Want to Avoid CannTrust's Fate? Adopt These 5 Good Governance Practices

CannTrust Holdings announced yesterday that Health Canada is investigating compliance violations at its manufacturing facility in Vaughan, Ontario. The company’s board of directors has initiated an internal investigation to determine the root cause of the problem and to initiate remediation steps. Investor’s reacted negatively to this news causing the stock price to collapse.

The company’s credibility is in tatters as news emerges from the internal investigations that are being performed as a result of compliance violations that were revealed in July.

On Friday, the company announced that KPMG was withdrawing audits from 2018 and the first quarter of 2019. KPMG’s decision was driven by the information revealed from the company’s Special Committee’s investigation as well as information that caused the firing of CEO, Peter Aceto, at the end of July.

The company also indicated that it was unclear what impact the Health Canada investigations would have on the value of its inventory and biological assets. In a separate announcement, CannTrust revealed that it will not sell or ship product from the Vaughan, Ontario facility until Health Canada’s investigation has concluded.

Health Canada’s most recent investigation shows significant compliance violations and a lack of internal controls. The company failed to obtain appropriate regulatory approval prior to making changes to its operating procedures and to the facility. The regulator also found that the firm’s operating procedures did not meet the regulatory requirements.

CannTrust is facing a serious situation that may result in the company’s sale, or even worse, shuttering. So, what are the lessons that CannTrust can provide to the cannabis industry?

1) Shareholders do not easily forgive. It is easy for shareholders to sue a company over a lost investment. Like any relationship, investors must trust that senior management will protect them. News of a regulatory violation may indicate that the company is playing fast and loose, which puts the company and its assets at risk. Investors that do not trust a company or senior management will sell the stock to protect as much of their investment as possible. Investors value honesty and information that can be relied upon.

2) Good governance can save your company. Everyone needs a boss including the CEO. The board of directors is charged with protecting investor interests by being fully engaged and keeping an eye on the big picture. The board must monitor high risk areas such as financial reporting and regulatory compliance for anomalies or other warning signs. By including independent board members, a company can demonstrate to investors that it values a fresh eye on the company to ensure that it has adequate controls and a culture of compliance.

3) Create a culture of compliance. A culture of compliance is worth its weight in gold. Culture can help a company mitigate the risk associated with internal threats posed by employees. Employees must be supervised and trained on the risks facing the company and how the employee’s actions can either exacerbate or mitigate this risk. A rogue senior management team can cause fast and loose practices to leach through an organization leading to the failures witnessed at CannTrust. Investors want a culture of compliance that will protect their investment.

4) Test, test, test. Companies must test operating procedures and controls to make sure they work. Operating procedures are designed to instruct employees on how the business is operated in a way that mitigates risk. By reducing risk, a company can ensure it maintains the value of its inventory and services and provides trustworthy financial statements. Companies that periodically test the controls and processes that are used in the operating procedures can demonstrate their effectiveness of the control framework to the board of directors and regulators.

5) A penny saved may cause a company to be lost. Recent news reports reflect a growing impatience by investors on the return on investment of the cannabis industry. Company’s that cut costs associated with maintaining effective controls and compliance will not be rewarded. As with CannTrust, companies that do not take good governance seriously will simply go away.

Will the FDA's Response To Curaleaf Set the Standard for On-Line CBD Sales?

The Food and Drug Administration issued a warning letter to Curaleaf, Inc. to stop selling CBD products that are unapproved and misbranded drugs within 15 days. The FDA reviewed Curaleaf’s social media accounts during April and June 2019, and determined that the products were “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease and/or intended to affect the structure or any function of the body.”

Curaleaf sold the CBD products, including a lotion, pain-relief patch, tincture and disposable vape pen on its own website as well as Twitter and Facebook, which the FDA considered to be interstate commerce. Curaleaf updated its Facebook cover photo a day after receiving the letter to remove products that included words on the label that reflect an effect on the body such as relieve, revive, and uplift. However, these photos are still available in the archives and in the Facebook feed.

Curaleaf, Inc. is a public company that is listed on the Canadian Stock Exchange and can be purchased by US investors on the OTC market. In its response to the FDA on July 26, Curaleaf indicated that the company was in the process of reviewing its social media sites and that the company discontinued the products in question. Curaleaf’s stock has rebounded after initially falling to close at $7.40 on July 23, 2019.

The FDA is clearly making a statement by issuing a warning letter to such a large industry player. The question is whether the FDA will be satisfied with the steps Curaleaf has taken. This is a big risk with significant ramifications for the company. The FDA’s stance will set the standard in the CBD industry for what will be considered acceptable online marketing standards. The industry will be holding its breath.

Colorado Thieves Break Into 34 Marijuana Dispensaries in 2019

The Denver police department issued a warning to the cannabis industry about an uptick in burglaries at marijuana dispensaries. Police indicate that the suspects broke into thirty-four (34) marijuana dispensaries during 2019 near major roadways using stolen Jeep Cherokees or Liberties.

The group of four men and two women use crow bars to enter the front door or through a glass window. Police are requesting that businesses ensure that motion sensors and outdoor lighting are working, and that video cameras are covering entryways. The police also recommends storing products in a safe when closed.

Humboldt County Collects $2 Million in Fines from Illegal Growers

Humboldt County continues to step up enforcement against illegal growers. Over the past year, the Humboldt County Code Enforcement Unit in California has actively identified illegal grow operations using satellite imagery. The county pays over $200,000 a year to access Planet’s software, which allows the staff to quickly identify possible violators.

The Eureka Times Standard reports that cannabis enforcement efforts are up 700% in 2018, and brought in over $2 million in fines for the county. Humboldt County holds around 20% of the overall commercial cultivation licenses in California.

