Tamala McBath, chief execution officer of the NCRMA, recently met with Kirk Barry of Clarion Compliance to discuss his views on illicit markets and their effect on the increasing regulations within the cannabis industry. Kirk had a plethora of insights, but here are the key areas of focus to keep in mind:

On the overall cannabis industry in terms of regulation, compliance, insurance and risk:

Kirk gives the industry an overall failing grade in these areas. He believes that the industry has been so focused on getting a license to operate, and navigating the tough regulatory requirements, that the thought of risk and its consequences seems to have taken a back seat. Where compliance is concerned, it is monitored by in-house persons instead of a third party, which results in spotty record-keeping at best. Self-compliance is currently prevalent and very problematic; causing the black market to thrive within the licensed sector. Additionally, the insurance industry is offering very few products and some policies that have been sold have exclusions that leaves the policyholder exposed. As banking enters the sector and insurance products gain traction, it will be crucial that clients have an exceptional compliance system in place. For these ancillary sectors, it is all about minimizing risk, monitoring risk, and ensuring that the cannabis customer is not a liability for them.

Regarding the cannabis situation in California:

Kirk emphasizes that California has set a “minimum” regulatory compliance standard that cities and counties within the state can adopt or add to. He finds this necessary as the regulatory sector was still drafting new rules for a new industry, and does not think that California is producing more product than it can sell. In fact, he asserts that the true issue is that cultivators and manufacturers move considerable product out into the black market. There is still a sizable demand from the consumer who does not want to buy from the regulated sector, and Kirk believes that California actually hurt itself by allowing cannabis to operate for 22 years (1996 – 2018) without licensing and regulatory oversight.  

How the regulated cannabis industry can effectively complete with the preexisting black market:

Kirk reminds us that for 90 years cannabis was a felony, and the black market is very adept at skirting regulatory and enforcement sectors. He believes that the regulated market actually has a rather passive role here, and that it is not that market’s job to stop the black market. In fact, he asserts that the black market will lessen over time as the regulatory and enforcement sectors gain more traction, and the job of compliance is turned over to the independent third-party model. This in turn will enable law enforcement to address the black market with more resources, and customers will turn to the regulated market in greater numbers as it becomes more normalized in their view.

Clarion’s method for protecting cannabis industry investors and making the industry safe for capital investment:

According to Kirk, Clarion provides independent third-party compliance monitoring that is continual in nature. This model was unheard of until now. Kirk shares that deploying Clarion’s solution brings an expected due diligence process to the compliance issue and protects the investor against due diligence risk. He believes that the investment sector will up its game regarding operational compliance under the realization that the black market is still prevalent.

Kirk’s thoughts on the need for risk management in the cannabis industry:

He strongly believes that risk management is a critical process in every industry in the world, because risk translates to exposure; exposure brings liability; and liability is very costly. He references the following quote, “an ounce of prevention is worth a pound of cure” in explaining that it is far cheaper to deploy a risk management process than to pay a loss and be sued due to substandard loss prevention practices. Kirk agrees that companies such as the NCRMA are quite necessary because they bring the discipline of risk management to the forefront of the nascent cannabis industry. Thus, he believes it is imperative that cannabis businesses see the necessity for risk management and risk mitigation.

As we progress into 2020 and the cannabis industry becomes more regulated, it is crucial to keep these considerations in mind. For more information on Clarion Compliance, visit https://clarioncompliance.com. To explore the risk management services that the NCRMA offers, click here.