High Costs: Corruption Scandals in America’s Legal Marijuana Industry

The movement to legalize marijuana in the United States has been gaining momentum. Thirty-three states and the District of Columbia have currently legalized marijuana to some degree, and of those, eleven states and D.C. have legalized recreational use of marijuana.  (Selling, possessing, consuming marijuana remains illegal under federal law, but the federal laws against marijuana are rarely enforced, which creates a rather odd situation in the states that have legalized marijuana: those who participate in the marijuana market are still technically engaged in illegal activity, even though that market operates out in the open.) In the absence of uniform federal regulation, those states that have legalized marijuana have adopted different regulatory approaches; most states issue a limited number of licenses to sell or supply marijuana, but have capped the number of licenses in order to limit the amount of marijuana on the market. This makes each license extremely valuable, given that the total value of the marijuana market is estimated to be somewhere in the neighborhood of $52 billion. Additionally, in most states the license evaluation criteria, and the evaluation process, are extremely opaque, and local government officials frequently have substantial discretion regarding who receives these licenses.

Given this combination of factors—state and local officials with the power to issue a small number of extremely valuable licenses through an opaque process—it should come as no surprise that the legal marijuana market has become a hotbed for corruption. Consider just a few examples:

  • The unsealed federal indictment of Lev Parnas and Igor Fruman, associates of Rudy Giuliani’s, includes an allegation that these defendants made substantial donations to Nevada state legislative candidates in an unsuccessful attempt to get a license to sell recreational marijuana in Nevada, despite having missed the application deadline.
  • FBI officials raided the home of Jermaine Wright, the Mayor Pro Tem and City Councilor of Adelanto, California for soliciting and accepting a $10,000 bribe from an undercover FBI agent to assist in obtaining a license to operate a marijuana business. 
  • In Fall River, Massachusetts, four business owners allegedly paid $600,000 in bribes to Mayor Jasiel Correia to gain support for their marijuana license applications.
  • In Huntington Park, California, eight medical marijuana dispensary applicants sued the municipality in court, alleging that the mayor, vice mayor, and a City Council member conspired with private companies to award the city’s only three dispensary licenses to predetermined companies, thereby defrauding other applicants of their $5,000 application fees.
  • In San Francisco, a licensed retailer sued the city and county alleging that the board of supervisors passed over a company that was applying for a license in favor of a competitor that contributed thousands of dollars to the board member’s political campaigns.

There are numerous other examples (see here and here); this corruption problem is so widespread that the FBI recently made a statement requesting help in catching bad actors.

What can be done? Many people, me included, would advocate legalizing marijuana at the federal level and establishing a uniform system of nationwide regulation of the industry—not only to address corruption issues, but to ensure that appropriate safety and business standards are maintained and enforced. Shifting licensing and regulatory authority from the local level to the federal level would likely help mitigate the corruption problem, among other benefits. But nationwide legalization and federalization of marijuana legalization may not be a viable short-term solution. Assuming that for the time being marijuana will remain illegal at the federal level (or, even if the federal laws criminalizing marijuana were repealed, that the regulation of the market will remain the province of state and local governments), what can be done at the state and local level in those jurisdictions that have legalized marijuana to address the serious corruption problems that have emerged? There are two key reforms that would help:

  • First, states should relax or remove the caps on the number of licenses that can be issued, so that the legal supply of marijuana matches the local market demand in the area. The limited number of licenses makes each license far too valuable, because the demand for (legal) marijuana far exceeds the supply, driving the price up (and, at the same time, ensuring that the illegal market continues to boom.) With a larger number of licenses, there will be more price competition among suppliers, making each individual license less valuable. With more open entry into the market, competitors and regulators will have less of an incentive to run legal risks associated with giving or taking bribes.
  • Second, states should set transparent standards for license applications. As discussed above, a key issue that encourages backdoor dealings for license applications is that the process remains a “black box” in which local politicians have an outsized influence on who receives a marijuana license. As different states and localities have chosen to approach legalization in different ways, it makes sense for each to have an individualized application process for marijuana distribution licenses (some states, for example, have chosen to provide licenses only to those who come from communities disenfranchised by the war on drugs). It is therefore not essential for there to be consistent standardization across localities, but it is imperative that the chosen process to be transparent. The application process should feature clear benchmarks, applications should be made public, and the reasons for denial or acceptance of an application should be made available. In doing so, local politicians will not have the capacity to dispense licenses for reasons other than the quality of the application.

10 thoughts on “High Costs: Corruption Scandals in America’s Legal Marijuana Industry

  1. Thank you for this interesting post. I’m curious whether you think it makes sense for states to relax the caps on licenses when they have only legalized medical uses of marijuana. After all, wouldn’t an unlimited number of licenses inevitably promote non-medical uses? Or, do you imagine this dilemma will be solved by the second recommendation? That is, if we have transparent standards it’s easier to monitor what those selling marijuana are actually doing with it? I wonder if it might might make sense to empower private enforcement where businesses are selling marijuana for purposes external to those permitted under the license?

