Corruption and Crackdowns in California’s Marijuana Market

California voters voted to legalize recreational marijuana production and sales in 2016. However, the majority of California cities outlawed such activities within their own borders. Adelanto leaders however were keen to welcome the legalized market. This small town in the desert of 31,000 was well-known for its close proximity to prisons. It had an infamous reputation for being poor and empty. The local politicians believed legalizing marijuana would make a difference.

Adelanto City Council approved plans to license retail and recreational growers in May 2017. This was the town’s first state-wide move. The unusual decision at the beginning of 2017 was widely covered in national media. An interview with The New York TimesRichard Kerr (then-mayor) predicted Adelanto’s potential to raise $10,000,000 annually from local pot businesses.

This didn’t happen. Adelanto’s budget for 2020–21 anticipated just $1.4 million in marijuana revenue, less than a third of the city’s projected $4.5 million budget deficit. Although that $1.4million is more than Adelanto would have gotten without legalization it isn’t enough.

Adelanto is now Mayor of Kerr. In 2018, the FBI raided Kerr’s home as part of its corruption investigation. The FBI arrested Kerr on seven wire fraud charges and two bribery counts three years later. Kerr is charged with taking $57,000 worth of bribes or kickbacks in order to get permits for pot businesses. His arrest came four years after then–City Council Member Jermaine Wright was accused of taking a $10,000 bribe from an undercover FBI agent posing as an applicant seeking approval for a local marijuana transportation business.

Similar corruption has been committed by other California officials. Helios Dayspring, a marijuana magnate, pleaded guilty in July to the bribery of a San Luis Obispo County Supervisor for many years in return for favorable policy votes. Although the name of the supervisor was not included in the plea deal, news reports identified Adam Hill as his victim. Hill died from an overdose which was later deemed suicide.

Dayspring’s guilty plea was accepted by the Los Angeles Times implied that the problem was California’s “nascent, ill-regulated marijuana industry.” California’s marijuana market is often described as “Wild West”, in stories.

It is true that California has badly mishandled legalization—so badly that, more than five years after voters approved that change, the black market still accounts for an estimated two-thirds of cannabis sales. However, this is far from being the end result. Schwach regulation, the disastrous rollout of legal marijuana stems from giving officials too much power to decide who can produce and sell it.

Which shops are there?

Californian cannabis customers don’t purchase pot from shops that are licensed by the state. Global Go Analytics and market observers estimate that California illegal cannabis sales amount to $8 billion per year. That’s twice as much as legal.

The persistence of the black market is due to Californians not having easy access legal retail outlets. California is home to only two licensed dispensaries per 100,000 residents. Oregon has about 18, Colorado 14 and Colorado has 14.

Proposition 64 was the ballot initiative legalizing recreational marijuana. It allowed municipalities to limit the number or ban all local sellers. Two cities in California have outlawed dispensaries for every city that permits them.

Prop. Prop. 64 permits people to grow marijuana on their property, but it is not an option for those who don’t have the space or equipment necessary. The policy, which is prohibited in certain parts of the state, allows people to grow their own marijuana but denies them the option to buy it from local stores.

Another option is to order online. In 2020, state regulations seemed to prohibit local governments interfering in marijuana delivery. However, 24 cities which had banned marijuana sales challenged the regulations, saying it violated their bans. Fresno judge rejected their lawsuit, however it left regulatory uncertainty.

Californians that live close to licensed dispensaries may find their marijuana prices exorbitantly higher due to the state and local taxes. A 15% excise and weight-based cultivation taxes are imposed by the state on all retail sales of marijuana. These tax rates are indexed to inflation. The rising inflation of 2021 meant that cultivation taxes increased at the beginning 2022 even though cannabis’ market value had fallen.

Prop. Local governments can also impose taxes under Prop. 64. Los Angeles’ legal cannabis purchasers pay a 10 per cent local tax on their purchase, in addition to state marijuana taxes, and an additional 95% general sales tax. The total retail price for legal cannabis in L.A. is up by over a third because of taxes. People who purchase marijuana illegally can, however, avoid this burden.

