Ask any cannabis regulator in California what one of the highest barriers to a well-functioning legal cannabis market is, and nearly all would say, at some point, the unlicensed market. This includes longtime illegal growers, grading hillsides in northern California, and pop-up shops selling unregulated cannabis products.
Voters passed Proposition 64 in 2016, legalizing cannabis for adult use. But the state has had problems with unlicensed cannabis operators for decades. How bad is the illicit market problem in California? During one session of the California Cannabis Control Summit last week, Kenneth Meyer, deputy district attorney for Los Angeles County, said the cannabis market in the state is split in a concerning way: there’s a $3.1 billion legal market and $8.7 billion illicit market, resulting in an estimated loss of revenue to the state of $2.6 billion.
“California’s numbers are the worst of any state that has legalized cannabis,” he said, adding that this high volume of illegal activity also brings money laundering concerns.
One hurdle in enforcement efforts in Los Angeles is unregulated, hazardous cannabis facilities that process flower into other products. “We have not seen a decrease in lab cases since the passage of Prop 64. We have seen, actually, an increase of the sophistication and scale. So what we are seeing is worse injuries, and more deaths, as a result.”
Joshua Mandell, a partner at Ackerman, LLP and co-founder and chair of the Los Angeles County Bar Association’s cannabis section, moderated another discussion on the topic, called “Civil Litigation and Criminal Issues in the Cannabis Industry.” Panelists included Melissa Bickel, senior deputy city attorney for the City of Sacramento, Emilio Camacho, deputy city attorney, also for the City of Sacramento, and Megan McClurg, deputy city attorney for the City of Chula Vista.
McClurg began by highlighting her dual role as both an enforcer of laws against illicit operators, and as a cannabis regulator.
“I’m assisting with the shut down of illegal operators and also with the regulation of licensed businesses, which is an undertaking,” she said.
In Chula Vista, which is the second largest city in the San Diego metropolitan area, the main illegal cannabis activity is around retail shops, McClurg said, and though illegal delivery likely exists, the unlicensed stores have been the “flash point” in Chula Vista, and the most “consistent problem.”
“They rent from a landlord, pop up overnight, and operate until we’re able to shut them down,” McClurg said. She described that the city has had between seven and twenty-plus unlicensed shops in the city over the past five years, and said they typically have “notoriously openly bright green flashing lights and lines out the door,” with high traffic. These shops often have similar building issues, like unpermitted electrical work, magnetic locks, which are a safety issue, and often boarded up windows. These violations come with separate fines, McClurg said, and some of these shops open right back up again 48 hours later, and are again fined.
Enforcement has been an evolution in Chula Vista. Through civil litigation, the city issued hundreds of thousands in penalties to landlords, McClurg said, and was able to collect some of those, but not all. Litigation dragged on, and the city council, frustrated, decided to prioritize quick shutdowns through administrative abatement, she said, which was a much faster process, but not fast enough, so that’s when the city shifted to criminal enforcement.
“It’s a big quality of life issue in the city, a lot of complaints about those,” she said.
Initially, in Sacramento, Camacho said, the illegal activity was “completely out of control” in residential neighborhoods, accounting for roughly 90% of the city’s enforcement in cultivation, and resulting in increased home invasions and burglaries. The other 5% is unlicensed shops, and the final 5% is made up of people throwing cannabis parties or hosting farmer’s markets, organizing people through Instagram and other social networks.
On the unlicensed cultivation front, the numbers are startling. Regulators identified 1,200 unlicensed cannabis grows in homes; these weren’t a handful of plants, but sometimes thousands, he said. So, in response, regulators did three things, he said: one, they changed an ordinance to include a $500 per plant fine; two, in 2018, the office hired Camacho as a city attorney focused on cannabis enforcement issues; three, the City of Sacramento created three cannabis police teams that divided the city in north, central, and south sections and focused on executing warrants to “try to eradicate this problem.”
And how, exactly, does a cannabis regulator identify an illicit grower, when those people don’t want to be found? A few ways, centered around community involvement and “good police work.”
The City of Sacramento also established a partnership with the Sacramento Municipal Utility District, the second largest public utility in the city.
“The utility, it’s actually quite fascinating, they have this very cool scientific process where they can tell you even how many lights they have at a specific location. And with scientific precision, they can tell you, ‘yes, that’s an illegal cannabis cultivation grow,’” Camacho said. Next, the police get a list of these potential unlicensed growers, especially because some of these growers are stealing electricity, and conduct an investigation, and possibly work to execute a warrant.
Other times, neighbors call the city to report a problem, sometimes because they suspect illegal cannabis activity, but other times, it’s another issue, say a flood from a poorly managed irrigation system, which dumps water into a neighbor’s yard, prompting a fire department to visit. Or maybe someone notices guard dogs that exceed local limits.
Bickel, senior deputy city attorney for the City of Sacramento, talked about how she worked with Camacho to develop new rules, adopted by the city council, that reflected a court hearing process, rather than the one that was inherited, which was a “process used for parking fines and not for million dollar penalties.”
“I think the difference between us and a lot of the other jurisdictions is that the city actually put in a lot of resources,” Camacho said, highlighting that Sacramento now has just 200 illicit cannabis grows, and has issued more than 500 fines, totalling north of $100 million. The city has collected nearly $10 million, Camacho said. “We’ve done creative settlements,” he said.
Camacho mentioned another case that was just settled for $1 million, involving an unlicensed grower that was cultivating 6,000 plants in a warehouse. Another unlicensed grower was slapped with a seven figure penalty for growing more than 2,000 plants in a residential house.
“We’ve gotten two house donations to nonprofits. And, for example, one of them now went to a single mom and her two daughters who otherwise wouldn’t have a home. And it’s been a huge success in trying to eradicate this problem.”