On Tuesday, September 22, the Vermont Senate voted (23-6) to pass a bill that would legalize, tax and regulate adult use cannabis sales. The bill, S. 54, was approved by 92-56 in the Vermont House of Representatives last week. The bill has now made it to Governor Phil Scott’s desk, where although he has not said whether or not he’ll sign it, supporters think it is likely he will.
Back in 2018, Vermont actually voted to legalize adult use possession and cultivation of cannabis, just not to tax and regulate it. Governor Scott signed that bill into law, which is why some supporters are hopeful he will sign S. 54 into law as well.
Currently, only Vermont and Washington D.C. have legislation that legalized cannabis, just not the sale of it. Technically speaking, it is still illegal to sell cannabis in D.C. or Vermont.
As legalization of cannabis products from hemp to medical cannabis takes root across the U.S., there’s a growing need to understand and build good security practices. While many think of security as safeguarding assets like facilities and product, effective security does much more. It protects a business’ workers, providing them secure workplaces and incomes. Ideally, it reaches from supply chain to customers by ensuring consistently safe products.
To truly understand the value of this for a brand or for the industry as a whole, consider the opposite: the destructive effect – on a brand and on the industry at large – of unsafe or tampered product reaching customers, or of crimes occurring, just as the industry seeks to demonstrate its validity and benefits. Security is vital not only to individual farmers, processors or customers but to all who value what the industry brings to those who rely on CBD or medical cannabis products for their wellbeing.
Know the Threats.
Part of the learning process involves understanding the value of the product.Security is all about anticipating and reducing risks. These can include physical threats from natural sources – think flood, fire, tornado or crop fail – or from human threats. Human threats can arise from organized criminals, hackers, amateur thieves, vandals – or insiders.
As regulated industries, hemp and cannabis businesses also face risk of losses, which can be significant, from penalties ranging from fines to being shut down for non-compliance. While rules vary from state to state and continue to change, a disciplined approach to security is foundational to reducing risk at many levels. Rigorous operational processes must incorporate security that addresses risks at multiple points of access, transport and sale of products.
Learn the Rules.
In a rapidly evolving industry, one of the most important things producers can do is to learn. Security requirements vary by region and providers need to be aware of what is available. Get to know your state, local and federal resources for your operating area. California law, for example, specifies use of high-resolution video surveillance in dispensaries, while others do not.
Part of the learning process involves understanding the value of the product. With medicinal cannabis, it’s helpful to grasp both its commodity value and the street value that could make it attractive to thieves. In “Why Marijuana Plant Value is So Important for Adjusters,” Canadian Underwriter Magazine gave examples that indicate the size of losses that may occur in growing and processing operations:
“In the medical marijuana space, ClaimsPro has already seen losses primarily between $150,000 and $750,000. These losses, mostly on Vancouver Island, were for fire and water damage, as well as boiler machinery issues, physical damage to buildings and specialized greenhouse equipment, as well as extra expense and business interruption.”
The same article notes a claim over $20 million at another single flower greenhouse. Security needs to reflect what’s present on our premises.
Educating the community can reduce risk as well. Producers of industrial hemp may need to inform would-be thieves that what they are looking at is not street-valued product. To protect the crops, which are generally grown outdoors and do not require a full security detail, a best practice is simply posting signs on the property that say explicitly “No THC.”
Begin with a Risk Assessment.
Security begins with a professional evaluation of site vulnerabilities, examining key weaknesses that could be exploited by attackers. These include:
Monitoring access to the site is a foundational principle of security.
Design limited access points into the facility as well as prepare for possible facility breaches with perimeter access control, technological redundancies and ballistic glass for defensive architecture measures.
Look at route vulnerabilities as well.
Hedge site risk by not limiting your operation to a single site where one incident could wipe out an entire year’s crop.
The nature of threats is always changing. A 2018 Newsweek article described the struggles of legal cannabis farmers against illegal and potentially cartel-backed and violent operations in California. While a 2020 Business Insider report described indications that legalization was prompting some cartels to leave cannabis alone and move on to fentanyl and meth. “While Mexican drug cartels made their money predominantly from marijuana in past decades, the market has somewhat dissipated with the state-level legalization of cannabis in dozens of states across the US.”
