Corruption and Crackdowns in California's Marijuana Market
Black markets thrive under mismanaged legalization.
After California voters decided to legalize the cultivation and sale of recreational marijuana in 2016, the vast majority of the state's cities banned those activities within their borders. But Adelanto's leaders were eager to embrace the newly legal market. The small desert town of 31,000, best known for its nearby prisons, had a reputation for poverty and emptiness. Local politicians hoped legal marijuana would change that.
In May 2017, the Adelanto City Council approved a plan to license recreational growers and retailers, making the town one of the first in the state to do so. That early, atypical choice attracted a lot of national press coverage. In an interview with The New York Times, then-Mayor Richard Kerr predicted that Adelanto could raise $10 million annually by taxing local marijuana businesses.
It didn't happen. Adelanto's budget for 2020–21 anticipated just $1.4 million in marijuana revenue, less than a third of the city's projected $4.5 million budget deficit. While that $1.4 million is money the town would not have seen without legalization, it clearly isn't enough to save Adelanto.
Kerr is no longer Adelanto's mayor. The FBI raided his home in 2018 as part of a corruption investigation. Three years later it arrested him on seven counts of wire fraud and two counts of bribery. Kerr is accused of taking at least $57,000 in bribes and kickbacks to approve permits for marijuana businesses. His arrest came four years after then–City Council Member Jermaine Wright was accused of taking a $10,000 bribe from an undercover FBI agent posing as an applicant seeking approval for a local marijuana transportation business.
Other local officials in California have been implicated in similar corruption. In July, marijuana magnate Helios Dayspring pleaded guilty to bribing a now-deceased San Luis Obispo County supervisor for years in exchange for favorable policy votes. The plea agreement did not name the supervisor, but news reports identified him as Adam Hill, who died of an overdose that was deemed a suicide in 2020.
After Dayspring's guilty plea, the Los Angeles Times implied that the problem was California's "nascent, ill-regulated marijuana industry." Stories about California's marijuana market commonly describe it as a "Wild West" situation.
It is true that California has badly mishandled legalization—so badly that, more than five years after voters approved that change, the black market still accounts for an estimated two-thirds of cannabis sales. But far from the result of weak regulation, the disastrous rollout of legal marijuana stems from giving officials too much power to decide who can produce and sell it.
Where Are the Shops?
Most California cannabis consumers do not buy pot from state-licensed shops. Market observers such as Global Go Analytics estimate that illegal cannabis sales in California total $8 billion a year, double the amount of legal sales.
One reason for the black market's persistence is that many Californians do not have easy access to legal retailers. California has only two licensed dispensaries for every 100,000 residents, compared to about 18 in Oregon and 14 in Colorado.
Proposition 64, the ballot initiative that legalized recreational marijuana, authorized municipalities to cap the number of local retailers or prohibit them entirely. For every California city that allows dispensaries, two have banned them.
While Prop. 64 allows people to grow their own marijuana, that alternative has little appeal for consumers who lack the requisite space, equipment, and know-how. In the parts of the state where retailers are banned, this policy is akin to letting people brew their own beer while denying them the ability to buy the finished product from a local store.
Online orders are another theoretical option. State regulations issued in 2020 seemed to bar local governments from interfering with state-approved marijuana deliveries. But 24 cities that had outlawed sales challenged the regulation, claiming it interfered with their local bans. A Fresno judge dismissed their suit, but in a way that left a lot of regulatory uncertainty.
For Californians who live near licensed dispensaries, the price of marijuana can be exorbitantly high due to state and local taxes. The state imposes a 15 percent excise tax on retail marijuana sales, along with a weight-based cultivation tax that is indexed to inflation. Thanks to rising inflation in 2021, cultivation taxes jumped at the beginning of 2022, even though the market value of cannabis had declined.
Prop. 64 also allows local governments to impose their own taxes, and many do. In Los Angeles, legal cannabis buyers pay a 10 percent local marijuana tax, along with the state's marijuana taxes and an additional 9.5 percent general sales tax. All told, taxes increase the retail price of legal marijuana in L.A. by more than a third. People who buy marijuana from illegal dealers, by contrast, can avoid that burden entirely.
Meanwhile, the power that Prop. 64 gave local governments fosters corruption. When Adelanto leaders announced that they would let the marijuana industry in, there was a land rush. Because so few cities were welcoming of marijuana businesses, everybody interested in establishing a presence in the industry wanted to set up shop in Adelanto. Property values tripled.
