States choosing to legalize cannabis have always had to deal with legally grown products spreading into communities where it might still be illegal. But as a greater number of states opt in to legal cannabis, concerns are growing over illegal product flowing into their legal markets.
Originally the threat was diversion, now it’s inversion.
Most recently, the inversion problem has come to New York, where dispensary openings are starting to outpace new cultivation licenses.
New York currently has 612 active retail licenses, according to the CRB Monitor database. Of those, at least 327 have opened for business as of the end of March, says the Office of Cannabis Management.
“Top of the list is inversion,” said Jim Rogers, OCM director of the new Trade Practices Bureau, during the Cannabis Control Board’s April 24 meeting. “We can’t run a legal market in any way if there is any tolerance. We are in the middle of significant investigations into a number of inversion cases. We keep getting credible complaints regarding inversion.”
The day before the meeting, OCM notified Omnium Health Inc. that 284 products it had produced for other brands, including Stiiizy and Mfused, were under a quarantine order over allegations that they were made with ingredients from illicit sources.
A spokesperson from Omnium Health said that the quarantine order was the result of a clerical error, and that they expected it be lifted once the company had a chance to clear everything up with OCM with additional documentation.
“All of our products are sourced exclusively from New York-grown cannabis and remain fully compliant within the state’s regulated supply chain,” said the spokesperson in a statement.
At the same time, the New York Medical Cannabis Industry Association released the findings of their investigation into product sourcing. The NYMCIA, which includes all nine registered organizations that supply the state’s medical market, obtained five prerolls from Heady Trees and Runtz and sent them to an independent testing lab that found all five had biomarkers indicating they were from the West Coast, mostly likely Oregon or northern California.
Could track and trace solve the problem?
New York has had an inversion problem perhaps longer than it has had legal adult-use sales. It took the Empire State a year and a half after it legalized adult use before the first official sales could take place. In the interim, a gray market exploded fueled by illegally imported weed from the West Coast, Michigan and Maine, among other markets.
In the case of New York, advocates have been calling on the state to implement its own track and trace system. New York signed a contract with BioTrack for a seed-to-sale tracking system, but the state has yet to roll it out.
“The Office of Cannabis Management has had over two years since adult-use sales began, but we still don’t have BioTrack fully implemented,” said NYMCIA spokesperson Ngiste Abebe in a statement. “That’s inexcusable, and it’s hurting compliant businesses most of all.”
In an April 21 press release, BioTrack defended New York regulators for their “grace and professionalism” in taking a “measured approach” to implementing the program.
“We commend New York’s OCM for its thoughtful, collaborative, and empathetic approach to implementation and integration,” BioTrack said in the press release. “They recognized that activating mandatory traceability before newer third-party integrators are fully ready — or before they’ve had sufficient time to test integrations end-to-end — would only place additional burdens on licensees, many of whom have already navigated a challenging rollout.”
BioTrack said it has been communicating with industry organizations for feedback on the system. In the meantime, it has been offering training webinars on the OCM website.
As long as demand outpaces the available supply from legitimate sources, there will be a likelihood for illicit market activity, even in states with seemingly functioning seed-to-sale systems.
Michigan, Colorado and Missouri all use Metrc for tracking, and all three have their own inversion problem.
A cultivator in Colorado sued the state’s Department of Revenue on March 10, alleging that the agency was failing to prevent other operators in the state from using both inversion and diversion to essentially launder their cannabis and game the state’s Metrc.
According to Mammoth Farms LLC et. al v. Colorado Department of Revenue et. al., operators are able to transport cannabis out of the state where it can get higher prices, while also smuggling in cheaper hemp products and entering them into Metrc in place of the more expensive product.
Missouri faced a similar problem when companies realized they could import hemp-derived products, such as distillate, to keep up with the demand for vape carts from licensed dispensaries.
At the same time, some Michigan operators also allegedly imported distillate because it was less expensive than creating the distillate in-house using locally grown cannabis.
In both cases, use of the distillate was against state rules because it was not produced by a licensed operator in the state, nor was it properly tracked in the respective state’s seed-to-sale system.
