In early November, the Washington State Liquor and Cannabis Board (LCB) issued a notice to stakeholders that it had issued two emergency cannabis license suspensions to a producer and processor licensee located in Port Angeles, Washington. These suspensions are a drastic measure, effective for 180 days, indicating the degree of seriousness the LCB attaches to such violations. During the suspension period, the LCB will seek permanent revocation of the licenses.
According to the LCB,
“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. The products were not manifested in the state traceability system. Subsequent investigation by LCB 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.
Seized text messages from the employee’s cellphone indicated that the licensee was aware of both the diversion and the selling of product on the black market. While executing the suspension orders, officers seized 556 pounds of marijuana flower product, 24 pounds of marijuana oil and 204 plants from both locations.”
Washington State is taking this matter very seriously, as the allowance of product diversion by licensed operators could open the state’s licensing regime up to federal scrutiny and enforcement. License cancellation is only invoked in the most extreme circumstances, and emergency suspensions are an extraordinary exercise of the state’s power—only one emergency suspension was issued in 2017, and six have been issued so far in 2018.
“The state is taking this matter very seriously, as the allowance of product diversion by licensed operators could open the state’s licensing regime up to federal scrutiny and enforcement.”
Washington’s regulated cannabis industry is a completely closed system, in that commercial cannabis activity can only be conducted among and between licensees. Pursuant to WAC 314-55-083(4), cannabis licensees must track all cannabis from seed-to-sale in order to prevent diversion and promote public safety. Any theft of cannabis or cannabis product must also be entered into the traceability system.
The state rules break penalties for employees and cannabis licensees down into five categories (WAC 314-55-515):
(a) Group One—Public safety violations
(b) Group Two—Regulatory violations
(c) Group Three—License violations
(d) Group Four—Nonretail violations involving the manufacture, supply, processing, and/or distribution of marijuana by nonretail licensees and prohibited practices between nonretail licensees and retail licensees
(e) Group Five—Violations involving the transportation freight of marijuana
The rules explicitly state that an aggravating circumstance for any of these types of violations includes “Engaging in criminal activities, including money laundering, organized crime, fraud, firearms, and diversion of marijuana.” In these instances, not only can the state issue an emergency license suspension and pursue permanent license cancellation, but the employees or other individuals involved can be subject to criminal prosecution.
One of the express purposes of Washington’s legislation to legalize and regulate adult-use and medical cannabis was to undermine and eventually eliminate the black market. Any tolerance for diversion of cannabis not only runs counter to this goal, but opens the state up to federal scrutiny. In the 2013 Cole Memo (which was rescinded by former Attorney General Jeff Sessions earlier this year, but still serves as useful guidance regarding federal enforcement priorities against state-run cannabis programs), then-Attorney General James Cole laid out the federal government’s enforcement priorities in targeting state cannabis programs. Those priorities dealt with diversion of cannabis across state lines and to states where cannabis is not legal, involvement of cartels and other criminal organizations, and access to cannabis by children. These are the federal government’s priorities, and if states fail to implement regulatory regimes robust enough to prevent such activity, they could invite federal scrutiny.
It is critical that licensees have protocols in place to prevent employee theft and to prevent the diversion of cannabis, as these types of violations, particularly where an owner is complicit, can lead to license cancellation and possible criminal prosecution.