Define Levels of Risk and Access.
The best security matches spending to risk in a commonsense way. Are you more at risk from the occasional smash and grab incident or is there reason to anticipate an organized assault? As in many industries, the greatest risk often comes from employee fraud or theft. Hiring carefully, paying fairly and training staff well are important to long term security.
How will the product be moved around within the facility and beyond it – and what staff are responsible for each part of the journey? Who can enter the cultivation areas and what protocols must they follow? On site staff should be trained on what to look for if they observe a security breach. Consider biometrics such as retinal scans, fingerprint scans or similar.
In cases where valuable product or cash is present, guards can play an important role. Harvest Connect uses only high-level former military or police officers in these roles, an approach recognized by many. Hunter Garth of Iron Protection Group notes they have “the ability to de-escalate a potentially harmful situation and the fortitude to see a mission through to completion, no matter what external circumstances may arise.”
Inventory and Transaction Controls
Inside threats from sloppy processes can be just as insidious as attacks. Poor tracking of inventory by Oregon’s legal cannabis producers made headlines in 2018 as The Oregonian reported, “U.S. Attorney Billy Williams told a large gathering that included Gov. Kate Brown, law enforcement officials and representatives of the cannabis industry that Oregon has an ‘identifiable and formidable overproduction and diversion problem.’’ Discipline, applied by state pressure but carried out by producers themselves, has begun to reduce the diversion of untracked product into the black market a year later.
Cannabis businesses need a professional approach to monitoring all product and money that moves through its systems. These operational processes can include time, date and attendance stamps on all inventory. Similarly, accounting systems and software must follow the highest professional standards. Lastly, when breaches occur, it is essential that fraud and theft are caught, eliminated and prosecuted as appropriate.
Nurturing an Emerging Industry
Security resources are an integral part of maintaining the integrity of a business’ supply chain. As the product moves from the fields to processing centers to consumers, purity assurance becomes an operational objective. Ultimately, protecting the product through secure and professional practices is the optimal way to serve customers, build a brand, and sustain the industry.
While you may not have heard of CannTrust Holdings so far, that is now about to change. A summer spectacle of double dealing and corporate greed has put this Canadian cannabis company on the global map.
Unfortunately, the current meltdown underway is indicative of more to come.
A Summary Of The Story So Far
CannTrust, a company which serves 72,000 Canadian patients and got into the game early, decided to do what it saw other companies doing all around them. That covers a lot of ground (good and bad at this point). Regardless, the most relevant recent twist to the saga came when the company hired a new CEO, Peter Aceto last October.
Aceto however, along with the now also fired co-founder and chair of the board Eric Paul, decided to continue growing and harvesting unlicensed product. Worse, this occurred while boasting in public of their productivity gains on the way to securing a hefty investment of capital this spring. $170 million. The grow rooms finally got their certification in April.
What is even more embarrassing however, is that this was a round led by the much-vaunted investors the industry has been courting assiduously for the past several years. Specifically, in this case? Institutional banks like Bank of America, Merrill Lynch, Citigroup, Credit Suisse Securities and RBC Capital Markets.
But that is “just” the North American hemisphere. The rather unfortunately named CannTrust (certainly at this point) also had a European footprint – notably Denmark. Unlicensed cannabis ended up there too, of course. Stenocare A/S, the company at the receiving end of the same, reported receipt of product from the unlicensed rooms on July 4.
As far as such things go, however, you have to give it to CannTrust company executives. In terms of setting standards if not benchmarks and “records”, they certainly seemed to have set a few, although probably not the ones they aspired to. If not, with certainty, their investors.
A Surprise Or Inevitability?
That said, for many who have been sounding warnings for at least a year, the 2019 Summer of Canadian Cannascandal is certainly starting to confirm what many have been saying for quite some time. This is not the first time a securities exchange, for one, has sounded the alarm. Deutsche Börse delisted the entire North American public cannabis industry last summer briefly. Then they revised their policy, reluctantly, after Luxembourg changed its stance on medical use. That said, they are still watching with a standing policy of bouncing any company that runs afoul of their rules.
The problems, issues and more bubbling at the center of this cannameltdown, in other words, are not limited to just one company or country.
