Jacob SullumJacob Sullum"We need to maintain the edifice of what continues to work in Colorado," declared Norton Arbelaez of the Medical Marijuana Industry Group at a January 24 meeting of the Amendment 64 Implementation Task Force's Regulatory Framework Working Group. Crucial to that system, explained Meg Sanders of Gaia Plant-Based Medicine, is "seed-to-sale production tracking," because "we need to make sure we are accountable for what we're producing until it reaches the consumer." The alternative, Arbelaez warned, is California-style chaos, which he presented as "a cautionary tale" of "cannabis run amok." The problem in California, he said, is that "the lack of a statewide seed-to-sale regulatory framework has made controlling diversion and effective regulation a near impossibility."

Arbelaez, Sanders, and their allies in the medical marijuana industry, who stand to benefit from rules that impede new competitors, argued that the state's strict regulations explain why the Justice Department has been relatively light-handed in Colorado, allowing hundreds of dispensaries to continue operating. They said preserving that system, including a rule requiring marijuana retailers to grow at least 70 percent of what they sell, would discourage federal interference with the new recreational market. And in the end, as I noted last month, their views were reflected in the task force's recommendations to the state legislature, based on the premise that, as Erica Freeman of Choice Organics put it, "you have a regulatory system in front of you that works very well." 

But as a state audit issued this week confirms, that system never really existed. Sure, there was an impressive-looking, 220-page book of Colorado Medical Marijuana Statutes and Regulations, and there was a Medical Marijuana Enforcement Division (MMED) within the state Department of Revenue. But Colorado's vaunted "seed-to-sale" monitoring system, which was supposed to include electronic plant tags, 24-hour video surveillance, and records of every marijuana transfer, was never actually implemented. "The envisioned seed-to-sale model does not currently exist in Colorado," reports State Auditor Dianne Ray, and in any case "may not make sense," especially now that the legal marijuana market is expanding to include recreational users. As a result of inadequate manpower, funding shortages, and poor financial management, Ray says, the MMED not only has failed to create the high-tech tracking system it envisioned; it does not even "review forms designed to track medical marijuana activities and inventories and ensure that medical marijuana is not being diverted from the system." That's right: Although medical marijuana businesses are required to file forms whenever they move any of their product, no one ever looks at them.

Furthermore, state inspectors visit medical marijuana businesses during the application process but generally do not check in again after they are up and running, so it is hard to say how many of 1,440 or so operations officially overseen by the MMED (including producers of cannabis edibles as well as dispensaries) are actually complying with regulations such as the 70 percent rule or the limit of six plants per patient. MMED Director Laura Harris tells me enforcement is "complaint-driven," although "we have to prioritize our complaints because we have a limited number of investigators whose primary mission at this point has to be conducting pre-licensing inspections." The auditor's report recommends discontinuing those inspections in favor of "risk-based on-site inspections of the licensed businesses as part of a comprehensive monitoring program."

The report estimates that pre-approval inspections of all 2,400 applicants who sought state licenses prior to a two-year moratorium that began in August 2010 "would take about 12,300 hours,  which equals the work of six full-time equivalent staff in a year." It adds that "the number of Division staff available to perform these on-site inspections has been as high as 19 but has been reduced to 10 as of February 2013." You can start to see why it takes so long to obtain a license. According to the audit, "The shortest approval time was 436 days, while the longest approval time was 807 days." The average was about two years. "Out of about 2,400 pre-moratorium applications," the report says, "the Division has approved or denied only 622, or about 26 percent [as of last October]. The rest of the applications were still pending (41 percent) or were voluntarily withdrawn by the applicant (33 percent)." Pre-moratorium cannabis businesses are allowed to continue operating in the meantime.

The extra time spent processing applications does not necessarily translate into extra care. In a a sample of 35 applicants, the audit found "potentially disqualifying information" about 13 (37 percent), including four out of the 10 who had received licenses. The audit likewise found that the occupational licensing required for employees of cannabis businesses "is not an efficient and effective method for determining eligibility to work in the medical marijuana industry." It does not reliably screen out people with disqualifying criminal records, for example, largely because the MMED typically issues employee licenses before it sees the results of background checks.

Other problems noted in the audit include "weaknesses in the Division's fee-setting, strategic planning, and expense controls" that have contributed to chronic revenue shortfalls, which led the MMED to lay off most of its staff last year. The audit questions the wisdom of "large capital purchases, such as furniture, computer equipment, and software for a marijuana plant tracking system" (the one that still does not exist). Meanwhile, the MMED "underreported sales tax revenue generated by 56 dispensaries by about $760,000 for Fiscal Years 2011 and 2012 combined."

This is the same agency that the Amendment 64 task force wants to entrust with regulation of the recreational market. Some state legislators are skeptical. "If they couldn't handle the little piece they have now," says Rep. Brian DelGrosso (R-Loveland) "there's no way we can trust them to handle more." But The Denver Post reports that supporters of the current system are undeterred:

Michael Elliott, executive director of the Medical Marijuana Industry Group, said the state's regulation works but needs funding. Although the state might lack oversight, he said, "the vast majority of business owners are staying in strict compliance with state law."

I don't know if that's true or not, and it really doesn't matter to me whether the current marijuana businesses are complying with the state's arbitrary rules. But Elliott and other advocates of strict control have sold those rules as the key to preventing massive diversion of marijuana to other states, which they warn would provoke a federal crackdown. It may well be the case that the appearance of careful, comprehensive regulation has helped keep the feds out, and it may also have reassured some of the voters who supported Amendment 64. But we should not confuse appearances with reality.

"There are folks in this industry [who] are interested in maintaining that status quo," says Harris, who as head of the MMED should know a thing or two about the reality of marijuana regulation in Colorado. "What you will hear from many in industry is that this works. Well, I'm not as optimistic about it working. If it worked, we would be able to present evidence of how the model works toward good enforcement....I'm not as optimistic that the theoretical model works as well as I think they hoped it would."