Has California’s Illicit Cannabis Market Hit a High Water Mark?

‘The night is darkest just before the dawn’ is often cited when circumstances look dire, but hope is on the horizon. The next year will show if this is true for California’s concerningly sizeable illicit cannabis market.

In late August 2022, a series of enforcement actions by California’s Department of Cannabis Control (DCC) pushed the amount of illegal cannabis seized passed the $1 billion mark.

While these enforcement actions prompted a press release by the DCC, calling this development an ‘important milestone’, if we examine the underlying numbers, this milestone appears to be more a mile marker at the beginning of a marathon rather than the beginning of a victory lap.

As a quick reminder, the DCC was created in July 2021, by consolidating the three former state cannabis authorities:

• Bureau of Cannabis Control (Department of Consumer Affairs)

• CalCannabis Cultivation Licensing Division (California Department of Food and Agriculture)

• Manufactured Cannabis Safety Branch (California Department of Public Health).

The reorganization of these three agencies into a single entity was intended to provide a more streamlined process, better enforcement, and synergies across local, state, and federal enforcement efforts.

Since my last writing, the illicit cannabis market in California seems to not have slowed down but remained very high at an estimated $8 billion, or twice the size of the legal market. And while $1 billion in seizures is certainly a remarkable feat, it represents only 12% of the illicit market – in other words, 88% of criminals are able to continue operating without impunity.

California’s path out of the dark

While California’s recent enforcement actions highlight a certain urgency by the state, significant structural reforms are needed to address California’s thriving black market.

California needs to examine the fundamental drivers of the illicit trade in cannabis. Taxes are making legal products too expensive, legal product is difficult to obtain, since legal dispensary locations are sparce. All the while, illicit supply from unscrupulous growers and distributors is widely available due to over-production.

California has several opportunities for enhancements, upgrades and reforms:

1. Tax reform: California will be well served to examine the lowering of cannabis taxes incurred for legal cultivation, distribution, and sales to ensure legal product is price-competitive to illicit product.

2. Increase retail dispensary licenses: California has an opportunity to drastically increase the number of retail dispensary licenses. It should also simultaneously evaluate lowering licensing fees and easing the burden to gain such licenses. Canada could serve as a good example to the state on how to quickly increase the number of legal retail licenses.

3. Drastically reduce the number of manufacturing, cultivation, and distribution licenses: while California is in the process of tightening these licenses, the timeframe needs to be greatly accelerated. Allowing shady operators to renew licenses until 2026 is likely an unwise move.

California needs to implement a rigorous licensing scheme with background checks, physical location verification and regular location inspections for its cultivator and distributor licenses.

As mentioned in prior articles, California should pause the issuance of new licenses while conducting an immediate inspection of all active licensed distributors to identify any illegal players. Furthermore, it needs to examine the cultivation, wholesale and retail capacity (licensed and available), to ensure there is no overproduction that can fuel illicit trade.

4. Inadequate track and trace system: it continues to appear that California’s track and trace system allows for several significant loopholes for criminal elements to exploit. It also appears that the system does not capture discrepancies between cultivated and sold product, allowing for significant product leakage.

California will be well advised to rapidly upgrade or change its technology. It can then use its track and trace system to identify suspicious distributors and can prioritize inspections and enforcement. In addition, California should examine the implementation of additional technologies, such as AI pattern recognition software, to help with the identification of suspicious activities and actors among its licensees.

5. Increased enforcement: while the seizure of $1 billion in illicit product is certainly encouraging, over $7 billion in illegal activity still go unpunished annually.

California will need to continue to invest in enforcement staffing for the DCC and will also be well advised to look at increasing penalties for cannabis cultivation and distribution violations. California, like many states, had lowered its penalties for violations in response to criminal justice concerns, but first violations currently only carry a $500 misdemeanor fine, which is not enough to deter illicit activity.

California’s illicit cannabis market continues to be a significant issue, not only for the state itself for its own tax revenue collection, but also for the other 49 states, since California’s illegal cannabis businesses are likely supplying illegal cannabis to the rest of the United States.

Sven Bergmann is the founder and CEO of Venture Global and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies. Send your comments to [email protected].