The illicit cannabis market is a common high-risk area affecting commercial cannabis businesses, but differentiating between the illicit market operator type and the organized crime operator type within this high-risk area is critical for commercial cannabis businesses to better manage inversion and diversion to the illicit cannabis market.
Illicit cannabis market risk is the exposure to legal penalties, financial forfeiture, adverse actions on a cannabis business license, or other material loss an organization faces if it is determined to be negligent or in conspiracy with illicit operators.
Illicit operators are individuals or loosely associated groups operating outside of the law, primarily for personal financial gain. There is a simple hierarchical structure, a near absence of force, fear, or other coercion tactics in terms of the seller-buyer relationship, and a decentralized supply chain inconsistent with organized crime.
Organized crime operators are closely associated groups operating outside the law, primarily for the organization’s financial gain. There is a well-defined hierarchical and management structure, greater operational sophistication, and they use coercive tactics to maintain their ongoing criminal activities.
Organized crime does operate in, and cooperate with, the illicit cannabis market; however, there will be noticeable variations when you encounter the organized crime operator. According to organized crime expert Jay Albanese, organized crime is a “continuing criminal enterprise that works to profit from illicit activities that are often in great public demand. Organized crimes can be grouped into three broad categories: provision of illicit goods, illicit services, and infiltration of business and government. Organized crimes are distinct from traditional crimes (such as larceny and assault) because they involve planning, multiple participants, and require corrupt measures such as threats to maintain and protect their ongoing criminal activities.” (Albanese, 2007)
The crucial differences between illicit operators and organized crime operators are found in the levels of organization, sophistication, and coercion within each criminal network. Illicit operators are individuals or loosely associated groups operating outside of the law, primarily for financial gain. There is a simple hierarchical structure absent of force, fear, or other coercion tactics in the seller-buyer relationship. Conversely, organized crime operators function within a methodical and sophisticated organizational structure that is well-funded and runs on corruption, fear, and coercion.
Two important types of illicit cannabis market risk that are important to be aware of are inversion and diversion. Both are tactics employed to subvert the flow of licensed cannabis products or business processes. Inversion puts illicit cannabis products and processes into the legal market while diversion diverts products and processes away from the legal market.
Inversion refers to the transfer of unlicensed cannabis products to the legal cannabis market. For example, a grower who replaces a licensed cannabis crop that should have been destroyed due to mold with illicit market cannabis to fulfill contract requirements is engaging in inversion.
Diversion, on the other hand, refers to the transfer of licensed cannabis products to the illicit cannabis market. Licensed cannabis growers producing cannabis bound for the illicit market and extractors allowing after-hours use of equipment to unlicensed individuals both constitute diversion. Diversion can also refer to the unlicensed use of a business process on unlicensed cannabis product. If a licensed grower allows for its equipment to be used by illicit cannabis groups, even if the commercial cannabis business never takes possession or title of those crops, that would be diversion.
Certain business processes; third parties, customers, and employees; and geographic locations may pose a higher illicit cannabis market risk. Such commercial cannabis businesses control susceptible points for diversion or inversion, involve transactions more susceptible to illicit cannabis market risks, or have an operational footprint within close proximity to illicit cannabis markets.
Business Processes
Certain business processes are more vulnerable to illicit cannabis market risks. Business processes refer to related tasks and activities to accomplish a business objective. The typical business processes that are vulnerable to illicit cannabis market risk tend to include data, physical security, and handling of the cannabis product and related processes. It is important for a commercial cannabis business to exercise judgment, with the understanding that not all business processes of a specific nature pose the same level of illicit cannabis market risk. In assessing business process risk, commercial cannabis businesses should consider other variables, such as history of deficiencies, level of automation in the control activities, and value or volume of cannabis product involved.
Third Parties, Customers, and Employees
Third parties, customers, and employees are potentially vulnerable to illicit cannabis market risk. The nature of the relationship between the businesses, economic purpose of the relationship, or anticipated transaction activity may pose specific illicit cannabis market risks. Commercial cannabis businesses should exercise judgement and neither define nor treat all members of a specific category as posing the same level of risks.
Geographic Locations
Identifying geographic locations that may drive illicit cannabis market risk is essential. Commercial cannabis businesses should evaluate the economic purpose of doing business in or facilitating transactions with a nexus to particular geographic locations known for ties to illicit cannabis markets.