Wherever money flows, misrepresentation and fraud will follow!

High times are unfolding in the cannabis industry.  Hot, lucrative opportunities  can attract many including  principled and unfortunately unscrupulous people, if your company is not diligent, you could face an infestation of selfish, shady and deceitful people. The opportunity to indulge, trick, and fraud attract many as deceit and free-flowing money go hand in hand.

There is a higher chance you are a victim of fraud than not. Give a person an inch and they could take so many miles that leave your marijuana business broke.

With so many hands involved in the supply chain, the essential question is, do you have an anti-fraud plan? If not, then you are possibly handing away money, secrets, and the possibility the fraudster can carry on at will.

A Fraudster’s Haven

The sticky-icky cannabis industry is a power player now. And people need their pot. With such high demand, fraudsters looking to make an extra buck (or a few million) will do whatever it takes to ensure their actions are unseen.  Don’t underestimate the cunningness of a criminal. Not all criminals are caught.

Recent activity in 2018-2019 has put a spotlight on the dangers of doing business in the Cannabis industry. The eleventh state to legalize marijuana, Illinois, legalized recreational cannabis use in 2020 and reported $11 million in revenue for their first week of sales alone, 3.2 million on the first day.  Giant amounts of money have been flowing in and around the Cannabis industry for a few years now, and this will continue as more states hop on board to ease massive budget deficits. With so much popular support, New York’s governor Cuomo vowed that New York would recreationalize cannabis by 2020. It’s clear that by 2021, at the latest, the three major U.S. cities in America will have gone green. These facts support the need for forensic due diligence to avoid misrepresentations in the industry or worse fraud.

The industry, including investors, cannabis operators, growers, employees, contractors and suppliers are engaged in an expansive terrain that involves strict compliance with state and local regulations and laws, quality growth standards, and adherence to fair and honest business practices. The problem is, without corporate due diligence, including an extensive review of corporate documents and multiple other factors, the question remains: Whose fault is it when thousands or millions of dollars go missing? Or when the company runs out of money.

There are three conditions that, when presented in differing levels, raise the possibility of fraud:

• the pressure to commit fraud,
• the opportunity to commit fraud,
• and the rationalization of committing it.

Being mindful of these three circumstances can help managers and business owners minimize the risk of fraud in their organization, and a corporation’s response to compliance must be ever more sophisticated.

Opportunity is generally provided through weaknesses in the internal controls such as inadequate or lack of:

• Policy and procedures
• Supervision and review
• Separation of duties
• Management approval
• System controls

Pressure can be imposed due to:

• Personal financial problems
• Personal vices such as gambling, drugs, extensive debt, etc.
• Unrealistic deadlines and performance goals

Rationalization occurs when the individual creates a justification for their fraudulent activities. The rationalization varies by case and individual. Some examples include:

• “I really need this money and I’ll put it back when I get my paycheck”
• “I’d rather have the company on my back than the IRS”
• “The company owes me for everything I have done”
• “I just can’t afford to lose everything – my home, car, everything”

The Need for Forensic Due Diligence

Corporate operations in the cannabis industry deal with shareholder responsibilities, the ins and outflows of large sums of money, countless actors to ensure procedures are running smoothly, and bureaucratic processes. Too often, these practices can become corrupted by one or more foul playing individuals bent on deceiving others to receive cash.

As this booming industry continues to take shape, and bring in billions of dollars, the opportunity to misrepresent, defraud, scam, and cheat grows each day. Are you paying microscopic attention to each hand in the supply chain, and to every detail of each transaction that your company does? Do you have dedicated professionals that do this for a living?

Fraud is a Commonplace Epidemic

Can Fraud Become an Epidemic in The Cannabis Industry? As it is in many industries.

Fraud is an American epidemic that can lead to devastating consequences. While epidemic may seem too strong a word, consider the amount of fraud in America every day—you may feel the term isn’t quite strong enough. Endless news reports are filled with individuals cheating and conning others in all professions. Cannabis is no different.

Apply the 10-80-10 rule and trust that you cannot trust that each person along your supply chain has proper intentions.

Fraud is, unfortunately, found throughout the cannabis industry. The fast-paced growth of Cannabis is attractive to con artists but also trusted employees with insider knowledge. Take a look at the 10-80-10 rule to get a taste of how prevalent fraud actually is.

10-80-10 Rule

The 10-80-10 Rule supports the basic assumption of capability by the breakdown of the population and the likelihood of fraud occurrences. Essentially:

• Ten percent of the population will NEVER commit fraud. This is the type of person that will go out of their way to avoid committing fraud.
• Eighty percent might commit fraud, given the right combination of pressure, opportunity, and rationalization.
• Ten percent of the population is actively looking at systems and trying to find a way to commit fraud.

*Source: National Association of State Auditors, Comptrollers, and Treasurers (NASACT) and the Oregon State Controller’s Division

Does Your Company Have a Strict Protocol in Place for Investigating and Detecting Fraud?

Cannabis misrepresentation can be complicated and varied, as well as the consequences. A misrepresentation, a situation in which false information is disclosed, as in a statement or document of a material fact made by one party which affects the other party’s decision in agreeing to a contract or complying with the contract. If the misrepresentation is discovered, the contract can be declared void and, depending on the situation; the adversely impacted party may seek damages. Also remember that fraud is any misstatement, misrepresentation, or omission made by someone. Basically, lying on applications or contracts is fraud. Even if you just exaggerate a little bit, even accidentally, can have serious consequences and possibly have committed fraud.

In order to be victorious in a fraudulent misrepresentation, the company must be able to prove the following elements:

• A representation was made in any action that can be turned into a statement of fact.
• The representation was false.
• The representation, when made, was either known to be misleading or made recklessly without knowledge of its truth.
• The representation was made with the purpose that the other party relies on it.
• The other party did, in fact, rely on the representation.
• The other party experienced damages as a result of relying on the representation.

Usually cases of corporate fraud are complicated, highly secretive, and if discovered they are economic centered or avoidances of financial responsibilities.In many cases, fraudulent actions start out small and are in no way intended to be ongoing. Thus, it’s difficult to detect fraud in its early stages. Often the fraud goes undetected for extended periods of time before the scheme is uncovered by a whistleblower, the lack of planning on the perpetrators part, or the lack of ability of the plan to keep up with the demands of its expansion.

A Professional Pathway to Expose Fraud

A forensic review of your business processes, documentation, and vendor management is crucial to develop the proper policy, procedures, and internal controls that can eliminate the opportunity for fraud to occur. With the growing misrepresentation and deception that is being exposed in the Cannabis industry, I strongly encourage finding a consulting firm that can take the pain of internal auditing off your hands.

How Can You Avoid All of this?

Your business deserves to grow to its full potential. Ensure you are fraud-free, take the appropriate steps, and enjoy the peace of mind that comes with having a proven professional solution for all your business needs. Find a hound-dog and let them confidentially sniff out the bad actors that could kill your buzz.

About the Author:

With a long career of business experience in the cannabis, lending, and real estate business, Michael S. Richardson discovered fraud within his own mortgage company. Now the Cannabis Industry has its own fraud triangle—pressure, opportunity, and rationalization. Michael never thought it could happen to him, but it did. Michael has since become a Subject Matter Expert in the Cannabis and Mortgage Industries over the last 30 plus years. Don’t become a victim of fraud: Where the money flows, fraud will follow. Michael S. Richardson is the CEO of Green Brain Solutions, and GBS is your answer to unseen problems that may very well find your company.