  2. Thank you for this post, Brydne! Even if marijuana was legalized at the federal level, I am hesitant if that would solve the problem. In many ways, this seems like a classic economic dilemma- a huge marked that is being opened up, and that is subject to capture because of artificial constraints. It is not clear to me whether the licenses come with a limit on production, and how that impacts their value. If the states deem the negative externalities of this market to be large enough, instead of increasing licenses, they could place stricter production caps, although that would still result in market distortions.

    It seems like one viable alternative that would serve the underlying purpose of restricting marijuana use, alongside loosening licensing requirements and making the process more transparent, as you eloquently suggest, would be to simply raise taxes. The idea of “sin taxes” isn’t new and has been used by states for gambling, for alcohol, for smoking etc. Heavy taxation accompanied by an open market might be the best way to prevent corruption while supporting the policy goals of the state.

  3. Thank you for this post! Even if marijuana was legalized at the federal level, I am hesitant if that would solve the problem. In many ways, this seems like a classic economic dilemma- a huge marked that is being opened up, and that is subject to capture because of artificial constraints. It is not clear to me whether the licenses come with a limit on production, and how that impacts their value. If the states deem the negative externalities of this market to be large enough, instead of increasing licenses, they could place stricter production caps. That would still result in market distortions, but could result in decreased corruption by reducing the value of each license.

    Another viable alternative that would serve the underlying purpose of restricting marijuana use, alongside loosening licensing requirements and making the process more transparent, as you eloquently suggest, would be to simply raise taxes. The idea of “sin taxes” isn’t new and has been used by states for gambling, for alcohol, for smoking etc. Heavy taxation accompanied by an open market might be the best way to prevent corruption while supporting the policy goals of the state.

  4. Thank you, Brydne. I think your recommendations are spot on as both substantive and relatively feasible. My only concern is about the unintended consequences of eliminating the cap on licenses. I imagine that some municipalities would be concerned about being defined as a dispensary haven. For example, I can see residents saying that they don’t mind having a few dispensaries in town, but having an unlimited number – especially if their neighboring towns don’t allow any – would alter the character of their neighborhoods. Maybe making the application process transparent would allow some municipalities to still limit the number of dispensaries within their boundaries but also reduce corruption.

    • Thank you for your comment! I agree that there are very reasonable worries about totally eliminating a cap on licensing, although I think by nature requiring licensing in the first place will create a natural market cap (i.e. new companies will have to be sure they are in line with safety and consumer regulations, that the local market is large enough…). I personally think at the very least, increasing the number of licenses to match market demand would diminish the inflated value of these licenses, and therefore lower incentives for sweetheart deals to receive them.

  5. Thanks for the post, Brydne, I learned a lot from reading this. I certainly agree with your solutions, which I think are feasible and well-tailored to the problem. I only wonder who will evaluate the adequacy of politicians’ choices. Given the very small number of licenses given, it is easly to imagine many situations in which politicians may establish standards that most applicants can meet, then justify awarding the licenses to pre-selected businesses. It is possible this could even be justified on the argument of preferencing particular populations, such as those affected by the War on Drugs. Would you suggest an independent evaluator or outside body to check political awards of licenses?

  6. Thank you Brydne for clearly explaining this current dilemma in the United States. Like Maura, I was particularly interested in the initiatives in some areas to give license preference to communities most negatively affected by the War on Drugs. Do you have some recent examples of these in practice? As a concept, I personally support these targeted types of programs that in some small way attempt to address the historical, systemic disenfranchisement of large parts of the population and actually believe they should be replicated more uniformly. However, I am curious to hear your thoughts on them and learn about some of the unique barriers that impede their successful implementation on a wider scale.

  7. For foreigners it is hard to understand why marijuana is a crime at the federal level and at the same time legalized in many states in the United States. The uniformization of the legal regimes at both levels of government would be more reasonable. However, I am not sure that it could counter corruption in the issuance of licenses. In fact, it seems that licenses to commercialize marijuana locally should continue to be issued by states, as an imposition of the American federal system. In relation to the solutions proposed by the post, they are very sound, especially concerning transparency in administrative proceedings.
    As a final remark, in Brazil marijuana is illegal, and drug traffickers pay bribes to police to run their business. In the United States, the legalization of marijuana has led to the payment of bribes to politicians in order to get licenses. The legalization may resolve or mitigate the problem of drug trafficking of marijuana, yet it might worsen the problem of bribery, turning petit corruption into grand corruption.

  8. Thank you, Brydne, for clearly articulating the state of this issue and making reasonable and feasible recommendations! I learned a lot. I am curious about the recommendation to make the process more transparent by setting clear benchmarks. What types of benchmarks would you recommend? Who should set them? In terms of who sets the benchmarks, maybe one way to increase transparency and accountability and address Maura or Eric’s concerns is to have state legislators draft up proposed benchmarks (with input from experts) and have the public vote on them. In many states, marijuana was legalized through a ballot initiative. Perhaps a follow-up referendum is needed to clearly articulate how this new regime should be run.

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