Los Angeles black market threatens growth in legal business

LOS ANGELES – The parking lot outside a stark clinic on a busy Los Angeles street is almost full in the afternoon on weekdays. Inside, jars of weeds line the shelves behind a counter and colorful signs indicate prices. But if everything seems normal, that's not it.

The clinic is part of a thriving black market.

"The black market is a huge problem," said Patricia Heer, lawyer and founder of Cannabis Law Digest. "In some states, that's between 70% and 80% of sales."

Many have seen the legalization of marijuana as a huge economic opportunity, but the reality is that its potential is not fully exploited. An underground economy reduces the profits of legal enterprises. New Frontier Data, a Denver-based company that studies cannabis trends, estimates $ 70 billion in illegal sales nationwide, seven times the size of the legal market. This means that the legal market "only captures a fraction of total demand," the company said in a summary of trends in US cannabis demand published this month.

In California, early estimates predicted annual cannabis tax revenues of more than $ 1 billion by 2018. But these predictions were far from entirely realistic: $ 345 million were actually collected last year, according to the Office of the Legislative Analyst and the state tax records. The black market is widely cited as one of the main reasons for the decline in numbers.

It is not difficult to see why.

A team of CNBC producers carrying hidden cameras visited 10 illegal cannabis clinics across Los Angeles. Some allow open weed consumption. Others offer free cannabis for a positive review on Weedmaps, an online listing of legal and illegal cannabis companies across the country. Others are open after 22h. None of this is allowed by the regulations in force.

And despite a legal limit on the daily number of licensed cannabis stores to sell, there is no limit in many illegal shops.

CNBC has not purchased any proceeds from illegal clinics. None of the 10 producers visited by the producers responded to repeated requests for comments.

"There are so many unlicensed sites that respectable cannabis sites are deeply concerned," said Los Angeles District Attorney Mike Feuer. He said he was not surprised to learn a compilation of videos of illegal clinics.

Feuer recently said that his office had closed 151 illegal dispensaries and that new criminal proceedings were pending. At the same time, more than 1,000 accused linked to dispensaries and illegal delivery services were prosecuted, he said.

His office has also resorted to civil suits to pick them up at illegal shops. A lawsuit was recently filed against a clinic, which he said was selling cannabis containing a type of pesticide used on golf courses. The case is in progress.

"I do not think that your viewers who buy marijuana are aware of the serious risks associated with buying marijuana in a place that does not test their product," he said.

As part of another tactic targeting illegal clinics, the Los Angeles Police Department accompanied city officials during operations in which they closed public services in illegal shops. Nevertheless, about 55% of stores reopen in the week, said detective Vito Ceccia.

"When we go out and lead any kind of enforcement effort, when we leave this place, it's closed," Ceccia said. "That does not mean it's going to be closed the next day, that does not mean it's going to be closed in a week."

Until now, in 2019, the LAPD had arrested 277 people in raids on unlicensed cannabis businesses, with a total of 562 arrests last year.

A review of Weedmaps lists In mid-June, 229 illegal clinics were found in Los Angeles. The Los Angeles Police Department estimates that the number is closer to 259, but no one knows exactly how many there are. There are 186 licensed clinics in Los Angeles.

Cat Packer, executive director of the city's cannabis regulation department, declined repeated requests for interview. His office would offer no reason to refuse the request.

California voters approved Proposition 64 in 2016. In total, 11 states have legalized the recreational use of cannabis.

Last year, California's Bureau of Cannabis Control issued a cease and desist order to Weedmaps for "illegal activity". The company responded that it was a "technology company and an interactive computer service" protected by exemptions from the freedom of expression under the law on the decency of communications.

In a statement, company spokesman Carl Fillichio said that it "provides patients and consumers with valuable information about everything that concerns cannabis." We also defend their interests and those of the company. Cannabis industry ".

He said the targeting of online platforms advertising cannabis "will not solve the problem of unlicensed clinics".

"Weedmaps is an agnostic information platform where businesses, consumers and patients can research and discover cannabis-based products," Fillichio said. "Companies can self-declare their list in the same way as on other digital platforms."

The California Bureau of Cannabis Control recently launched a $ 1.7 million public awareness campaign called "Get #weedwise" to inform consumers about buying from licensed companies listed on the websites of cities and states.

In addition, the office sent 3,915 letters of cessation and abstention in 2018 and 2019 to illegal dispensaries and received 8,584 consumer complaints at the end of June.

Cannabis industry lawyer David Welch said he doubted that these efforts will have much of an impact.

"What you find are dispensaries that are not forced," said Welch. "Even when they are taxed, they simply go and open the next day, because the penalties are so low that it does not deter them from breaking the law, because the profits they make are far more important. . "

The penalties are largely minor offenses, so if a shop is closed, there is an incentive to reopen because it is likely that there will be only a fine, did it? he declares.

Cameron Wald, executive vice president of Project Cannabis, which owns four stores in Los Angeles, said illegal clinics can sell the same product at a price nearly 40% lower than a legal store.

"We have to deal with outrageous price cuts in our stores to compete with people who do not pay their taxes," he said. "They do not pay their license fees, they do not pay the city."

However, it does not expect that the increase in the number of legal licenses available in the city will solve the problem. The city is expected to issue 250 additional licenses in the fall.

"We have (186) licensed stores right now and they do not even do a good job of monitoring the illegal activities that are taking place around them," Wald said. "Now they will add another 250 that they will regulate? I just think that law enforcement against illegal operators is lagging behind."

A study conducted in 2019 by Applied Development Economics estimated that the demand for cannabis in California was about 6.2 billion US dollars "from" supposedly illegal sales ".

"I think the black market will be a threat as long as we do not have it at the legal level," said attorney Susan Ameel, a partner at Global Regulatory Risk Advisors. "Only interstate commerce will prevent the diversion of marijuana from a legal state to a state where it is still illegal."

"Unlicensed stores outnumber registered stores," said Virgil Grant, an operator with three licensed clinics and co-founder of the California Minority Alliance, a cannabis group.

South Los Angeles, a historically minority community, is one of the regions with a large number of unlicensed stores, the California Minority Alliance said.

"Unlicensed shops are a public nuisance and a critical public safety issue for people in South Los Angeles.Lack of control has turned safe communities into shelters for illicit activities encouraging the proliferation of illegal cannabis operations. "said the advocacy group a letter to the city's attorney and city council.

One way to solve the problem could be to multiply licenses, especially for minorities. "Giving more licenses is probably a good thing – the more licenses you give, the more you can compete with unlicensed stores – start smuggling unlicensed stores," said Grant, who owns a clinic in South Los Angeles. .

However, Grant warned that with more licenses, the city needed more controls.

"Reduce taxes or suspend taxes to allow us to apply the same rates as all others," he said.

Wald said legal operators like him needed more assurances from city and state authorities to solve the problem.

"This is the most influential cannabis market in the world," Wald said. "So, if we can not do it right, it'll be embarrassing."

– Yasmin Khorram, Louise Connelly, Caroline Skinner and Waverly Colville, CNBC, contributed to this report.