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Noncompliance in the Cannabis Industry: The Dangers of Operating Blindly

Sep 17, 2020 | By Kelley Detweiler and Jack Teitelman

Noncompliance in the Cannabis Industry: The Dangers of Operating Blindly

Whether you are a multi-state operator or running a cannabis testing laboratory, your day-to-day focus is ensuring that operations run safely, efficiently, and effectively. You are expected to wear many hats and adhere to a plethora of regulations at the state and federal levels that, often times, seem like moving targets. This can be a challenge for any operator. While compliance efforts typically do not rank “top of the list” for priorities, they do serve as the foundation for your operation, and ultimately keep you in business and on the right side of the law.

Still, compliance is an area where many cannabis companies fail to implement a cohesive and comprehensive program. If you are (or have previously been) in the running for a state license, chances are you had a voluminously detailed set of standard operating procedures (SOPs), developed as part of the application submission packet. Whether you are lucky enough to have been awarded a license, or you have an application in the works, SOPs create the foundation for your operational network.

Unfortunately, as we’ve seen time and again, shortly after cannabis companies are awarded a license, they hit the ground running too fast and abandon their SOPs (and plans). While growth and expansion take front and center, gaping holes develop exposing an operation to vulnerabilities in its compliance infrastructure. This snowball effect can permanently inhibit an operation’s long-term growth and stability.


Avoid it or embrace it

Avoiding compliance in the cannabis industry is similar to training for a marathon, then showing up to the race without shoes. You put the time and effort into preparing for the marathon, then put yourself in a position to fail when it’s time for the race to begin. You wouldn’t do that, right?

One of the most common reasons cannabis companies fail to implement a compliance program is cost. We often hear that “it’s too expensive,” and “I can’t afford it right now.” Going back to the marathon example, if the shoes were too expensive, you should not have entered the competition. Compliance, like the time and energy you put into your operations, is most effective when applied proactively, so embrace it!

Complying with the innumerable laws and regulations throughout the cannabis industry is number one. Everything from cultivation to sales must follow an ever-changing set of federal, state, and local laws/regulations. While compliance solutions are not cheap, investing in a cannabis compliance program will reward you with dividends far exceeding the potential costs of non-compliance.


Complacency is costly

Whether you are just starting, or you are years into operations, now is the time to start implementing a compliance strategy. It may seem like an overwhelming task, but the truth is that complacency is costly. Federal, state, and local regulatory processes are anything but transparent. Information concerning the number of cannabis companies currently under investigation or being targeted will never be made public knowledge.

If you are on the DEA’s or state’s radar, there will be no warning, regulatory agents will simply show up unexpectedly to assess your facility or retail location. This isn’t a scare tactic; it is a fact of doing business with controlled substances.


Examples of fines

A Massachusetts cannabis company was fined $120,000 for charges that it sold tainted vape cartridges as a result of an employee’s failure to read the full set of results from required laboratory testing.

The Nevada Cannabis Compliance Board recently issued a $1.25 million fine, revocation of six business permits, and required the sale of eight additional licenses to vertically integrated operator CWNevada for a range of violations including “running afoul of the state’s MJ inventory track-and-trace program.”

The good news is you and your business do not have to become victims of non-compliance. You can take action now to ensure you are not only ready for an unexpected visit, but are also in a position to provide these governing entities with a positive report.


Compliance vulnerabilities

Though every business is unique, here are the most common areas where we see vulnerable cannabis companies.


Poor inventory management

Never be caught in a situation where you lack sufficient evidence and/or an explanation for missing stock or inventory discrepancies. Discrepancies are typically due to human error, lack of quality assurance, and careless packaging.


Improper data reporting

Every state that has legalized cannabis implements their own set of compliance requirements. These requirements outline the format and frequency for reporting of product testing results, inventory, and sales. Compliance reporting is a regular part of conducting business. Therefore, you should be able to provide on-demand reports that reflect accurate inventory counts in the format required by the governing authorities.


Licensing issues

Let’s face it, licensing requirements for cannabis operations can be confusing. Each legal state has its own set of ever-changing requirements and regulations concerning licensing and documentation for cannabis cultivation, retail, and testing operations. Knowing what’s required in your state is paramount for your continued success.


Illegal sales

Whether it’s selling to an underage person, making a sale outside of authorized operating hours, or exceeding the daily sales limit for an individual, every form of an illegal sale can cause compliance trouble for an operation.


Insufficient technology

Efforts put into tracking inventory and transactions are worthless if that data is stolen, corrupted, or cannot be recorded. Loss of data due to unreliable technology is a significant compliance risk. Unreliable technology can take many forms. There have been high profile data breaches in the news recently and the cannabis industry has not been spared.

Technology is also a very valuable part of your security measures. Proper surveillance and storage equipment as well as money handling procedures, can make or break your business.


Insufficient record-keeping

Every state has its own set of requirements for how long cannabis records must be maintained. For example, California has a seven-year requirement, whereas Washington has a three-year requirement. To be safe, stay on top of your state record-keeping requirements, and conduct periodic self-audits to identify any weakness in record-keeping or any other compliance issues. Self-audits allow a cannabis business to address issues as early as possible.


Failure to follow packaging, labeling, and product safety laws

Packaging, labeling, and product safety issues are quickly becoming one of the largest compliance pitfalls throughout the cannabis industry. As noted previously, states set their own regulations, and some will impose more stringent requirements than others. Does the state you’re operating in (or distributing to) require all packaging to be child-resistant? Are there regulations that mandate government warnings and/or symbols that also specify prominent placement? For example, in Colorado, all edibles must be marked with a “THC” or “cannabis warning” on each piece.


Unreliable legal partners

A common theme among compliance pitfalls is their ability to be avoided. It is vital for cannabis companies to engage the right legal and technology partners to keep them on track. For instance, prioritize finding a legal firm that specializes in the cannabis industry specific to your operational area. You want a legal team that will keep you current on licensing issues, regulatory changes and forecasting for potential compliance problems.


Have a plan

In the event of a violation, attorneys, PR nightmares, investigations, remediation, and more, can all quickly add up to in excess of $100k. But nothing compares to the costs associated with forfeiting your license. You can easily avoid these risks and their associated costs by partnering with reputable legal and compliance firms who specialize in cannabis business and operations.

The TITAN Group has helped multiple cannabis operators ranging from testing labs to multi-state operations from Massachusetts to California. Led by former DEA special agent Jack Teitelman, the TITAN Group leverages years of enforcement experience to approach cannabis compliance with the same vigor and insight as the DEA or regulatory authority you may be facing. Remember, it may be daunting, but an investment in compliance will pay dividends beyond your bottom line.


 

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