HomeMy WebLinkAboutItem 2 - Written Communications - Chapman ajxia�le4 a2minff/2 DnS'
OC Register 3.15.19 Brooke Staggs O%�
Legal? Illegal? Some players still work both s><dOss2f s�ew`�marl<IJuanaviddustry
Many illicit shops sell products also offered in legal shops,even though licensed cannabis farmers, manufacturers
and distributors can't legally peddle their goods in unlicensed shops.
Some of the underground shops are owned by people who also have stakes in legal stores,with the owners'usmg a
complex scheme of limited partnerships and proxy owners=sometimes called"go to jail guys"—to hide their
dual roles.And unlicensed business are promoted side by side with legal operators on the online directory
Weedmaps,whose principals are also invested in the legal cannabis industry: ,
More than a dozen sources who spoke to the Southern California News Group on and off the record over the
course of several months say the blurring of legal and illegal worlds is the cannabis industry's most widely known
yet difficult-to-prove secret. All of the players who double dip—meaning they support unlicensed operations even
as they hold licenses for other,legal operations—are taking a huge risk.If they're caught,they face losing their
legal businesses,could pay stiff fines and might face criminal penalties.
But California's legal marijuana market, which started on Jan. 1,2018, is still small and struggling. The state's illicit
market—which has its roots in the medical marijuana market California created 21 years ago—is profitable and roughly
eight times bigger than the legal world. So, according to many in the industry, business owners_are playing in both sides
of the cannabis market.
Publicly, many of those double dippers are joining other legal operators in calling for more enforcement against an illicit
market that's undercutting their prices, stealing their customers and robbing the state of hundreds of millions in tax
dollars. But behind closed doors, sources say a handful of people with stakes in the licensed industry also are backing
dozens of illegal shops throughout Southern California.
Meanwhile,some manufacturers and distributors are diverting products that didn't pass strict state testing
requirements to California's thousands of unlicensed shops. "The black market that they're complaining about is
the black market that they're creating,"said GemUcintes director of the Inland Empire chapter of the cannabis
advocacy group NORML.
The strength of the unlicensed cannabis market is a key reason why the state reports that the industry generated just$1.5
billion in taxable sales in 2018. That was a fraction of the state's estimated $8 billion marijuana market, meaning only one
dollar changed hands legally for every seven that changed hands illegally.
And when state or local authorities do manage to shut down a rogue shop or manufacturer,they often don't have
the resources or hard evidence needed to nail the people behind the operation. In many cases, limited enforcement
means an operator can use a legitimate business as a shield to make money in both sides of the cannabis industry. Jett
Nettekoven, a former cannabis shop manager who'now works in one of Santa Ana's licensed stores,described the
problem this way: "Untilyou get the head of the snake,you're never going to stop it."
Addicted to profits. Given how challenging it is*to get state and local marijuana licenses,the assumption a year ago was
that business owners wouldn't risk losing that legal status by double dipping in both markets. But Montes and others said
those challenges are precisely the'factors driving some folks to take the risk.
Insiders describe an economic cycle that's tough to break. Some cannabis business owners initially kept their underground
operations'going only as.a way.to sustain them financially until they got licenses to operate legally. But they'soon learned
that as long as the unlicensed market remains entrenched, legal businesses struggle to make a profit,paying taxes and
other overhead to comply with state regulations while unlicensed competitors sell similar or even the same product
without paying the same overhead.
That makes the illegal cannabis both cheaper for the customer and more profitable for the merchant or producer—an
incentive to work both sides of the fence until the legal market stabilizes enough to generate profits. Complicating it all is
the fact that in a state where recreational weed is legal, many customers shop in unlicensed stores without any idea that
they're helping to break the law.
"Most(operators)are surviving off of their black market businesses even when they have a license,"Montes said.
These operators landed millions of dollars in investment to build massive grow and manufacturing operations as
soon as the legal market emerged.But more than a year later,there are nearly 7,000 licenses for farms and more
than 1,200 licensed manufacturers.sup plying just 700 licensed storefronts... ,
Those operators can't move their product fast enough on the legal market*i6 meet their obligations to investors, so some
have either remained in—or turned to—the illicit market. "They had.dreams of conquering and owning everything,"
Taft said. "But if they.scaled (up).too early,that's their own fault."
Then there's a third group of operators who are double.dipping simply because they aren't interested in taking a
pay cut. Many in this group made a lot of money when recreational weed wasn't legal(Illicit shops,pre-Prop.64,
could easily pull:in $10,000 a day),andnow they're letting he,violence,corruption and double-dealing leak into the
legal market.
"There's no way people.who came out,of running illegal stores,and cameyinto the legal environment,can try to live the
life they were living five yeais ago if they're doing everything by the book,"Nettekoven said."All these guys..; got
addicted to the money back in the day,"he added. "There's just no way they're going to stop."
Elaborate schemes protect owners.During the 21 years that.California's multibillion-dollar.unregulated medical
marijuana market thrived,cannabis operators learned to create elaborate schemes to disguise their connections to
unlicensed shops.And now that some operators are also tied to valuable licensed businesses,Montes said,double
dippers have become even more careful about burying their identities.
For example, "there's not one illegal store that has the actual owner,'.s name on A,"said Nettekoven, who five years ago,,
helped run a medical rnarijuand,shop,called.The Q, in Corona, before:California legalized the recreational side of the
industry. The true owners often will find a landlord willing'to deal with getting'warning notices from city authorities in
exchange for a tenant willing to pay twice the going rate for rent,Nettekoven said.
The operator then pays an`individual to sign the lease as a proxy owner,perhaps cutting them-in on l0 percent of the'
shop's revenue, in exchange for'that person accepting whatever.punishment might come from running an illegal,operation
and keeping the majority owner's name off all paperwork. When the city's code enforcement officers visit the shop, :
the workers don't know who actually owns it so they can't offer up that information.And when local authorities
confront a property owner,the landlord typically will claim ignorance about their tenant's operation and then
spend.weeks slow-walking the eviction process,according to Nettekoven and others.
Meanwhile, illicit operators often repeat this process at multiple locations in multiple cities. That way,when authorities
eventually,do shut down one location,,they can send their customers to another spot. "It's your flock of sheep,"
Nettekoven said. "You just guide them to the,next.pasturei t
Tough to trace.. One factor that makes it tough to regulate where licensed products are,sold.is the.embryonic state
of California's track and trace program,a:component of Prop.64.that eventually will.require licensed companies
to digitally monitor all of their products,from seed to sale.Though some farms and other companies are starting to
use the track and trace system,the current status of the technology makes it difficult to pin down whether
manufacturers or distributors are knowingly diverting their products,or if licensed shop.owners are buying.
products for their legal stores and shuffling them be sold tax-free in their underground shops.
Even manufacturers say they're not sure how products with their branding are.ending.up with illicit retailers."The answer
to this questionls'unclear," said Allison Luvera, spokeswoman for Kurvana, which has Tong been a,major player in the
world of cannabis vape oils and cartridges.`,`All we know is that Kurvana is not selling products directly to unlicensed
operators."After the Southern California News Group,emailed Kurvana photos of what-appears to one of its,vape pens
that had been purchased at Harbor Holy Fire,an'unlicensed store in Costa Mesa,Luvera said.they started working with
their attorneys to send a cease and desist notice to the shop.