A large indoor cannabis grow operation based out of Washington state.

California Compliance: Reducing the Risk of Federal Cannabis Enforcement

Kern County, California — somewhere along Highway 5

The driver belonged to a collective and was transporting about $2 million of unprocessed product, from Northern California to Los Angeles. He had with him various documents, including a bill of lading and authorization from the collective to transport. The collective had corporate counsel and had established a phone-tree in case of an emergency or urgent situation. The driver pulled the truck into a mandatory weigh station. Officers inspected the documents, discovered there was marijuana on board, flagged the truck for secondary inspection and detained the driver. The driver was told that somehow the paperwork wasn’t in order. Officers arrested the driver for transportation of a controlled substance, a state-law charge.

In the days that followed, the collective had to hire a criminal lawyer — and one for the driver, as well — at a cost of many thousands of dollars, and it feared authorities were contemplating conspiracy charges against everyone. One day after the arrest, narcotics agents were seen lurking around the trimmers’ facility in L.A.; word quickly spread among employees and retailers, and a lot of people worried they would be next. The product, meanwhile, was moved to a non-climate controlled warehouse, neglected by police, and left to rot. Months passed. The collective didn’t get prosecuted, but asking the court to order the product returned would have brought unwanted attention compared to just moving on and being left alone. Because of the weight involved, and the suspicion that state law was not being complied with, local authorities still contemplated referring the matter for federal prosecution.

Sunset on a highway through Sonoma Pass in California. Photo credit: A Silly Person

Could this happen to you in California’s newly regulated cannabis market? Of course, whether the load is medical or recreational. And, if federal authorities wanted to try and make an example of you, they could — despite limitations on the use of federal funds to prosecute cannabis consumers or businesses in MMJ-legal states.

Let’s talk about these federal funding issues, what they mean and don’t mean, and then return to the Kern County scenario to assess how businesses should approach compliance in this new era.

Federal prosecutors blocked by Congress

Since 2014, the federal budget has prohibited the U.S. Department of Justice from using federal funds to “prevent any state from implementing their own laws that authorize the distribution, possession, or cultivation of medical marijuana.” This budget item is named the Rohrabacher-Blumenauer Amendment, after two of its three authors. The Rohrabacher-Blumenauer Amendment was recently renewed as part of a temporary federal spending bill — but each time the federal budget is up for consideration, the Amendment must be renewed or limitations on the Department of Justice will be lifted.

Rohrabacher-Blumenauer is pretty plain and clear: no DOJ funds can be used to block the implementation of medical cannabis reforms in states where it has been legalized, and consumers and businesses who are in full compliance with state law are protected from federal prosecution. But that’s where the protection ends. Many cannabis entrepreneurs make the mistake of over-hyping Rohrabacher-Blumenauer or thinking of it as an outright ban on federal action when it is not.  

Cannabis consumers and businesses need to be clear that even if state and local governments are supportive of the industry, federal acquiescence should not be expected beyond the narrow limits of the federal budget limitation. What’s more, no one wants to be in a position where their own interpretation of state law compliance might differ, dangerously, from a federal prosecutor’s interpretation of whether state law is being fully followed.

Another important thing to note about Rohrabacher-Blumenauer is that it applies only to medical marijuana, and does not extend to adult-use cannabis. So even as California’s recreational cannabis industry is poised for some major expansions — and with other states coming online later this summer — federal agents do not have to defer to or be limited by state adult-use cannabis laws. Theoretically, a recreational cannabis company or consumer is completely exposed to federal law. How this translates into reality has yet to be seen, we can only hope that federal authorities will exercise discretion and significant restraint in choosing whether to spend scarce taxpayer dollars enforcing federal law in a legalized state.

Beyond the Justice Department

It also means that federal agencies other than the Department of Justice are still able to investigate potential legal violations. At a recent raid on a purportedly illegal grow in San Bernardino County, the DEA was present — but so were agents from the U.S. Department of Agriculture, the Department of Interior, the Food and Drug Administration and more. While any federal agency would have to present a case to a U.S. Attorney for criminal prosecution — and U.S. Attorneys are part of the Department of Justice — these other agencies have their own legal staffs who are not Justice Department lawyers and they can bring civil or administrative actions of their own, short of criminal prosecution. In the San Bernardino County case, the DEA and U.S. Attorney quickly formed an opinion that the grow was not in compliance with California law. They ordered the grow eradicated. Many people in that case thought they were doing things right and are now hoping they won’t get hit with federal drug charges. Everyone has had to lawyer up, and there could be civil lawsuits about everything from the lease, to the equipment, to the management contracts associated with the grow.

