How state marijuana legalization became a boon for corruption

(Politico) - By making local officials the gatekeepers for million-dollar businesses, states created a breeding ground for bribery and favoritism.

How state marijuana legalization became a boon for corruption

In the past decade, 15 states have legalized a regulated marijuana market for adults over 21, and another 17 have legalized medical marijuana. But in their rush to limit the numbers of licensed vendors and give local municipalities control of where to locate dispensaries, they created something else: A market for local corruption.

Almost all the states that legalized pot either require the approval of local officials – as in Massachusetts -- or impose a statewide limit on the number of licenses, chosen by a politically appointed oversight board, or both. These practices effectively put million-dollar decisions in the hands of relatively small-time political figures – the mayors and councilors of small towns and cities, along with the friends and supporters of politicians who appoint them to boards. And these strictures have given rise to the exact type of corruption that got Correia in trouble with federal prosecutors. They have also created a culture in which would-be cannabis entrepreneurs feel obliged to make large campaign contributions or hire politically connected lobbyists.

For some entrepreneurs, the payments can seem worth the ticket to cannabis riches.

For some politicians, the lure of a bribe or favor can be irresistible.

Correia’s indictment alleges that he extorted hundreds of thousands of dollars from marijuana companies in exchange for granting them the local approval letters that are necessary prerequisites for obtaining Massachusetts licenses. Correia and his co-conspirators — staffers and friends — accepted a variety of bribes including cash, more than a dozen pounds of marijuana and a “Batman” Rolex watch worth up to $12,000, the indictment charges.

Cigar bars were his preferred meeting spot, where he rendezvoused with aspiring marijuana licensees to ascertain their willingness to pay bribes, prosecutors allege. When one marijuana vendor asked him why he demanded so much money for a letter in support of his business, Correia said he needed the money for legal fees. A year earlier, he had been indicted on charges of wire fraud and filing false tax returns in connection with his tech startup.

“All government contracting and licensing is subject to these kinds of forces,” said Douglas Berman, a law professor at Ohio State University who authors a blog on marijuana policy. But “there are unique facets to government contracting in [the cannabis] space that makes it uniquely vulnerable to corruption.”

In Fall River, with its population of roughly 90,000, the cost of obtaining a letter of local approval from Correia’s City Hall was anywhere from $100,000 to $250,000 in bribes, according to the indictment. One vendor even agreed to give two percent of his sales to a friend of Correia’s who was helping to facilitate the bribes, according to court documents. This friend allegedly acted as a middleman to help conceal the mayor’s involvement in the extortion scheme.

Genoveva Andrade, who served as Correia’s chief of staff, pleaded guilty to bribery and extortion charges in December. Correia is scheduled to go to trial in February, and five marijuana applicants are expected to testify for the prosecution.

“There’s a lot of deal-making between businesses and localities that creates the environment of everyone working their way towards getting a piece of the action,” Berman said. Whether it’s city or county officials that need to be appeased, local control is “just another opportunity for another set of hands to be outstretched.”

It’s not just local officials. Allegations of corruption have reached the state level in numerous marijuana programs, especially ones in which a small group of commissioners are charged with dispensing limited numbers of licenses. Former Maryland state Del. Cheryl Glenn was sentenced to two years in prison in July for taking bribes in exchange for introducing and voting on legislation to benefit medical marijuana companies. Missouri Gov. Mike Parson’s administration is the target of law enforcement and legislative probes into the rollout of its medical marijuana program.

“The state Is given full control in an industry where there is so much competition -- where everyone realizes how valuable these licenses are,” said Lorenzo Nourafchan, CEO of Northstar Financial Consulting, which works with cannabis businesses.

Nourafchan cited some friends who submitted “incredible applications” for Missouri medical marijuana licenses only to see the licenses go to large, multi-state operators: “It just seemed to me and many others that it was not fair … people were not given objective and unbiased treatment.”

Paying for police and restoring artwork

When advocates seek to legalize marijuana, whether through a ballot initiative or through the state legislature, there is typically a corresponding demand that local communities be given a say in whether a dispensary will be set up shop in their towns.

Inevitably, some localities would want to ban marijuana businesses as unsuitable to their tastes; others, however, may welcome them in hopes of reaping a tax windfall. When Massachusetts passed a recreational legalization initiative in 2016, the state gave wide latitude to local authorities. Not only are cannabis companies required to have a letter of support from municipalities to get a state license, they must also have a "host community agreement," which allows for a "community impact fee" of not more than 3 percent of gross sales of the cannabis business.