For these early speculators, it was very important that the property they purchased end up in areas zoned for the marijuana industry. As the Adelanto City Council prepared to vote on the locations where marijuana retailers would be allowed, according to the federal indictment against Kerr, he asked for a boundary change to accommodate a specific business property; a week later, Kerr deposited a $5,000 check from the real estate trust account of that property's owner. According to the FBI, Kerr received additional checks from this unnamed individual and others as the city continued to craft its marijuana ordinances, and he helped the owner get a dispensary permit.
Bribes also can be used to gain a competitive advantage through regulatory exceptions. Dayspring confessed to paying for an exemption from a proposed county moratorium on outdoor cultivation operations. In a text to Hill before county supervisors approved the exemption in 2018, Dayspring emphasized that "it's really important u guys extend the timeframe for submission and don't allow other people in yet."
Because marijuana is still banned by the federal Controlled Substances Act, financial institutions are leery of serving businesses that grow or sell it, which under current law could expose them to criminal charges, forfeiture, and potentially ruinous regulatory sanctions. Thanks to that threat, state-licensed marijuana businesses frequently have to operate without access to banking services. Instead, they generally rely on cash, which increases the risk of theft and robbery.
All that cash also facilitates corruption. Some of California's bribery cases feature literal wads of money changing hands.
In June 2020, two former officials from Calexico, a city on the Mexican border with a population of about 40,000, pleaded guilty to accepting envelopes stuffed with cash from undercover FBI agents they thought were trying to open a marijuana dispensary. David Romero, a former councilman, and Bruno Suarez-Soto, the city's former commissioner for economic development, had promised to fast-track the license for the fictional business.
According to the FBI's complaint, Romero and Suarez-Soto also offered to "revoke or unduly delay cannabis business permit applications filed by applicants who had not paid bribes, in order to ensure favored treatment for later-filed applications submitted by individuals who had paid or agreed to pay bribes." They set up a shell company that appeared to be a consulting firm but existed primarily to launder the bribes they had received.
Douglas Berman, executive director of the Drug Enforcement and Policy Center at the Ohio State University's Moritz College of Law, thinks federal prohibition fuels such corruption. "Everybody is breaking federal law," Berman says. "The kind of elaborate corporate structures and real estate transactions that are necessitated by federal prohibition makes [corruption] easier or more likely." Berman adds that California's burdensome licensing system, which requires marijuana businesses to get state and local permission before they can operate, might make would-be growers or retailers feel they have to grease some wheels just to get off the ground.
The Scourge of 'Local Control'
All of these corruption cases revolve around the reality that marijuana legalization under Prop. 64 has given local officials a tremendous amount of power to determine who can participate. With two-thirds of California cities banning marijuana businesses, dozens of supplicants converge on jurisdictions that have decided to allow them and fight each other for limited licenses and approved locations. Cities add their own taxes in the hope of covering budget shortfalls or jump-starting their economies, which makes it harder for legal businesses to compete with the black market.
Rather than liberating its citizens from the drug war, California has turned government officials into cartel bosses. It's no wonder that the black market still dominates marijuana sales: The government's terms are terrible.
In a sense, this system is what California voters approved. The fact that cities could say no to marijuana businesses was one of Prop. 64's selling points. While polls consistently show that a large majority of Americans favor marijuana legalization, that does not necessarily mean they would welcome pot shops in their neighborhoods. And those who would can be outmaneuvered by small numbers of powerful naysayers.
"Local control is the primary factor that is crippling California's market," says Hirsh Jain, founder of the marijuana consulting firm Ananda Strategy and chair of the Los Angeles Marijuana Chamber of Commerce. "Local control is often framed as a democratic virtue. In practice, local control is being used to thwart the will of the voters."
In dozens of California cities where most voters favored Prop. 64, Jain notes, local politicians nevertheless are blocking dispensaries. Last fall, local residents who object to that situation started gathering signatures for ballot initiatives that would force officials in places like Manhattan Beach and Redondo Beach to let retailers in. Some cannabis business advocates are pushing for a new statewide ballot initiative that would restrict or remove cities' authority to completely ban marijuana sales.