The power Prop. Local governments were encouraged to corrupt by the power that Prop. There was an immediate land rush when Adelanto officials announced they would allow the marijuana industry to enter. Adelanto became a magnet for anyone interested in setting up a business in this industry, as there were so few places that would accept marijuana businesses. The property values have tripled.

It was crucial that these early speculators purchased property in zones designated for cannabis industry. The federal indictment against Kerr states that Kerr requested a boundary modification to permit a particular business property to be used as a marijuana retailer. Kerr also deposited a $5,000 cash check to the owner of the property one week after the Adelanto City Council was set to vote. The FBI claims that Kerr was given additional checks by this person and other individuals as city officials continued crafting its marijuana ordinances. He also helped the property owner obtain a permit for a dispensary.

You can use bribes to get a competitive advantage by utilizing regulatory exceptions. Dayspring admitted to having paid for an exemption from the proposed county moratorium regarding outdoor cultivation operations. Dayspring wrote Hill prior to the approval of the exemption in 2018. Dayspring stressed that it was important for Hill to extend the deadline for submissions and not allow others in.

The federal Controlled Substances Act still bans marijuana. Financial institutions avoid serving those who grow and/or sell the drug. They could face criminal charges, forfeiture or other harsh regulatory penalties. State-licensed marijuana companies often have to work without banking access due to this threat. The majority of their operations rely solely on cash which can increase the chance for theft and robbery.

Corruption is also possible with all that money. California has seen a lot of bribery cases.

Two former officials of Calexico (a Mexican city with around 40,000 inhabitants) pleaded guilty in June 2020 to receiving cash-stuffed envelopes from FBI agents. They believed they were opening a cannabis dispensary. David Romero (a former city councilman) and Bruno Suarez–Soto (the former commissioner for economic growth of the city), had promised to speed up the licensing process for the fictional company.

The FBI filed a complaint that Romero, Suarez-Soto, and others offered to “revoke” or delay applications for cannabis business permits from those applicants who were not in receipt of bribes. This was to allow them to receive preferential treatment for applications later submitted by people who have paid or promised to pay money. The two men set up a shell corporation that looked like a consulting company but was primarily used to conceal the money they received.

Douglas Berman, the Ohio State University Moritz College of Law’s executive director of Drug Enforcement and Policy Center, believes federal prohibition is fueling such corruption. Berman claims that everyone is violating federal law. Federal prohibitions require the use of sophisticated corporate structures, real estate transactions and other complex business arrangements. [corruption]This makes it easier or even more possible. Berman also said that California’s complicated licensing system makes it difficult for potential growers and retailers to operate marijuana businesses. They must obtain state or local approval before operating.

“Local Control”: The Peril of the Scourge

The reality of Prop. 64’s legalization of marijuana has shaped all these cases. Local officials have a lot of power over who is allowed to participate in marijuana legalization under Prop. 64. Many supplicants gather in California, where two-thirds have banned marijuana business. They then fight for approved licenses or locations and compete with each other to be allowed. To cover budget deficits or boost their economies, the cities add their taxes. It makes it difficult for legal businesses compete with the black markets.

California is turning government officials into cartel bosses instead of liberating its citizens in the war on drugs. It is no surprise that marijuana sales are still dominated by the black market.

This system, in a way, is the same as what California voters approved. Proposition 64’s selling point was the fact that municipalities could not say no to cannabis businesses. Proposition 64 is a strong selling point. The selling points of 64. Many powerful naysayers can outwit those who want to legalize marijuana.

Hirsh Jain (founder of Ananda Strategy marijuana consulting firm and chair of Los Angeles Marijuana Chamber of Commerce) says that “Local Control is the main factor that is crippling California’s market.” “Local control can often be seen as a democratic virtue. Local control can be used to subvert the will of voters in practice.

There are dozens of California cities in which Prop. Jain noted that dispensaries are being blocked by local politicians. Residents who were opposed to the situation collected signatures last fall for initiatives on the ballot that would require officials at Redondo Beach and Manhattan Beach to permit retailers to enter. Advocates for cannabis businesses are calling for a new ballot initiative in the state that would reduce or abolish cities’ ability to prohibit marijuana sales.

