Coining it on cannabis
As more and more states in the US opt to regulate the production and sale of recreational marijuana, GC examines a developing industry and the contentious legal frameworks enabling it.
Cannabis within the law
In the US, since the conclusion of alcohol prohibition in 1933, no substance has proved as divisive and controversial as cannabis.
While alcohol once again became a legalised and regulated product, the decades that followed would assemble the legislative building blocks for the notorious ‘war on drugs’. In the case of cannabis, that began with prohibitive regulation, followed by outlawing possession, before eventually imposing mandatory prison sentences for those caught with the substance.
In 1970, Congress passed the Controlled Substances Act, which classified drugs based on their medical characteristics and potential for abuse. Marijuana was given a Schedule I classification – the same as heroin and one level higher than cocaine – recognising that it had no accepted medical use in treatment and a high potential for abuse.
Since then, a number of legislative initiatives have sought to reclassify cannabis, from formal petitions to Congress and the Drug Enforcement Agency, through to reclassification bills put before Congress.
But 45 years on, cannabis remains a Schedule I controlled substance in the US at a federal level. That’s despite more than half of states having introduced medical marijuana laws, following California’s lead in 1996.
Such a disconnect between state and federal law is only exacerbated by an increasing number of states passing legislation that legalises and regulates the cultivation, sale and possession of cannabis for recreational use.
The contemporary situation in the US represents a scenario in which activities considered legal and protected by state law in one jurisdiction, could trigger felony charges across a state border just one mile down the road.
In the absence of formal federal protections, operating any business can be risky. But conducting business that is in direct contravention of federal law, would seem downright foolish to many.
But wherever there’s money to be made, there’s usually no shortage of those willing to take a chance.
Going where the Grass is Green(er)
Colorado and Washington were the first two states to legislate for a regulated recreational cannabis market at the state level in 2012, with the first sales taking place in 2014. The legislation introduced strict controls for the cultivation, distribution and sale of cannabis.
Eight more states followed their lead during the 2016 election campaign, with more expected to follow in the coming years – although the legalisation of recreational cannabis stands to be a hotly contested issue at the ballot box.
Despite being legalised for recreational use in a minority of states only, cannabis is already big business. In 2016, total sales of legal marijuana – whether for medical or recreational use – totalled $6.7bn USD. That number is expected to top $20.2bn USD by 2020 – representing a compounding growth rate of 25%.
While companies that comprise the cannabis industry in the US are solely privately held businesses – and therefore not obliged to publicly report any of their financial activities – off-the-record conversations with executive-level industry figures revealed a staggering 35-40% target profit percentage.
But it wasn’t the pursuit of riches that prompted Jerry Derevyanny to leave behind a career as a New York City litigator and law firm partner, to enter the cannabis industry.
‘Some friends of mine started a business in Washington, looking to take on the recreational cannabis market, and they wanted me to come on board as their first lawyer,’ says Derevyanny, general counsel at Northwest Cannabis Solutions.
‘When they first offered me the job, I turned it down. But when they called back a week later, I had a change of heart. For me, it was the opportunity to be the first in an industry, to try and do something groundbreaking and take a real chance. If you told me four years ago that this is what I’d be doing, I’d tell you that you were insane, but here we are!’
Getting Legal involved with any prospective cannabis business was a vital first step, as a quickly developing, yet already onerous regulatory regime set out the legal frameworks necessary to conduct operations.
‘Our business is regulated at the State level by the Washington State Liquor and Cannabis Control Board. The de facto approach to cannabis so far has been to treat it like alcohol, but the market dynamics and underlying economics work very differently. At this stage, it’s still a learning process for everybody,’ says Derevyanny.
‘It shows part of the problem when you’re trying to regulate cannabis, which is that it’s a relatively new product – at least legally, so there are no examples from elsewhere which can be used.’
Adding to the difficulty for those trying to navigate the already complex regulatory systems is a lack of consistency between states, with different approaches to how each part of the process is carried out – from cultivation to retailing.
‘With the rules between states being so different – plus conflicting with federal law as a whole – implementing a meaningful and consistent framework is still a long way off,’ says Chris Conrad, a business and legal consultant specialising in cannabis.
Congressman Dana Rohrabacher (R-CA), explains his proposed legislation to harmonise state and federal marijuana policy.
‘My bill, entitled the ‘‘Respect State Marijuana Laws Act,’’ will permit residents to participate within the confines of a state’s medical and recreational marijuana programme, without running afoul of Federal law.
