Corruption in the Cannabis Industry

It seems the latest corruption scandals in the cannabis industry could be just the tip of the iceberg.

On December 19, 2019, an undercover FBI agent attended a meeting with two Calexico city officials, Bruno Suarez-Soto and David Romero.

He presented himself as a representative of investors seeking to open a cannabis dispensary in Calexico.

According to the charging documents, Romero and Soto accepted $35,000 in cash bribes for the rapid issuance of a city permit for the dispensary, and for revoking or hindering other applicants if necessary.

The city officials required half of the money to be paid upfront, “because they had done similar work for other people, and those people had not paid the agreed-upon fee after the favors had been rendered.”

Soto explained somewhat smugly, perhaps: “This isn’t our first rodeo.”

Long story short, they were both charged in federal court, pleaded guilty, and are awaiting sentencing.

However, there are reasons to suspect this corruption “rodeo” will continue its show long after Calexico officials take their penalties.

The Calexico Case

Besides confirming that bribery has become an almost regular practice in the licensing protocol, the Calexico case revealed some other curious routines behind the scenes. 

“It’s not necessarily the norm, but it’s not far from it,” said Avis Bulbulyan, the CEO of Los Angeles-based consultancy Siva Enterprises to Marijuana Business Daily.

Namely, Romero explained that the people who were to approve the undercover agent’s license were his “best friends at the entire City Hall.”

When asked if the “best friends” had already signed off on the plan, Romero responded “Fuck, yeah!” and laughed.

In other words, the two charged officials aren’t the only ones who got their hands dirty. They have an entire network of colleagues who helped them with their schemes.

Second, the bribery disclosure revealed what we all suspected: that permit issuance is a grey zone where a lot of “pay-to-play” situations occur.

“I get so frustrated when states decide to give out limited licenses,” said Rachel Gillette, a Colorado cannabis attorney with Greenspoon Marder, to Marijuana Business Daily.

Limiting the number of licenses, she added, can result in “crazy valuations” that make licenses akin to “winning the lottery.” 

The Federal Bureau of Investigation

Another interesting thing about the investigation in Calexico is that it was performed by the FBI.

On August 15, 2019, the FBI announced in a podcast it will be watching the cannabis industry closely, as they observed a “public corruption threat emerge.”

“We’ve seen in some states the price goes as high as $500,000 for a license to sell marijuana. So, we see people willing to pay large amounts of money to get into the industry,” said Supervisory Special Agent Regino Chavez in the podcast.

On top of that, the host of the podcast, Mollie Halpern, noted that the FBI is seeking tips to investigate:

“If you suspect a dispensary is operating with an illegally obtained license, or suspect public corruption in the marijuana industry, contact your local FBI field office.”

The reactions from the industry are not as unanimous. While some welcome the Bureau’s scrutiny, others suspect that another unjust targeting of the marijuana industry might be at stake. 

“The bottom line is that you want the industry to be clean,” said Donna More, a partner in Fox Rothschild’s Chicago law office to Marijuana Business Daily

“That was the rationalization for legalizing. You want it out in the open from the shadows of the black market,” she added.

But others are not so convinced in the FBI’s benevolence.

Referring to Chavez’s statement about the license price that can “go as high as $500,000”, Steve Schain, a senior attorney at Hoban Law Group in Pennsylvania and New Jersey, said to Marijuana Business Daily:

“Apparently, the FBI is re-creating fables about our industry,” he noted, explaining that “a license is not a guarantee of printing money.”

National Cannabis Industry Association: “Prevent Corruption in the Name of Fairness and Industry Reputation”

To hear an informed opinion on the matter, we spoke to Morgan Fox, Media Relations Director at the National Cannabis Industry Association.

He noted that corruption cases as the one in Calexico are “rare,” but that “they have occurred in several states usually at the early stages of their regulated markets opening and usually in the form of officials either accepting or demanding compensation in order to ensure licensure.”

However, there have been some outliers, he added.

Such was the case of Lev Parnas and Igor Fruman allegedly using money from Russian investors to try to get a public official re-elected on the promise of that person extending a license application deadline that their clients had missed, Fox illustrated.

When it comes to the FBI scrutiny, Fox noted that it’s a “net positive that federal law enforcement is more interested in maintaining the integrity of local governments and the industry than in enforcing federal cannabis prohibition.”

“That said,” he added, “I don’t see any evidence that these situations occur more in the cannabis industry than in other industries, so I’m not sure it is the best use of FBI resources.”

The Issue of Licensing

Probably the most important takeaway from our conversation with Morgan Fox is that the corruption issue “is a direct result of arbitrary license caps, either at the state or local level.”

“Limiting the number of licenses creates competition in the application process instead of in the market where it belongs, and usually ends up either favoring applicants with more financial resources or creating an environment that is ripe for public corruption,” he explained.

The best way to avoid this situation is to allow any applicant that meets established and uniform criteria to have a license, Fox suggested.

“This [eliminating license caps] not only increases the revenue from licensing fees but allows barriers for entry to be lowered and removes unfair bias in the licensing process,” he clarified.

And it’s not just about businesses that need to survive.

“Corruption makes it harder for legitimate, honest businesses to survive in the industry, so it is important to prevent corruption in the name of fairness and industry reputation,” Fox made a point.

Subtle Forms of Corruption

So far, we have discussed corruption in the form of “pay-to-play” deals.

But, as in every industry, there are subtler ways of corrupt malpractices.

A recent case reported by Joe Mozingo from the Los Angeles Times is perhaps the best illustration of this kind of nuance.

Namely, as stated in the article, “the Santa Barbara County grand jury criticized county supervisors this week for allowing ‘unfettered access’ to marijuana lobbyists as the board voted to let cannabis cultivation explode in the Santa Ynez Valley region and Carpinteria with little regulation and a flimsy tax regime that has deprived the county of millions of dollars.”

The most controversial example of the problematic relationship was “an email sent by a Board member to a lobbyist, during a Board meeting, asking the lobbyist if they agreed with a [planning and development] staff recommendation,” Mozingo writes.

On the other side of the coin, Fox depicts one more controversial malpractice.

“A good example of a different form of malfeasance can be found in the structure of local fees in Massachusetts,” he noted.

“Even though the law limits localities to a specific additional percentage tax on cannabis businesses, some municipal governments or officials have found ways to require potential cannabis businesses to pay “fees” or contribute to various funds or projects before they are given permission to operate within the jurisdiction,” explained Fox.

Advice to Those Who Want to Enter the Industry

Even though corruption stories like these can discourage those willing to join the cannabis industry, Morgan Fox has wise advice for new-starters.

Admitting that this [advising the industry beginners] is “a very complex and nuanced topic”, he shares pure gold if you know how to listen carefully:

“I think my first piece of advice is to take your existing knowledge and skills and apply them to the cannabis space, rather than necessarily focusing on starting a plant-touching business,” he said.

“If you aren’t a botanist or farmer, don’t have retail experience, etc.,” he went on explaining, “why would you think it is a good idea to jump into those fields in one of the most difficult, heavily regulated – and still federally illegal – industries in the country? There are so many opportunities in the ancillary market that are being ignored, underserved, or under-imagined.”

The second piece of advice is perhaps even more telling:

“Learn about the plant, and learn about the history of prohibition and the racially and economically disparate ways it is enforced to this day,” cautioned Fox.

“This industry is built on the hard work of advocates and the unnecessary suffering of marginalized communities, and it is vital to keep those things in mind and work to make the cannabis industry a tool to help undo those harms,” he concluded.