'Millions Of Pounds' Of Legal Marijuana Diverted to Underground Market In California And Guess Who Seems To Be Turning A Blind Eye?

A suit filed last week in state court by a California retail chain against the Department of Cannabis Control (DCC) alleges that criminals have been legally buying an unknown number of cannabis distribution licenses, reported MJBizDaily.

The DCC is responsible for, among other things, establishing, implementing, maintaining, and enforcing a track and trace program for reporting the movement of cannabis products throughout the distribution chain.

Through this lawsuit, HNHPC, Inc., a state/local licensed dispensary in Santa Ana, seeks to compel the DCC to perform its legal duties.

According to HNHPC, the DCC’s failure to perform its legal duty to implement systems to properly track and flag questionable transactions has led to the exponential rise of “Burner Distros,” which conceal and launder State-grown cannabis for delivery to unregulated markets without paying significant legally mandated taxes.

According to the suit, operators (usually legal cannabis operators) purchase or obtain distribution licenses in various local jurisdictions, often where cultivation operations are prevalent and/or where such licenses are relatively easy to acquire. They do this by using an array of different “front men” who agree to attach their names to the licenses.

Once licensed, the Burner Distros purchase large quantities of cannabis from cultivators within the State. By law, Burner Distros are responsible for paying all mandated taxes although they "may or may not pay" them, alleged the Plaintiff. 

HNHPC is informed and believes the system implemented by the DCC, called “METRC,” can be re-designed to identify Burner Distros, but it would require the State to amend its current agreement with the developer of METRC.

In addition, the suit alleges that the DCC and the State have purposely turned a blind eye to illegal Burner Distros in order to keep excess cultivation tax money flowing in.

“This leads to two inevitable and ultimately devastating consequences,” claims the suit. 

• A cheaper illicit-market cannabis undercuts the legal industry, for starters.
• A huge hit to state tax revenue, which the suit estimates could be in the “hundreds of millions of dollars.”

The practical result: The legal market has been propping up the illicit market instead of replacing it, said Elliot Lewis, CEO of Catalyst Cannabis Co., a California retail chain that operates six stores. Catalyst’s parent company, HNHPC, is the plaintiff in the suit, per MJBiz.

"More legal product is going out of the state than is being sold legally in the state,” Lewis added. “The only question is, is it two times, three times, four times?”

Industry executives say the lawsuit is important because it exposes a problem that state regulators and lawmakers need to address.

“I’m really happy this lawsuit is coming to light because it’ll force the state to act,” said Vince Ning, CEO of Oakland-based marijuana distributor Nabis.

Others in the industry seem to agree that the lawsuit is exposing a serious flaw in the regulatory system that is "cutting the financial legs out from under the legal market," wrote MJBiz Daily.