FBI scrutiny of corruption in US cannabis industry welcomed by some, scorned by others

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The FBI’s announcement that it is probing public corruption in the legal marijuana industry has stirred up strong reactions among cannabis insiders.

While some complain the FBI’s scrutiny is another example of how the legal MJ industry is being unfairly targeted as if it’s a bottomless gold mine, others welcome the feds’ attention to illicit influence on licensing decisions.

Cannabis legal experts also said the issue underscores the need for regulatory regimes that, as much as possible, can cordon off the political backstreets to lucrative business licenses.

FBI scrutiny “actually can be a good thing,” said California cannabis attorney Henry Wykowski, a former federal prosecutor.

“I think some people are taking advantage of the industry, and we’re entitled to the same protection other industries receive.”

Donna More, a partner in Fox Rothschild’s Chicago law office, concurred.

“The bottom line is that you want the industry to be clean,” she said.

“That was the rationalization for legalizing. You want it out in the open from the shadows of the black market.”

The FBI discussed the problem of public corruption in the marijuana industry in a 72-second podcast, a weekly feature that often highlights emerging enforcement issues.

The feature concluded with a request for people to contact an FBI field office if they suspect such activity.

An FBI media relations official told Marijuana Business Daily the special agents interviewed in the podcast were traveling this week and unavailable for additional comment.

The podcast comes in the aftermath of bribery allegations in California and other marijuana markets and at a time when two big states – Illinois and Michigan – are preparing to launch recreational cannabis programs.

It also coincides with federal government agencies more closely examining various aspects of the legal cannabis industry, including:

“It’s part of a trend. As cannabis becomes more mainstream, all these different groups that have ignored us in the past are starting to pay attention to us,” Wykowski said.

“Despite marijuana remaining illegal at the federal level, the fact the FBI is investigating improper government conduct in respect to rewarding licenses is de facto recognition for us.”

‘Re-creating fables’

But others bristled at the FBI’s involvement in state-legal programs.

The podcast included a statement by a supervisory special agent saying that, in “some states, the price goes as high as $500,000 for a license to sell marijuana.”

“Apparently, the FBI is re-creating fables about our industry,” said Steve Schain, a senior attorney at Hoban Law Group in Pennsylvania and New Jersey.

“Unless you’ve been in the industry for only 15 seconds, you may be ignorant to the fact that a license is not a guarantee of printing money.”

Schain emphasized he isn’t saying corruption doesn’t exist.

But he added that, in any political or business process, “the potential of pay-to-play exists. The question remains: Why is the FBI once again targeting legalized marijuana?”

Some markets more vulnerable to corruption

It’s unclear to what degree the legal marijuana industry is plagued by bribery and pay-to-play schemes.

But allegations and convictions have surfaced in recent years, particularly in California and Michigan.

Cannabis experts said regulatory structures make some markets more vulnerable to potential corruption.

“My take is that, where there’s money and limited licensing, there’s corruption,” More said. “Like any other industry, honestly.”

“I get so frustrated when states decide to give out limited licenses,” said Rachel Gillette, a Colorado cannabis attorney with Greenspoon Marder.

That process, Gillette said, can result in “crazy valuations” that make licenses akin to “winning the lottery.”

The FBI podcast implied that local decisionmaking also is a contributing factor.

Mollie Halpern, the FBI’s public affairs specialist, said in the podcast: “The corruption is more prevalent in Western states, where the licensing is decentralized – meaning the level of corruption can span from the highest to the lowest level of public officials.”

It’s not just Western states that have decentralized regulatory structures that increase the potential for corruption.

Barton Morris, principal attorney of the Cannabis Legal Group in Michigan, cited that state’s medical marijuana industry as another example.

“Michigan municipalities have a significant amount of power to identify and select those who are going to get a license and those licenses are worth millions of dollars,” Morris said.

He added that a person’s “greed and desire to do almost anything” to get one of those licenses could lead to a public official willing to open a backdoor for a price.

One such effort to get a license led to a 2017 federal indictment of three men who allegedly delivered $15,000 in an envelope meant for city councilors in a Detroit suburb.

Two of the men were sentenced to prison last year, while another was put on supervised release.

More said that “shockingly” she hasn’t heard of such cases with the medical marijuana industry in Illinois.

“It’s stayed pretty clean, I think,” she said.

But she said there is potential for corruption.

For example, while recreational marijuana licensing decisions will be done on the state level, zoning will be local, “so you do have two sets of politicians looking at it,” More said.

“There’s always going to be some exposure.”

Finding the right formula

Gillette of Greenspoon Marder said the entire issue underscores the need to install regulatory schemes that decrease the potential for corruption.

“It just illustrates how local communities and states have to be thoughtful in how they choose to regulate,” Gillette said.

“We’re still learning as an industry what exactly the right formula is.”

In general, though, she advocated for a free-market process.

She and other experts said it also will help when the cannabis industry is legal on a federal level and marijuana isn’t treated as if it were “plutonium” but, instead, “like a normal business.”

Jeff Smith can be reached at jeffs@mjbizdaily.com