WSLCB Proposes Hidden Ownership Amnesty Program

By: Sam Mendez, Strategic Legal Counsel at Cultiva Law

The Washington State Liquor and Cannabis Board (WSLCB) recently proposed a “Hidden Ownership Amnesty Program” at their June 27, 2018 Executive Management Team meeting. Insiders learned about this development after a transcript (see p. 5) was written up by a team assembled by Gregory Foster of cannabisdata.com who regularly sit in these public meetings and record WSLCB discussions. The WSLCB may implement the Amnesty Program in an attempt to allow cannabis businesses to come into compliance with ownership and financing regulations without fear of license revocation. If the Amnesty Program is ever implemented, we predict it is unlikely it will work well.

At the meeting, the Amnesty Program was merely in a brainstorming phase; any final version will likely be quite different than what was proposed. The Management Team, comprised of the WSLCB’s top leadership, discussed implementing the Amnesty Program for 30 days, which would allow “qualified” applicants not currently under investigation to apply for amnesty within that time period with the understanding that wrongdoing with respect to ownership would essentially be forgiven by the WSLCB. In practice, licensees that have previously accepted cash from a source not vetted by the WSLCB (a Group 3 license violation) would apply to the Amnesty Program; the WSLCB would either forgive the wrongdoing entirely or issue a minor penalty short of license cancellation. During the June 27 meeting, the Management Team could not decide amongst themselves whether the Amnesty Program should be conditional or not––that is, whether the WSLCB would allow unconditional amnesty no matter the offense (within the umbrella of hidden ownership offenses), or whether it would still reserve the power to deny certain amnesty claims and potentially continue to prosecute those licensees.

“Hidden ownership” means violations of the Washington Administrative Code relating to a cannabis company’s ownership, control, and/or finances. The most applicable violation is a “true party of interest/financier” violation, which calls for a penalty of license cancellation even upon a first offense. There is arguably no harsher penalty than cancellation in the Code. Violations range from the egregious, such as accepting large sums of undisclosed cash or distributing company profits to an undisclosed owner or financier, to the innocuous, such as paying for a $50 utility bill from an unvetted bank account. No matter the case, it is entirely up to the WSLCB to decide the degree of the penalty: the WSLCB could cancel a company’s license; they could simply issue a warning or issue no penalty at all; or the WSLCB could do something in between, such as issue a $50,000 fine.

During the WSLCB Amnesty Program discussion in June, the Management Team indicated their intent to draw a line between “intentional” violations and “innocent” ones, though members wrestled with the difficulty of drawing such a bright line. WSLCB Board Member Russ Hauge stated, “[W]e’d get significant push back… because one person’s innocent desperation move to take money that might be a little questionable, is going to be, in the eyes of the person on the outside who suffers a business disadvantage or doesn’t have that opportunity, fraudulent intent at the outset.” The Management Team wrestled with potential blowback from the industry, attempting to parse out differentiating good actors from bad, the moral hazard of offering companies to come forward with wrongdoing that may or may not be forgiven, and the question of whether such a program would actually be effective.

The Amnesty Program is well intentioned. It is near impossible to know how many of Washington’s cannabis businesses have committed hidden ownership violations, but many in the industry agree that it is a significant amount. If it is true that these violations are so far reaching, and if one accepts that it is unrealistic to expect them all to be accounted for, it is understandable for the WSLCB to want to clear some of these violations up––at least the minor ones––and alleviate the threat of license cancellation as well as the burden these prosecutions impose on the WSLCB’s investigation and enforcement divisions. If businesses currently do not disclose such transactions to the WSLCB or otherwise conceal them for fear of losing their business license over a minor financial mistake, then these licensees might not go to the WSLCB for more serious issues either, say a dangerous pesticide found in their product––a policy that is not helpful or healthful for consumers, businesses, or regulatory agencies.

In our professional opinion, the proposed Amnesty Program amounts to a band-aid on a third-degree burn: It does nothing to stop future violations from being committed; It is questionable whether businesses would actually come forward with their wrongdoing, especially if forgiveness under the program was conditional; And it also leaves businesses that have been diligent about following the rules out in the cold. One can imagine a small compliant company’s frustration as other companies violate the rules, get ahead of the game, and are then forgiven.

So what is the proper solution? One idea floated at the meeting as an alternative to the Amnesty Program was to adjust penalties downward for a limited time, such as paying a fixed penalty, as an alternative to license cancellation. But this proposition creates inequity between companies that can afford to pay fines and those that cannot, and still raises the same questions of fairness. It also would accomplish less of what the WSLCB hopes to accomplish by implementing the Amnesty Program, which is to bring more companies into compliance. One can expect businesses would be more likely to come forward if promised full amnesty rather than a fine.

Big-picture reform would be simply to remove large pieces of these regulations from the Code. For example, Oregon has no state residency requirements and their system functions no less rigorously with respect to company ownership than Washington’s. Further, Washington––like Oregon and other states that do not impose such stringent ownership requirements––has a strong interest in tightly controlling what comes in and out of the cannabis industry in the interests of following federal guidance in the form of the 2013 Cole Memo, which was rescinded earlier this year.