Local corruption becoming hurdle for marijuana license seekers in California

Just Released! Get realistic market forecasts, state-by-state insights and benchmarks with the new 2024 MJBiz Factbook member program, now with quarterly updates. Make informed decisions.

Allegations of corruption during competitive bidding for marijuana business licenses is far from a new phenomenon, especially in California, where tales of backdoor wheeling-and-dealing between companies and public officials have been circulating for years.

But the state’s newly regulated market, launched in January, has brought the issue even more to the forefront, as illustrated by at least four different cases that have garnered media attention in recent months. The FBI even got involved in one instance.

Stories of corruption will continue to emerge, sources say, largely because local licenses are a prerequisite to obtaining a state permit.

That puts local officials in a position of power over entrepreneurs who may be desperate to find a path into the industry.

“In the legal market, they’re going to continue to have corruption issues, because local folks are easier to bribe and corrupt than state bureaucrats,” said Matt Kumin, a longtime cannabis industry attorney based in San Francisco.

“You see allegations like this all over the place, because the state decided it was more important to give locals control than to have a uniform and less-corruptible process statewide.”

Illustrating the problem

A few examples that highlight California’s cannabis corruption issues:

  • In February 2017, in Huntington Park, eight medical marijuana dispensary applicants sued the Los Angeles suburb in federal court. The suit alleges several officials – including the mayor, vice mayor and a City Council member – conspired with private companies to award the city’s three dispensary permits to predetermined companies, essentially defrauding subsequent bidders of their $5,000 application fees.
  • In January, one licensed retailer filed suit against the city and county of San Francisco, alleging the local board of supervisors passed over the company for a license but later granted one to a competitor that had contributed thousands of dollars to several board members’ political campaigns.
  • In May, FBI officials raided the mayor of Adelanto‘s home and executed search warrants there, at city hall and at an MJ retailer in the city northeast of L.A. The nature of the investigation has not been disclosed, but the incident follows the 2017 arrest of Adelanto’s vice mayor, who stands accused of taking bribes to “fast-track a marijuana business,” according to the Los Angeles Times.
  • Also in May, a Humboldt County Planning and Building Department inspector was arrested on bribery charges, and is alleged to have defrauded various companies, including some in the cannabis sector.

None of these cases has fully run its course, and both lawsuits are still active.

But what they illustrate is an immediate hurdle for California businesses still attempting to get licenses.

Ed Muramoto, one of the lead attorneys for the Huntington Park plaintiffs, told Marijuana Business Daily his firm is investigating “a handful” of other jurisdictions and may file parallel corruption lawsuits by the end of the year.

“We hear about this all the time,” he said. “Adelanto is the most recent example, but there’s going to be many, many examples like this.”

He’s not the only cannabis industry stakeholder to express such concerns.

“In every jurisdiction there is a different shakedown,” said Sacramento-based consultant Jackie McGowan.

“Whether it’s from a planner, a council member, a consultant or a landlord, there is a consistent expectation that cannabis companies must pay to play.

“I ask myself often, ‘Am I just naive? Is this the way the world works in other industries?’ I don’t know the answer to this yet.”

‘Money runs the show’

The situation also brings to the forefront how the lines between legal lobbying by business interests and outright corruption can be blurred.

“There’s going to be a lot that gets uncovered, but then there’s also these fine lines of, what is and isn’t corruption?” said Amanda Ostrowitz, CEO of CannaRegs, which tracks local regulatory developments across California.

“When people call corruption because they correlate the timing of a donation (from a business) to a certain city or certain council member and then that business gets what they want, that’s an area where people really need to tread lightly, because that’s how this world operates. Money runs the show.”

The key is whether companies are dealing legally and transparently with public officials.

“Are you doing it within the confines of lobbying and general campaign contributions, or are you directing it as a bribe?” Ostrowitz said. “The differences between those two isn’t as obvious as one may think.”

Ostrowitz emphasized that the “vast majority” of local officials are “trying to do right” by the cannabis industry, and it’s not as though every municipality and county is trying to elicit bribes from marijuana executives.

Kumin agreed, saying there’s a “spectrum” of corruption that occurs in nearly every American industry, not just the cannabis space.

Recourse for entrepreneurs

It’s often difficult for unsuccessful license applicants to know if they’ve fallen victim to law-breaking city officials, have a case that’s worth filing suit over, or should just cut their losses and attempt to get a business permit in another municipality.

Muramoto, the attorney, suggests companies that suspect the law has been broken regarding the licensing process use the “reasonable man standard.”

“I know it when I see it. If it looks bad, if it smells bad, if it sounds bad, it’s probably bad,” he added.

Filing suit over alleged corruption is a possible recourse, albeit a time-consuming one.

Just ask Muramoto.

He received a ruling from a federal judge in mid-June that found a portion of Huntington Park’s MMJ ordinance to be unconstitutional. Muramoto believes the city will have to reissue its three dispensary permits since the licensees have not yet received state licenses and, thus, are not operational.

But the judge has yet to issue a formal order in the 17-month-old case, and there’s no guarantee any of the plaintiffs will ultimately win a business permit in Huntington Park.

To Kumin, the issue belies a larger problem: the tendency for local California governments to limit the number of cannabis business licenses in their jurisdictions.

“The more caps you see … the more rife the possibilities for corruption,” he surmised.

John Schroyer can be reached at johns@mjbizdaily.com