Key to success? Hiring a Full-Time Compliance Officer

Acres of crops destroyed? Pounds of product confiscated? Total business shutdown? It’s happened – and there could be more to come

Almost every week, there is a new report of someone breaking with a state cannabis commission regulation and getting nailed.

Issues arise generally in three areas: security/safety, pesticides, and packaging.

Most recently, it was pesticides, from an investigation completed by the California Bureau of Cannabis Control on December 21 of Sequoia Analytical Labs in Sacramento. The bureau claimed the lab was faking results for four months about inadequate pesticide testing on cannabis products.

That means nearly 850 batches – tens of thousands of pounds of flower, edibles and marijuana products – will have to be returned and either destroyed or retested. Quoted in an article in the San Francisco Chronicle, Tony Daniel, the chief revenue officer with Steep Hill Labs in Berkeley, said the incident is “that doomsday scenario that everybody has been anticipating.”

“Everybody up and down that chain is going to want their money back, and not everyone’s got 25 to 50 grand to cover a recall,” Daniel said.

Then there is the case of ForwardGro, which became the first cultivation operation licensee in Maryland in mid-2017. After a six month investigation and 17 witness interviews, on December 17 the Maryland Medical Cannabis Commission (MMCC) issued a consent order stating that the company used some of the banned pesticides listed by MMCC.

During that investigation, the commission also found additional compliance violations: failure to ensure employees used adequate personal protective equipment when they were spraying crops with the unauthorized pesticides, and failure to have appropriate security measures in place as required by the commission’s regulations when plants were moved to an area without security cameras.

As a result, ForwardGro has agreed to pay a fine of $125,000 within 30 days of the issuance of the consent order, serve a 24 month probation period, make critical changes in its leadership structure (which meant getting rid of CEO Mike McCarthy), and offer refunds on any flower or pre-roll products produced by ForwardGro before May 31, 2018.

The consent also noted: “The respondent shall ensure an expanded role for its compliance officer in the management and operations of the respondent’s business reporting directly to the CEO … and create a revised compliance officer job description …”

To some industry watchers, companies that get in trouble about compliance are even deeper behind the eight ball than they realize. “If you don’t start with that compliance at the core of everything you do, it is very difficult to catch up,” Joe Hodas, CEO of General Cannabis Corporation, said at a presentation during the 2018 Marijuana Business Conference in Las Vegas, adding that the cannabis business is a compliance business. “You are putting your business at risk if you don’t have someone focused on compliance on a day-to-day basis. If you are not compliant you will not be in business.”

What will probably go down in cannabis history as the biggest compliance failure to date occurred with Sweet Leaf in Denver, where undercover Denver police found that budtenders there were doing multiple daily cannabis sales to the same buyer, in violation of regulations. The city revoked 26 Sweet Leaf licenses in total: seven retail licenses, six medical center licenses, seven medical cultivation licenses, one infused products manufacturing license and five retail cultivation licenses, effectively putting Sweet Leaf out of business. “The biggest lesson learned from that experience was that you are being watched, you are being observed,” Hodas said. “If you think no one is looking, that can come back to bite you.”

Now with other states opening up recreational sales – ten so far, with New Jersey, New York, Vermont and other states on the cusp – and more regulators getting in the mix who have never had to regulate an agriculture commodity the way that cannabis has to be regulated, things could get tricky fast.

California, where adult use cannabis sales began on January 1, 2018, is still tweaking rules and regulations, ready to roll out the final version of the state’s cannabis regulations on January 19, 2019. “California dispensaries I think are having some trouble because of this sudden shift from a sort of gray market, loose framework to this very strict framework,” Kyle Sherman, founder and CEO of Flowhub, a point of sale software supplier, said during a presentation at the 2018 Marijuana Business conference in Las Vegas. “Now having to integrate compliance is actually really difficult because people are so set in their ways.”

To a business already deep in the red just to open its doors with all the capital equipment investments and license fees, adding another full-time employee can seem like an unnecessary burden. A quick search on a jobs site shows compliance officers annual salary as high as $80,000.

Hodas advised hiring someone as a compliance officer who not only knows and understands the particular state regulations, but how to create institutional compliance. “You have to choose a person who understands how to integrate that into the culture – in sales, in product development, whatever. They need to understand culture and messaging.”

Everyone needs to be onboard with compliance, Hodas said, not just the assigned compliance person. “The compliance person is that one person responsible for checking every box and every label and those parts and pieces what I would call end-of-the-funnel stuff,” he said. “You can set that person up for failure because there will be mistakes made.”

So what can be done now? Sherman said that more technical assistance in developing new applications for getting and reporting data is already impacting how cannabis businesses make compliance work better. But he also advises to just try to understand the spirit of the law. “If you know what that law is intended to do, go with that.”

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