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David Downs September 21, 2021

Despite widespread reports of smuggling, state investigators revoked zero distribution licenses in 2020, Leafly has learned. (Leafly)

Cannabis prohibition might be ending. But the era of cannabis bootlegging seems to have just begun.

According to an official with the California Department of Cannabis Control (DCC), on Sept. 7 state investigators surprise-inspected the office of Blue Tree LLC, a licensed cannabis distribution company in Oakland, CA.

The action came after an anonymous tip from a whistleblower alerted DCC officials to a possible smuggling operation involving tens of thousands of pounds of cannabis potentially moving into the illicit market over the past six months.

In 2021, America’s roughly $25 billion legal cannabis market still pales beside the estimated $50 billion total spent on cannabis in the US. Much of that market is fed by illicit growing. But a slice of it comes from legal growers who are—knowingly or unknowingly—selling their harvest to state-licensed distributors moving tons of weed out the back door.

Tipster comes forward

The whistleblower, who is familiar with Blue Tree’s operations, reported the alleged diversion to Oakland officials earlier this summer, and tried to make a report to the state’s now-defunct Bureau of Cannabis Control. That state agency has since been folded into the larger Department of Cannabis Control.

In late August, the same tipster contacted Leafly with statements and Blue Tree shipping reports filed into California’s cannabis track and trace system, known as METRC. Looking at Blue Tree’s METRC activity, the whistleblower claimed that the activity represented “rampant, massive, organized fraudulent diversion.”

Blue Tree started in 2019 when founder and social equity applicant Joshua Jones went to the front of the line for a legal permit. Jones obtained the standard dual-licensing in 2019—first a local Oakland equity license as a distributor, with a corresponding state license for the same.

But Blue Tree did not use its license, the tipster alleged. No METRC activity existed until Feb. 9, 2021, when inbound manifests started reporting serious weight moving into the tiny, dusty workspace, the tipster told Leafly.

If Blue Tree is conducting its business in compliance with state law, the tipster’s documents indicate that the distributor should be currently warehousing tens of millions of dollars of cannabis products.

  • Inbound orders averaged several per day, sometimes 500 pounds of cannabis for a safe that could hold about 30 pounds maximum.
  • One inbound order, #2025450 on June 4, listed almost two tons of flower and leaf.
  • Five inbound transfers alone in May totaled one ton of flower.

A Leafly review of Blue Tree shipping manifests found major anomalies—over 800 orders came in, but just a few dozen went out.

Leafly visited the Blue Tree workspace recently. It’s a bedroom-sized sub-lease locked in the back of an Oakland warehouse. Empty grey plastic flower bins sat next to a disheveled desk. Bare metal racks lined the walls. Empty, blue plastic product divider bins sat in piles on the floor. A locked closet in the back held a small, fridge-sized safe that could secure maybe 30 pounds of flower.

Blue Tree’s distribution license remains listed as ‘active’ on the BCC website. Despite Leafly’s repeated attempts to reach Blue Tree officials, no one returned calls, text messages, or emails sent to the license’s contact information. The company’s voicemail box is full.

How does a burner distribution license scheme work?

McGowan, as well as other industry experts who spoke to Leafly on background, confirmed the broad outline of the scheme. It involves loading up a legitimate distribution license with a bunch of inbound legal pounds in METRC, diverting the weed into the street market, and then letting the distribution license lapse (burning it), before starting another one.

State regulators have not been watching the industry adequately, experts say. Above, distribution vans outside the Blue Tree office complex. (David Downs/Leafly)

Steps to the burn

Here’s a general outline of a burner license operation:

  1. An illicit market middleman (called a broker) finds a desperate or naive individual who either already has a distribution license, or who can pass a background check and can act as the applicant for a distribution license.
  2. They rent commercial office space in an industrial part of town zoned for cannabis, and obtain a local municipal license. Distribution licenses are considered the cheapest and easiest to get, unlike retail or farming, which can be more controversial activities with neighbors.
  3. After securing the local municipal license, the company secures an official state license—again, with distribution being the easiest license type to obtain.
  4. At this point, an illicit broker effectively has a distribution license. This allows them to purchase huge amounts of weight from any legal cannabis farm in the state.
  5. The broker buys up weed from the farms, filing METRC reports, and promising to pay their cultivation taxes.
  6. Instead of selling the weed to licensed retail stores and paying cultivation and excise taxes, however, the company ships the weed to illicit East Coast buyers. No taxes are paid.
  7. Instead of reporting the sale in METRC, the distributor either never files an outbound report, or reports the cannabis as “damaged,” “lost,” or lists it as having $0 value or “N/A.”
  8. The crew keeps moving weight until the license’s annual renewal comes up.
  9. Company officials allow their license to expire, and switch over to another burner license they’ve obtained.
  10. The scheme relies on the fact that state cannabis regulators don’t have the resources to monitor all companies and all METRC reports. By the time a regulator does notice the anomalies, the license holders are long gone.