Today, the scourge of marijuana prohibition has fuelled organised crime, here and south of our border, and in our inner cities and throughout the world. There is little that we can do to stop that because we keep feeding them with money by having outlawed drugs that people want to consume.
Marijuana is now designated as a Schedule I substance and has prevented a robust research of the drug to find out exactly what it could be used for in a positive way.
What we have had in the past has limited the research supply of marijuana, both in quantity and in quality, making access particularly difficult to legitimate scientists and practitioners. Thus, we have made it very difficult, if not impossible, for us to get a full understanding: If there are dangers, what are they? If there are some potential positive uses of marijuana, what are they?
A plethora of anecdotal evidence suggests that this plant and its constituent parts may offer relief from ailments such as post-traumatic stress disorder, cancer, chronic pain, epilepsy, glaucoma, and multiple sclerosis.
When people are free, some of them are going to make wrong decisions in their lives. We need to make sure that we understand that when we legalise medical marijuana, or even recreational use of marijuana, some people will hurt themselves, just like with alcohol. It is up to us not to try to put them in jail, not to try to hurt them, not to try to force them to do what we want, but to try to reach out to them, to help people who are in need.’
‘I see two realistic options for achieving this. You could put hemp – an industrial product with a multitude of uses as a fibre – under the control of the Department of Agriculture, with marijuana regulated by the Bureau of Alcohol, Tobacco and Firearms. Or you could create a new agency which oversees cannabis altogether.’
By implementing strict regulatory processes at the state level, both Derevyanny and Conrad hope that if federal law is to eventually be used to regulate the cannabis industry, whether recreational or otherwise, having strong controls early on will make for a more seamless transition.
‘The approval process you have to go through is pretty strenuous. A really important requirement is showing where the money is coming from, because one of the big things is proving that the cartel isn’t getting involved,’ explains Derevyanny.
The risk of involvement by nefarious financial backers is exacerbated for cannabis businesses, as they don’t have access to the bulk of traditional financial institutions the way almost every other industry does. That’s because national banks can only categorically avoid federal charges when handling transactions involving cannabis funds if they ensure that the transacting businesses are complying with all state laws, as well as the ‘Cole Memo’ issued by the Department of Justice.
‘Most banks decided it just wasn’t worth the hassle. Thankfully, in Washington, we’ve been relatively fortunate in that our State-based credit unions have stepped up in a big way. They’ve been hugely supportive of the industry and you get access to real banking facilities. Other states haven’t been so lucky,’ says Derevyanny.
‘The unfortunate reality is that for this scenario to change, it’s going to require a change in federal law – not as far as legalising cannabis across the country – but a fairly significant change nonetheless.’
The change Derevyanny is referring to is the Secure and Fair Enforcement (SAFE) Banking Act, which would permit banks to serve cannabis businesses without fear of federal penalties. Despite failing twice, once in 2013 and again in 2015, Derevyanny expressed optimism that a third attempt to pass the legislation would prove the charm.
‘The SAFE Banking Act would go a long way to helping legitimise the industry. At the moment, there’s just far too much cash being used in our businesses, which raises the risk profile, while also making it more difficult for customers to transact, because they’re unable to use debit or credit cards,’ says Derevyanny.
In contrast, Conrad was not nearly as optimistic about progress being made on any front at a federal level under the Trump administration for marijuana policy.
‘Despite promising to respect the ability of individual states to administer their own policy towards cannabis during the campaign, Donald Trump did nothing when [Attorney General] Jeff Sessions attempted to pressure the Senate to remove protections for the medical marijuana industry and its patients,’ says Conrad.
While the Senate showed no regard for Sessions’ rhetoric, expanding on the protections laid out by the Rohrabacher-Farr amendment, which blocks federal officials from prosecuting state-legal marijuana businesses and their customers – a number of operators still remain wary about what the future could hold, particularly with Sessions’ pledge that the Department of Justice would ‘remain committed to enforcing’ the federal ban on cannabis.
As the approach taken by Sessions and Trump under the current US administration remains hazy, an increasing number of states are experimenting with relaxing rules around cannabis – or signalling their intention to do so. While the uncertainty surrounding the legality of the industry likely isn’t going to stop many from trading, for corporate entities like Northwest Cannabis Solutions – uncertainty comes with a cost. For now, the reward trumps the risk – but for just how long that proves to be true in the pursuit of the green dollar, remains to be seen.