But the competition for licenses has been so intense that companies quickly found ways of going beyond the cap, offering more community givebacks in order to win their support. In this scramble for licenses, large, well-heeled firms were able to offer municipalities greater financial benefits compared to small, locally run businesses – the opposite of what the law intended.

For instance, the national pot powerhouse PharmaCann (“Improving people’s lives through cannabis”) offered the town of Wareham, on the Cape Cod Canal, money for police details; paid an art conservation company to restore a painting; and put up money for a local oyster festival, among other sweeteners.

These special benefits – particularly the police details – seemed to run afoul of the state’s commitment to right past wrongs of marijuana enforcement, which was the thinking behind a requirement that cannabis businesses have a "Positive Impact Plan" in order to help areas that were disproportionately targeted by marijuana enforcement.

State regulators delayed the license renewal of PharmaCann last year in order to review its agreements with Wareham. A bill to increase oversight of these agreements stalled in committee last session, but state Sen. Julian Cyr, who represents Cape Cod, Nantucket and Martha’s Vineyard, plans to reintroduce the legislation next year.

Local control is "the biggest mistake that we made," said Massachusetts Cannabis Control Commissioner Shaleen Title at a Boston University conference on marijuana law. Title is a longtime drug policy-reform advocate and serves in the Commission's social justice seat. As someone who helped draft Massachusetts’s legalization law, Title said, she takes responsibility for those shortcomings.

"We should have spelled out a lot more how local control would work … how the selection decisions would be made as to who can operate in a city or town," she said. A quick solution, she said, would be to tie municipal marijuana tax revenue to certain social equity goals like rewarding local businesses.

"Then, you get your share of tax revenue,” Title said, referring to local governments. “I think that would completely solve that issue."

Massachusetts, however, isn't the only state that is plagued by issues of local control.

California led the way for the country's modern legalization movement when it legalized medical marijuana at the ballot box in 1996. The state's early medical marijuana program was largely unregulated — no testing requirements for contaminants, no seed-to-sale tracking software that are now common in regulated marijuana markets. The industry flourished, and many saw California's program as "de-facto legalization" amid the lax regulatory structure.

Those days are long gone. Oklahoma's medical marijuana market is looking more like California's cannabis heyday when small operators didn't have to contend with the exorbitant costs of compliance. California, on the other hand, is contending with the same forces that gave rise to Correia's alleged crimes in Massachusetts: local control.

Since California voters approved adult-use legalization in 2016, giving municipal governments near-total control of the approval process, many longtime medical marijuana and underground operators struggled to enter the industry. Aside from compliance costs, there's the matter of actually securing a license. Despite California's pot-friendly reputation, most of the state’s municipalities have chosen to ban commercial cannabis businesses, fueling even greater competition among companies to enter the municipalities willing to host them.

In return, the localities have chosen to enact their own regulations on how to obtain cannabis licenses, empowering local politicians and government officials. That's given rise to a myriad of corruption cases, from bribes to local sheriffs to a Ukrainian-born man indicted alongside two associates of presidential lawyer Rudolph Giuliani, Lev Parnas and Igor Fruman, over campaign finance violations for plotting to funnel money to politicians in hopes of getting licenses in Nevada and New York.

In May, federal prosecutors charged two city officials in Calexico, near California’s border with Mexico, with corruption, after the pair solicited bribes from an undercover FBI agent in exchange for fast-tracking a marijuana permit application, according to court documents. "This isn't our first rodeo," one of the officials told the agent, referencing how the pair had done similar work for others. The bribery scheme was carried out under the guise of a consulting firm, which was used to launder money, according to court documents. Both officials struck plea deals.

Just a month later, FBI agents arrested Los Angeles City Council Member Jose Huizar for corruption. The city is home to the largest legal marijuana market in the world, posting more than $3 billion in sales last year.

While the federal corruption case focuses on allegations that Huizar was a central figure in a pay-to-play scheme for real estate developers, court documents in a separate suit allege that Huizar operated in a similar fashion with marijuana companies. A former staffer filed a wrongful termination complaint, claiming he was fired after sharing details about Huizar extorting cannabis companies with federal officials.

According to court documents, Huizar conditioned local marijuana permits on "political donations, 'consulting fees' funneled to the Councilmember's friends, and cash payments made directly to Huizar."