The cola of an indoor cannabis plant leans slightly right. Photo credit: Rory Savatgy

The ever-present reality with cannabis is that all activity is still federally prohibited. The U.S. Attorney General recently rescinded guidelines that had the effect of limiting or narrowing the types of cases federal prosecutors would pursue in legalized states such as California. What we are left with is a situation where recreational and medical cannabis are legal under state law, assuming compliance with state law, and illegal federally, with U.S. Attorneys in California and around the country making very vague public statements about what their enforcement priorities will be — if they say anything publicly about it at all.

You can’t eliminate federal exposure until federal law changes to reclassify or declassify marijuana from Schedule I in the federal Controlled Substances Act. But if you are a cannabis business operating in a state where cannabis is medically or recreationally legal, you can minimize your federal exposure and, given the Kern and San Bernardino County scenarios, you’ll certainly want to do everything you can.

California’s cannabis regulations are complex and involved, and an in-depth analysis would require an article or two of its own. However, the rule of thumb is to be in full compliance with state law — that is the best way to protect yourself. Cannabis businesses should devote significant effort to understanding California law, carefully and methodically incorporate regulation into daily operations, and seek professional advice to make sure that they’re doing everything they can to be fully state-law compliant. 

Submitting to state law

Back to Kern County. If your employee were the driver at that weigh station today — and the test is to be fully compliant with the law of your state — what would officers or agents determine? Would packaging and labeling be as required? Would the insurance papers be in order? Would the vehicle specifications match state requirements? Is the driver a properly vetted employee per the regulations? What about the itinerary? Are there seemingly innocent detours that will place you outside of state law protection? And what of the page-long list of things the shipping manifest has to contain, and proof that the information was timely transmitted to state regulators before the truck pulled out of your parking lot?

These things are doable, but there’s little room for error and there’s no place for trying to cut corners. You’ll get in trouble, and the vendors and customers who do business with you will get in trouble. Your company’s reputation will take a potentially lethal hit, your business and investments could completely combust, and you will hurt the entire cannabis industry. It will be a tough road back to regaining the trust and confidence of your peers and colleagues who counted on you to do things right not just for your sake but for theirs. Ultimately, of course, you could be prosecuted federally for distribution of a controlled substance, and you could go to prison. Anyone whose product you were transporting, as well as wherever it is destined for, could be looped in on conspiracy and racketeering charges. Forfeiture proceedings would accompany any criminal indictment and would extend to everything believed to be the product of illegal activity (which, if you’re not complying with state law, is basically everything). Federal authorities would report back to your state regulator so that administrative action could be taken to revoke your state license, something state authorities might be all too eager to do in order to send the message that only compliant businesses will be tolerated.  Local authorities where you are licensed would follow suit. And, to top it all off, the feds will notify the IRS.

It could happen if you’re out of compliance with state law on medical marijuana — and, with recreational cannabis, it could happen even if you are fully compliant with state law. There is no eliminating federal risk, there is only minimizing it. That is why your compliance efforts have to be significant: they’re how to do business legitimately in a cannabis-legal state and they’re your best, maybe your only, hedge against federal attention.  There’s no good reason to do it any other way.

So, how to start? Read the law, get professional assistance in understanding it, design a compliance program with someone who knows not only the industry but what everything will look like to a hostile government agent. Then, put into action a proactive and full compliance plan, which you monitor, check up on, act on, and nurture like a new cultivation. In any industry — any sector of the economy — robust compliance goes a long way toward showing good faith and a law-abiding spirit. It’s no different with cannabis; in fact, it’s crucial.

Editor’s note: This article was co-authored by Steve Meister, a criminal defense attorney and healthcare compliance consultant in Los Angeles. He represents cannabis industry clients and emphasizes proactive compliance as an industry standard and as the best defense.

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