And everyone knows it.
Accounting For Past Mistakes
For those who are counting, the value of all of that illegally grown CannTrust product is not insignificant. Estimates are floating in the CA$50-70 million range. The problem is, of course, nobody is sure what numbers to rely on. CannTrust employees knowingly provided inaccurate information to the new CEO if not regulatory body until a whistle-blower provided a few more details.
That said, for all of the hullabaloo, one thing this story also does is point a bright spotlight on the lax enforcement of even this pretty easy-to-understand regulation.
The question, however is, if CannTrust thought it could get away with this kind of blatent flouting of the rules, if not lax oversight, are there any other companies who might have also done similiar things?
After all, even the pesticide scandal of 2016 did not occur at just one company either.
Where Are The Proceedings?
This is a rolling story, which began to break at the beginning of last month when Health Canada issued a non-compliance order to CannTrust and impounded 5,200 kg of dried cannabis that was apparently grown in unlicensed grow rooms on July 3.
There have already been some jaw dropping revelations so far (beyond the executive decision to even go down this road in the first place) no matter how attractive pimping numbers was. Starting with things like fake walls being erected to hide the grow. And then of course pictures that have been all over social media of late, of the now departed CEO Aceto being photographed directly in front of said unlicensed rooms too.
As a result, the drama has continued to unfold in a highly predictable way.
By August 1, CannTrust Holdings, a Canadian cannabis company listed on both the New York and Toronto stock exchanges, was facing a “quasi-criminal investigation” by the Canadian Joint Serious Offenses Team. This is a coalition of law enforcement agencies including the Ontario Securities Commission, the Royal Canadian Mounted Police Financial Crimes Unit, and the Ontario Provincial Police Anti-Rackets Branch.
But CannTrust’s issues don’t end there. This is an international story that is just beginning. Government regulators in Europe if not elsewhere are paying attention.So are shareholders, and their lawyers.
For the second time in six months, the Washington State Liquor and Cannabis Board (WSLCB) took swift and severe action on a cannabis business licensee operating in the black market. The regulatory agency issued an emergency license suspension for Port Angeles’ North Coast Concentrates, which are effective for 180 days, during which time regulators plan on revoking the license altogether.
According to a release emailed last week, the violation was uncovered during a routine traffic stop. “On September 20, 2018 an employee of North Coast Concentrates was pulled over by Lower Elwha Police, during the course of the traffic stop officers found 112 grams of traceable marijuana concentrates, three large jars and a large tote bin of untraced dried marijuana flower,” reads the release. “The products were not manifested in the state traceability system. Subsequent investigation by WSLCB officers revealed that the untraced product had been removed from the licensees grow operation and that the traced concentrates were returned from a marijuana retailer in Tacoma several weeks earlier.”
The release goes on to add that when regulators investigated the matter, they found text messages indicating the license holder’s complicity in the act. When the WSLCB suspended the license, officers seized “556 pounds of marijuana flower product, 24 pounds of marijuana oil and 204 plants from both locations.” Regulators say, “the severity of these violations and the risk of diversion” is the reason for the emergency suspension and product seizures.
According to the end of the release, The WSLCB issued one emergency suspension in 2017, and six in 2018. One of those was roughly six months ago in July when regulators issued an emergency suspension for a Tacoma-based cannabis business for the same reason as the most recent one- diversion.
The enforcement branch of the WSLCB acted on a complaint and inspected Refined Cannabinoids where they found “numerous and substantial violations including full rooms of untagged plants, clones and finished product,” reads a release emailed back in July. “During the course of the inspection officers discovered and seized 2,569 marijuana plants, 1,216 marijuana plant clones, 375.8 lbs. of frozen marijuana flower stored in 11 freezer chests, 3,423 0.5 gram marijuana cigarettes, and 97.5 lbs. of bulk marijuana flower without the requisite traceability identifiers.”
That July release also states that enforcement officers found evidence of diversion to the black market, in addition to the company not tracking their product. “Traceability is a core component of Washington’s system and essential for licensee compliance,” says Justin Nordhorn, WSLCB chief of enforcement. “If our licensees fail to track their product they put their license in jeopardy.”
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