Dispensaries are not always allowed in cities. They often place arbitrary limits on their number, or create bureaucracies that make it difficult for people to comply with the rules. The Prop. 64 referendum was passed more than five decades ago. Since Prop. 64 passed in 2005, Fresno has only recently approved licenses to open recreational shops. According to interviews and an elaborate scoring system, the city manager has final authority over who can legally sell marijuana. Last year, 21 applications were approved by Fresno. The city was sued by four businesses that refused to license them in November, December. These companies complained that the process was confusing and that certain applicants were trying to fake local ownership.

Los Angeles’ slow licensing system has made it difficult for aspiring entrepreneurs to start cannabis businesses. L.A. was home to 217 licensed recreational marijuana retailers, serving 4 million people as of January. Denver with its population of approximately 700,000. lists 476 retail stores.

Los Angeles established a program called “social equity” three years ago to help applicants who were convicted or arrested in connection with the war against weed. However, the rollout of this program has proved to be a failure. Since the program launched, Jain notes, only 20 social equity–approved storefronts have opened. Numerous others struggle with the bureaucracy.

This program doesn’t seem to have been designed to help the most disadvantaged. Jain points out that applicants needed to own a property to be eligible. Some had to borrow money and others were renting storefronts. This led to some people being bankrupted and limited participation for the well-capitalized. It is not exactly the best model to lift up the poor.

Even though they survive the licencing process, cannabis entrepreneurs still must deal with complex, expensive, and burdensome regulations from two levels. Fresno is one example. It charges more than $8,000 for applicants who are trying to get the few available licenses. In order for an applicant to become eligible, six separate plans must be submitted that describe different aspects of the business’s operations. Every plan can contain a maximum of twelve city-mandated requirements.

California’s cannabusinesses face similar obstacles to their operations as the ones that prevent developers from building new housing. California Environmental Quality Act can also be used to prohibit marijuana businesses by California citizens, as can apartment buildings they disagree with. Humboldt County environmental groups filed a lawsuit in April against the government to prevent approval for an 8.5-acre marijuana farm operation.

Due to the fact that both legal and regulatory barriers exist, it’s not surprising that California has a similar cannabis-related corruption scandal. Jose Huizar was indicted by the federal government in June 2020 for accepting $1.5million in gifts and bribes in exchange for his support of real estate developers in order to approve their projects. Jesse Leon was a former Huizar assistant who claimed that he alerted federal investigators to the possibility his boss had been seeking campaign donations from cannabis businesses. The city settled for $150,000 with Leon. Huizar hasn’t been accused of taking bribes form cannabis businesses, but Leon denied Leon’s allegations, noting that Leon had tried to take part in L.A.’s marijuana social equity program as a city employee.

California’s New War on Weed

California could emerge from this cannabis mayhem by flipping its incentives”, the Los Angeles Times editorialized in December. “It is far too lucrative and simple to continue in the black marketplace, but too difficult and costly to move to the legal market. The state can increase its chances of getting fence-sitters licensed by easing licensing requirements or temporarily reducing taxes.

The federal government’s current response to “this cannabis mayhem” has been focused more on enforcement and penalties than light taxes and regulations. Prop. 64 civil sanctions were authorized against illegal marijuana sellers and growers. They also face misdemeanors that can result in a $500 fine or up to six months imprisonment. The law, which took effect in 2022, doubles that penalty by allowing civil penalties of up to $30,000 for anyone who “aides or assists” illegal cannabis business activity. A separate offense is committed for each day that you aid illegal cannabis sales and cultivation.

Drug Policy Alliance, American Civil Liberties Union and American Civil Liberties Union oppose the law. They warn that it is too vague and doesn’t include “aiding or abetting” and that local authorities can target lower-level workers. These employees could see their wages garnished, and have their driver’s licences suspended. United Cannabis Business Association welcomed new penalties. It stated, “The illicit cannabis market must stop to ensure legal operators can have an increase in patients and customers, which creates union job opportunities.”

California Attorney General Rob Bonta boasted in October about the 13-week long operation that saw state and local police officers round up more than 1,000,000 illegally grown cannabis plants. They targeted farmers who were trying to avoid taxes, oppressive fees and licensing requirements by growing in rural locations.

These raids were an everyday occurrence in California, even before legalization. Now, the government promotes a black market by not banning marijuana production or selling it illegally.