After conducting more than 450 compliance inspections on marijuana licenses and providing detailed compliance reports with scores for license owners, investors, banks, insurance and real estate providers, compliance data tells a compelling story.
Where do marijuana businesses most commonly fail?
Low-hanging regulatory fruit are compliance areas where the most frequent violations occur, or areas where infractions are the simplest and easiest to review. Recent compliance data trend analysis over the past six months highlights three compliance areas to focus on below.
More than 71% of marijuana businesses inspected had one or more infractions with inventory traceability and inventory system reconciliation. Some cannabis operations have up to four disparate inventory tracking systems:
- Physical Inventory
- Point-of-Sale System
- State-mandated Inventory Tracking System
- Accounting System
Unfortunately, many marijuana operations overlook these tracking systems on a daily basis. Over time, inventory errors can compound and become increasingly more difficult to explain, correct and report to state authorities.
Some top red flags for marijuana inventory management include:
- Four or more consecutive days without daily sales entries (also known as daily reconciliation);
- Ten or more inventory tracking units are discounted within a 7-day window;
- Any adjustments over 14 grams made to a tracking unit;
- Any adjustments over 3 grams made to 15 or more tracking units in one day;
- Any tracking unit that is “active” for more than 4 months;
- Any plants in an immature, vegetative or flowering state for over 3 months;
- Fifty or more plants destroyed over a 30-day period.
Knowing what regulators look for in advance can help businesses pass inspections.
2.) Security and Surveillance
More than 64% of marijuana businesses inspected have one or more infractions related to security and surveillance requirements. A violation can start with an issue related to an event, employee, process, system or requirement failing in terms of compliance or health and safety concerns. Once a violation occurs, the most likely place the regulatory agency will start the inspection process is with the surveillance system.
In all states regulating legal marijuana sales, security and surveillance is considered a public safety requirement and can lead to stiff penalties, fines and even license revocation if violations occur.
Top Violations in Security and Surveillance:
- The cameras do not have a clear, unobstructed view of all activity without sight blockage
- All records applicable to the surveillance system are not maintained on the licensed premise
- The licensee does not have a current list of authorized employees and service personnel who have access to the surveillance system
Security and surveillance violations can increase fines, add penalties and raise operating costs.
More than 68% of marijuana businesses inspected have one or more infractions related to financial requirements. In reality, financial compliance for marijuana businesses is just starting at state and federal levels.
Due to the all cash aspects of marijuana businesses, many licensed operations have had physical cash payments of more than $10,000 in one transaction. In Colorado and other states, the Internal Revenue Service (IRS) has identified its low hanging regulatory fruit – currency transaction reporting requirements. The IRS requires that Form 8300 – Report of Cash Payments Over $10,000 is completed within 15 days of receipt of cash. The requirement is specific to any single business transaction, or related transactions, that include cash payments of more than $10,000 received by a business.
The information provided on Form 8300 is used by both the IRS and the Financial Crimes Enforcement Network (FinCEN) in efforts to detect and combat money laundering. As one can imagine, a marijuana business who is non-compliant in Form 8300 filings may not be adequately tracking other revenue, expenses and taxation information. For the IRS, this is the easiest initial regulatory action to start the auditing process.
If the cannabis operation is then non-compliant in Section 280e of the Federal Income Tax Code, the process continues and intensifies.
Be Proactive to Survive
Will a federal de or reschedule remove the current state and local regulatory infrastructure? It is very unlikely.
Case in point California. With multiple regulatory agencies starting to enforce at the federal, state, city and county levels, marijuana businesses in California will face regulatory scrutiny from more than 20 disparate governing agencies due to dual-licensing and the local evolution of cannabis. Any marijuana operations in California that are not fully compliant by mid-2017 may not survive into 2018 and beyond.
For any stakeholder in a marijuana enterprise – is the entity compliant in the areas of low-hanging regulatory fruit? If not, odds are that an in-depth regulatory inspection could suspend or close the marijuana business permanently. Think of compliance as a competitive advantage. Be proactive at inception of the business, or fully audit the current compliance program, to ensure survival.