outline a list of safe pesticide options, this has not always been the case.
In 2015, the city of Denver issued citations to 10 cannabis companies for using banned pesticides on their products and put their plants on hold while the investigation continued. Though growers could continue to cultivate cannabis, they were unable to sell anything until they got the go-ahead from the state. Some plants never got the green light, especially if they contained pesticides like Eagle 20, Avid or Mallet.
Cannabis regulations are constantly evolving, and it is imperative that companies in the industry stay on top of changes. Though it’s unlikely that minor compliance issues will result in federal prosecution, they could still be costly and time-consuming to rectify, and could hurt your brand or bottom line in the long-run.
David Kani is an Orange County veteran high-stakes business litigator with a strong track record of trial victories, favorable settlements, and positive outcomes for clients in Southern California.