California’s Cannabis Permitting Process Fails to Thwart Corruption, Auditor Finds

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Local governments must take steps to prevent conflicts of interest and conduct proper background checks, state auditors said.

California’s permitting process for the legal cannabis industry has many holes that leave the door open for corruption, according to a state audit prompted by several allegations of wrongdoing.

State Auditor Grant Parks launched the investigation in March 2023 after the Joint Legislative Audit Committee approved a request by Assemblyman Reggie Jones-Sawyer, a Los Angeles Democrat. Six locations were reviewed—the cities of Fresno, Sacramento, San Diego, and South Lake Tahoe, and the counties of Monterey and Santa Barbara.

Overall, the state auditor found the local jurisdictions could improve their permitting processes to increase public confidence and cut down on the risk of corruption.

Mr. Jones-Sawyer said the audit findings, published March 28, were “concerning.”

“The report by the state’s auditor does show inconsistencies and loopholes in varying degrees,” the assemblyman told The Epoch Times. “This is concerning as some business operations may lack proper documentation, including background checks, with some jurisdictions having no appeals process in place for businesses who may have been the victim of favoritism or bias.

“Ensuring that standards are universally applied is vital to the cannabis industry and maintains public trust,” he added.

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The state auditor pointed out two main areas where the local governments fell short: preventing conflicts of interest and doing background checks.

First, the cities and counties reviewed did not always take “reasonable steps to ensure fairness and prevent conflicts of interest, abuse, and favoritism,” the auditor said.

A customer buys cannabis products at a store in West Hollywood, Calif., on Jan. 2, 2018. (David McNew/Getty Images)
A customer buys cannabis products at a store in West Hollywood, Calif., on Jan. 2, 2018. (David McNew/Getty Images)

For example, Fresno’s “process lacks transparency for how potentially lucrative cannabis-related permits are being issued by the city manager, possibly eroding public trust in the process.”

The report also remarks on the Fresno city manager’s authority to approve applications.

Fresno city spokeswoman Sontaya Rose told ABC 30 the City Council granted approval for the process.

“The ordinance passed by the Fresno City Council in 2018 gives the city manager responsibility and authority for developing the permit application evaluation process and for issuing permits,” Ms. Rose said. “However, the mayor and City Council have the authority to appeal that decision.”

Fresno was also the only local jurisdiction reviewed by the state that lacked an administrative appeals process for applicants to contest a denial. The city’s appeals process allows city councilors to appeal decisions for permits and to also vote on the appeal.

Also, the local governments reviewed were inconsistent in documenting whether they followed their own policies that require background checks, the auditor reported.

None of the six jurisdictions were able to show that they consistently reviewed or documented the results of background checks on applicants or their associates.

Other areas of concern included permitting delays.

According to the state auditor, the local jurisdictions took more than two and a half years on average to process and approve applications.

“Of the applications we reviewed, the local jurisdictions took an average of 1.6 years in Fresno to 3.9 years in San Diego, to approve cannabis-related permits after an applicant submitted the initial application,” the state auditor reported.

Monterey County and Santa Barbara County noted that it takes a long time for applicants to satisfy all environmental review requirements. Other locations also noted it takes more time for applicants to submit documents, including background check information.

The state auditor recommended all local jurisdictions adopt or amend cannabis ordinances or policies and procedures to prevent favoritism, ensure fairness, and reduce the risk of corruption.

The changes recommended included:

  • Create a blind-scoring permit process by removing any identifying information about an applicant before review.
  • Create a process to allow appeals to an impartial decision maker.
  • Require all those involved in the cannabis application to sign impartiality statements, reviewed by staff, asserting they don’t have personal or financial interests that could affect their decisions.
  • Require separation of duties so that the decision to award a permit is not made by one person.

Local governments were also encouraged to require law enforcement or other relevant departments to certify that applicants have passed background checks.

The state auditor also suggested local jurisdictions publish permit-related ordinances, information, and application forms on a public website to improve transparency.

California voters legalized recreational marijuana for use by adults 21 and older in 2016 with Proposition 64. Although marijuana use has increased each year since then, the legal industry has struggled.

Last year, the market suffered a series of setbacks. The largest distributor, Herbl, closed its California operations. The company managed more than $700 million worth of sales in 2022 to about 1,100 retailers across the state, according to Market-Watch, an online business and finance website.

Many experts in the state say California imposes expensive and burdensome regulations and tax structures that prevent the legal market from competing with illegal growers. The United Cannabis Business Association said last year several legal cannabis businesses had left California as the market continues to struggle.

“The California cannabis market continues to collapse with little effective leadership from California’s regulators and legislature,” association President Jarred Kiloh said in a Dec. 13 news release following a Los Angeles Times article that highlighted corruption in the industry.

Last year, numerous multi-state operators left California, including the state’s largest cannabis distributor, according to Mr. Kiloh.

“Most recently, several large cannabis retailers and smaller equity retailers have closed their doors as well,” he added. “All these businesses join the thousands of cultivators, retailers, manufacturers, distributors [and] testing labs that have failed.”

Mr. Kiloh had not returned a request for comment about the state audit by the time this article was published.

California’s total cannabis tax revenue for 2023 was $1.08 billion—a decrease of about $30 million, or 2.7 percent, from 2022.

In 2023, licensed cannabis businesses produced $5.1 billion in total cannabis sales, according to the state auditor.

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