The fines sought by the regulators continue to increase. In October, the Enforcement Unit was seeking a $10,000 per day penalty against 87 growers for commercial cannabis land use and building code violations. The illegal grow sites were given 10 days to dispose of the cannabis plants and illegal structures, after which, the $10,000 per day fine took effect.

Today, the Enforcement Unit is seeking fines per day fines of between $20,000 and $30,000 for code violations. Now that cannabis is legal, regulators are raising administrative fines as a means of forcing cannabis operators into the legal market. Humboldt County continues to transform its legendary cannabis market into the legal framework, although at a greater cost and regulatory burden for its local residents.

Los Angeles Creates SWAT Team to Tackle Illegal Cannabis Businesses

The Los Angeles City Council approved recommendations to fund a Business, Licensing and Compliance program designed to shut down illegal cannabis businesses. Los Angeles will pay $3 million per year over the next three years to establish an inter-agency enforcement response team comprised of the Los Angeles Police Department (LAPD), the Los Angeles Fire Department, the Department of Cannabis Regulation, and the Los Angeles Department of Building and Safety. The group will share information about illegal operations through a new technology platform, and work together to direct enforcement efforts.

Over the past year, Los Angeles has developed creative administrative measures to tackle the growth of illegal cannabis businesses including shutting off their electricity and access to premises. In the report dated November 9, 2018, the LAPD indicated that, during the prior year, it executed 143 search warrants on unlicensed businesses, and made 435 arrests. The LAPD confiscated 67 firearms, over $600,000 in money and 34,852 pounds of cannabis. The arrests did little to stop the reopening of the unlicensed businesses. The LAPD indicated that additional enforcement efforts were needed as the misdemeanor charges for most violations was not adequate.

US Government Says Pot Smokers Lack the Good Moral Character Required of US Citizens

The Department of Homeland Security (DHS) issued a policy statement notifying persons seeking US citizenship that the process is at risk if they use marijuana or engage in marijuana related business activities. The DHC policy explains that persons who are convicted of a marijuana charge or admit to engaging in marijuana activities do not exhibit the good moral character that is required of a US citizen.

The policy statement is the latest warning shot to persons applying for US citizenship. Denver recently issued a Marijuana Information Bullet to notify industry participants that the US Department of Justice (DOJ) has denied two applications for citizenship by persons who are employed in the cannabis industry. Denver has asked the marijuana industry to inform current and future employees about the negative impact that working for a cannabis company may have on an individual’s ability to become a US citizen or to stay in the United States. Persons who are impacted by this US DOJ policy should speak with an immigration attorney.

Los Angeles to Shut Off Illegal Pot Shops' Electricity

Los Angeles will soon be adopting an ordinance that is aimed at shutting down illegal pot shops. The Los Angeles City Council directed the City Attorney to draft an ordinance as quickly as possible. At a meeting held on February 26, 2019, City Council members voiced their frustration over the inability to effectively shut down the illegal operations that are not following the rules. Illegal pot shops reduce the city’s overall tax revenues and engage in criminal activities.

The proposed ordinance would allow the Los Angeles Department of Water and Power (LADWP) to disconnect utility services after the Department of Cannabis Regulation has informed the illegal pot shop that it needs a license to operate, and a Los Angeles city department confirms that illegal cannabis activity is occurring at the address

The city of Los Angeles started to focus on shutting unlicensed cannabis businesses in July 2018. The Los Angeles Police Department issued a report on November 9, 2018 that noted that, in the last year, it executed 143 search warrants on unlicensed businesses, and made 435 arrests. The LAPD also confiscated 67 firearms, over $600,000 in money and 34,852 pounds of cannabis. The arrests did little to stop the reopening of the unlicensed businesses. The LAPD indicated that additional enforcement efforts are needed as the misdemeanor charges for most violations is not adequate.

Oregon Issues Warning About Criminal Charges for Shipping Hemp Across State Lines

The Oregon Department of Agriculture (DOA) has issued a warning related to the transport of hemp and hemp commodities across state lines. The DOA has indicated that states bordering Oregon are stopping trucks that are carrying hemp products, and charging the drivers with criminal violations. Oregon is reminding state businesses that other states may still consider hemp to be a Schedule 1 drug, which would be considered illegal possession of cannabis. Businesses involved in the cultivation, processing, transport or sale of hemp or hemp products should review state laws to determine where industrial hemp has been exempted from the state’s definition of cannabis or marijuana. Failure to do so could result in criminal or civil charges.

Oregon Revokes Grower's License Due to Compliance Violations

The Oregon Liquor Control Commission (OLCC) revoked Panda Farms license for serious compliance violations discovered during three (3) separate inspections. The OLCC discovered during the inspections that Panda Farms, among other violations, made changes to the premises without obtaining prior approval; failed to retain or produce video recordings or implement enough surveillance cameras to ensure all coverage areas are captured; failed to tag and track certain inventory; and failed to prevent access to restricted areas or implement safeguards to prevent theft. Panda Farms will have until May 21, 2019 to surrender its license or transfer ownership.

San Francisco Announces Increased and Focused Cannabis Enforcement Priorities

The San Francisco Office of Cannabis issued a bulletin outlining its cannabis enforcement priorities. The bulletin reminded licensees that the Office of Cannabis may enter and inspect any cannabis establishment or vehicle used for deliveries or distribution for compliance with regulatory obligations. The Office of Cannabis will pursue rule violations that produce (1) actual harm, (2) unacceptable risk of harm or (3) fraud or deception. The regulators announced that there will be increased and focused enforcement efforts as the industry matures.