Even when cities allow dispensaries, they often impose arbitrary caps on the total number or create maddening bureaucracies that frustrate people who try to follow the rules. It has been more than five years since Prop. 64 passed, and Fresno only recently began approving licenses for recreational stores. Last fall the city manager, who has the final authority to decide who can sell marijuana, approved 21 applications (three in each city district) based on interviews and a complicated scoring system. Four companies that were denied licenses sued the city in November and December, complaining that the process was opaque and that some successful applicants had hired frontmen to feign local ownership, which earned them bonus points.
In Los Angeles, the incredibly slow speed of the licensing process has left aspiring cannabis entrepreneurs hanging. As of January, L.A. had 217 licensed recreational retailers serving a population of 4 million. By comparison, Denver, with a population of about 700,000, lists 476 retail locations.
Three years ago, Los Angeles created a "social equity program" that was supposed to assist applicants who had been arrested, convicted, or otherwise harmed by the war on weed. But the rollout has been a mess. Since the program launched, Jain notes, only 20 social equity–approved storefronts have opened. Dozens more struggle to navigate the bureaucracy.
The program does not seem to be designed for the disadvantaged people it was supposed to serve. "Applicants needed to secure a property" to qualify, Jain notes. "Some had to take loans and were paying rent for storefronts. It bankrupted some applicants and made sure only the most well-capitalized could participate." Not exactly a winning model for lifting up the poor.
Cannabis entrepreneurs who survive the licensing gauntlet still have to deal with complicated, burdensome, and expensive regulations imposed by two levels of government. Fresno, for example, requires more than $8,000 in application fees from those vying for the small number of licenses being distributed, and the eligibility process requires applicants to include six separate plans describing different components of their proposed business's operational models. Each of those plans can have a dozen or more city-mandated information requirements.
The barriers that keep cannabusinesses from operating in California look a lot like the barriers that keep developers from building new housing in the state. Citizens can even use the broadly worded California Environmental Quality Act to block marijuana businesses, just as they can with apartment complexes they oppose. In April, environmental groups in Humboldt County filed a lawsuit aimed at preventing approval of an 8.5-acre marijuana grow operation.
Given the legal barriers in both areas, it is not surprising that California's cannabis corruption resembles some of the state's development-related scandals. In June 2020, a federal indictment charged Jose Huizar, then a member of the Los Angeles City Council, with taking $1.5 million in gifts and bribes from real estate developers who wanted to get their projects approved. In a separate case last year, the city agreed to a $150,000 settlement with Jesse Leon, a former Huizar aide who claimed he was fired for alerting federal investigators that his boss might have been looking for campaign donations from marijuana businesses in exchange for similar favorable treatment. Huizar, who has not been charged with taking bribes from cannabis companies, denied Leon's claims, pointing out that Leon himself had gotten into ethical hot water by attempting to participate in L.A.'s marijuana social equity program while working for the city.
California's New War on Weed
"California can emerge from this marijuana mayhem by flipping the incentives," the Los Angeles Times editorialized in December. "It's too easy and profitable to remain in the black market and too onerous and expensive to join the legal one. By easing licensing procedures or reducing taxes temporarily, and ramping up enforcement and penalties for illegal operators, the state has a better chance of coaxing fence-sitting operators to get licensed."
So far the government's response to "this marijuana mayhem" has focused on tougher enforcement and penalties rather than lighter taxes and regulations. Prop. 64 authorized civil penalties against unlicensed marijuana growers and sellers, who also are guilty of misdemeanors punishable by a $500 fine and up to six months in jail. A law that took effect at the beginning of 2022 doubles down on that approach, allowing civil fines of up to $30,000 per violation against anyone guilty of "aiding or abetting" unlicensed cannabis commercial activity. Each day of assisting illegal sales or cultivation is a separate violation.
The Drug Policy Alliance and the American Civil Liberties Union opposed that law, warning that the wording is vague (it doesn't define "aiding and abetting") and will let local law enforcement target low-level employees, who could have their wages garnished and driver's licenses suspended. But the United Cannabis Business Association welcomed the new penalties, saying "the illicit cannabis market must be shut down to ensure that legal operators can see an increase of patients and consumers, which creates union jobs."
In October, California Attorney General Rob Bonta bragged about a 13-week operation by state and local law enforcement officials that rounded up and eradicated more than 1 million illegally grown marijuana plants. The cops targeted growers who tried to escape oppressive fees, taxes, and licensing demands by operating in rural areas.
Raids like these were a familiar feature of life in California for decades before voters approved legalization. The difference now is that the government is promoting a black market not by banning marijuana but making its production and sale absurdly difficult to accomplish legally.