Why would you burn a distribution license?

Burning a license is a profitable scheme, if you don’t get caught.

The farmer legally sells his crop, as the distribution license itself is legitimate and the farmer may or may not be aware of the burner scheme.

The distributor, broker, and street seller all mark up the marijuana and profit off the trafficking without paying any state or federal tax. Burner license holders often participate because they’re strapped for cash, said McGowan. Tax payments are astonishingly high for legal, licensed companies in California. And that’s before the federal government demands its take, which is astronomical due to the notorious IRS Rule 280E.

Add to that the fierce competition faced by many in the California market, where deep-pocketed competitors have the means to wait out long stretches of unprofitability. The price of legal cannabis is currently tumbling from prohibition highs to commodity lows. Many cannabis farmers are happy to move product, even if their harvest may never see a legal shelf. Other farmers need to report some legal sales as a cover for the illicit growing they’re also doing.

And all of this is happening against a background of lax and underfunded regulatory enforcement. State regulators simply don’t have the resources to keep a sharp eye on every single distribution license.

“It’s systemic failure,” the Blue Tree whistleblower told Leafly.

“It’s just getting stupid” said Elliott Lewis, CEO of Catalyst Cannabis in Long Beach. Lewis is a long-time licensed cannabis operator. “All the weed is getting offloaded into [the illicit market].”

Enforcement was lacking

After more than three years of legal cannabis sales in California, the enforcement picture is not impressive.

  • According to the DCC, state inspectors conducted only 50 inspections of 1,179 distributor licensees in 2020, due to COVID-related constraints.
  • Regulators issued seven letters of non-compliance, and did not revoke a single distribution license in 2020.
  • In 2019, the BCC revoked 15 distribution licenses, and none for diversion.
  • At the local level, Oakland could not even say what enforcement they have done or are doing. City Administrator Ed Reiskin has failed to publish timely cannabis regulatory enforcement reports. Officials with Reiskin’s office said they do not have the data on hand.

Number of licensed California cannabis distributors: 1,179
Distribution licenses revoked in 2020: 0
Distribution licenses revoked in 2019: 15 (Source: CA Dept. of Cannabis Control, 2021)

State regulators have been hobbled by a number of issues.

They receive thousands of complaints each year, and are in the middle of merging three state agencies into one. The newly formed DCC—formed by combining parts of the Bureau of Cannabis Control, California Department of Public Health, and the California Department of Food and Agriculture—is less than two months old.

The department is not planning to issue full enforcement reports, like Colorado does, until March 2023.

Who’s getting hurt and why should readers care?

Burning a distribution license is not a victimless crime. Experts note that the scheme:

  • defrauds taxpayers of tax revenue for social programs like childcare vouchers
  • deprives legal consumers of supply, choice, and price competition
  • deprives unwitting legal growers of legal brand awareness and value
  • punishes legal competitors who are playing by the rules
  • and deceives investors, undermining the credibility of the licensed market.

McGowan said the burner scheme also preys on the “straw men” license holders who don’t know what’s truly going on, or are willing to be set up. She said burner distro schemes especially prey on social equity applicants, who may have less access to financing but do have greater access to the front of the licensing line.

We found the city with the lowest weed tax in California

Burner distros are one symptom, not the disease

Ultimately, the entire burner distribution license scheme exists because California legal cannabis taxes are too high and regulations are too onerous for the legal market to compete with the street, said Lewis, the long-time Long Beach, CA, operator and licensing veteran.

Some experts say California’s pioneering voter initiative to legalize cannabis clearly needs some fine-tuning after three-and-a-half years of legal sales.

“The reason burner distros exist is because the state system is so fucked up,” said Lewis, who operates seven licensed retail stores. “They created such a bad system, people have to use burner distros. I don’t hate on their game.”

“They have an oppressive tax rate that’s a total failure.”

For complete article

Dalgarno Comments: This is just one of the predicted outcomes foreseen by any non-cannabis using clear head. The failed promise that once Cannabis was legalized the following would eventuate

  1. ‘Black market’ would all but disappear, and criminals would no longer make money from cannabis (yet the black market grows, now giving us two massive markets ‘regulate/police’)
  2. Massive savings in ‘law enforcement’ and criminal justice would fill the state coffers, whilst gleaning a massive tax revenue.  (Instead, we have increasing white collar and organized crime, with the demand for enforcement growing, not diminishing – and again into two markets not one.)
  3. Safer product that will not be diverted – (the market is flooded with unsafe product, and diversion is rife.)

For a more thorough insight into the this Three Market chaos read 

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