Cannabis Industry — Regulatory Challenges and Opportunities

Cannabis is quickly becoming one of the fastest growing industries in the United States.  Currently, thirty-seven out of the fifty states have some combination of an operational medical or recreational cannabis program.  These programs have had a tremendous impact on the U.S. economy.  The cannabis industry is expected to account for $112 billion in 2022, with some projections predicting it to reach upwards of $160 billion by 2025.  

It is a diverse industry made up of many different types of operations and facilities.  It begins with cultivation centers where the plants are grown and harvested.  From there it moves to separate processing facilities where the plants are processed into the many cannabis products such as oils, pills, and edibles.  Then, the final products are sold to either medical or recreational dispensaries for public consumption.

Although, the industry has made great strides since California became the first state to legalize marijuana (medically) in 1996, it stills faces many of the same challenges that it did twenty-six years ago. 

Besides still having to deal with old stigmas that have survived since the “reefer madness” days, cannabis is considered a Schedule 1 narcotic at the Federal level.  A holdover from the War on Drugs, marijuana was designated as a Schedule 1 Narcotic as part of the 1970 Controlled Substance Act.  This designation was meant to classify a list of drugs with no medical benefit and a high probability of abuse and addiction (we now know that both characteristics are false regarding marijuana).  This designation makes no legal distinction between marijuana and substances such as Heroin, LSD, Ecstasy and Bath Salts.  

Because cannabis is still illegal at the Federal level, regulation of the industry has been left up to the individual states.  This has placed the industry in one of the most challenging regulatory environments that any industry could face.  Companies with operations in multiple states must become and work with partners that are experts in these individual state regulatory compliance standards.  It’s not enough to just know what the law is, companies need to fully understand and embrace how the law is interpreted by the officials of these state regulatory boards.

Regulatory Interpretation

Although each state carries different regulations and standards that cannabis companies must comply with, the one thing they all have in common is that they require the facilities to meet very high standards of security systems and protocols.  As with most legislation, these regulatory requirements allow plenty of room for interpretation, leaving the final assessment up to the individual state inspectors.  For example, “All rooms containing marijuana plants or products must be secured at all times”, can be interpreted in very different ways.  Many companies have chosen to meet this requirement by installing traditional key locks, only to find out at the time of inspection that they will need to install electronic access control on these doors.  

Another example is “all cameras must have the ability to provide facial recognition”.  Without a specific guideline for what facial recognition is, such as the number of pixels contained in the width of a human head, this requirement has again left the final decision up to the inspector’s discretion.  This lack of clarity has caused companies to both over and underestimate the picture quality that is required, costing them time and money.  

It’s extremely important for new cannabis entrepreneurs to partner with a security integrator that is well versed with the regulations within the state they plan to operate in.  They need to work with a company that understands the intent behind the regulations and how the inspectors of that state typically interpret them.  Failing a security inspection can delay the opening of their facility and create a tremendous financial burden in the early stages of their company. It is critical for them to find companies that have had experience and success within the cannabis industry when choosing a partner.

Financial Challenges

Due to the robust nature of their security requirements, being deemed compliant and operational by the state they are operating in can be a very expensive proposition for these companies.  Most state laws call for a commercial grade security system that includes 24/7 surveillance, access control and burglary alarm sensors throughout the entire facility as a minimum requirement.  In some of the larger cultivation facilities this could require over 400 cameras!  While we can all agree that these are positive measures for these companies to take in order to protect their people, products and facilities, they can also be very hard to fund.

To make matters worse, raising capital to meet these regulatory requirements is also a difficult burden on cannabis industry start-ups.  The status of their product as Federally illegal makes it next to impossible to get approved for loans from financial institutions because it could negate their FDIC insured status.  This leaves only private investors to fund these companies at their own expense and risk.  It’s not easy to find investors willing to take that risk in a “normal” industry, let alone one that’s primary product could, in theory, be seized by the Federal Government.

Operational Challenges

Because cannabis companies are unable to do business with traditional financial institutions, they have been forced into a cash business model.  This model has created many unnecessary risks.  Since it is well publicized that these companies have so much cash on hand, they have become a prime target for criminals.  In a recent incident in Detroit, suspects used a stolen truck to smash their way into a marijuana facility, slamming it into the side of the building.  Although, the robbery attempt failed, the incident did cause severe damage to the facility and neighboring businesses due to a fire caused by the stolen vehicle.  

As the Design Basis Threats (DBTs) continue to evolve, security professionals and state legislators will have to include these new threats in their risk assessment.  They may find it necessary to include security measures such as bollards or security barriers to prevent future attempts such as this example.  While maintaining adequate protection against all DBTs, security professionals will have to find new, creative ways to help cannabis companies maintain a balance between compliance, safety, and cost.

Moving Forward Safely and Cost-Effectively

Talented security technology integrators can play a big role in helping cannabis companies strike a balance between regulatory compliance, safety and cost.  Being involved in the early stages of design is important to help them understand how the facility layout can affect the costs associated with their security systems and protection strategy.  For example, many states require that the surveillance system has visibility throughout the entire facility.  Placement of walls, large displays and shelving, may require more cameras to meet the regulations due to blind spots created by these obstructions.  Opening the floor plan and keeping displays and shelving along the walls could alleviate the need for additional cameras without jeopardizing operational efficiencies or aesthetics.

More mature cannabis companies are beginning to look at ways that they can use analytics to leverage the security technology that they have already invested in to create new operational efficiencies and obtain data on customer tendencies.  Security integration partners should help their cannabis customers understand how using cameras for people counting can help them identify the times when most customers visit their facilities.  This will allow them to better utilize their labor force and reduce labor costs when possible.

Heat mapping is another valuable analytic tool that can be utilized through the security system.  By using the cameras to create heat signatures of where customers spent most of their time in the facility, cannabis companies can better understand which displays and products are the most popular with their customers.  Using this data, they can adjust their inventory and marketing strategy to maximize their sales.

Conclusion

The cannabis industry is a challenging vertical to work with.  Beginning with the ever-changing regulatory environments and new threats posed by nefarious actors, security professionals need to stay informed and always engaged in order to serve these clients.  However, this is also one of the most rewarding industries for a security professional to serve.  These companies do not need and are not looking for just a security vendor.  They need a trusted advisor that will help them navigate through these difficult waters.  They need a partner that understands the challenges they are facing.  They need us at our best.

Author’s Bio:

Ron Stein leads customer engagements for Dagostino Electronic Services, Inc. in Pittsburgh Pennsylvania. He specializes in industries and organizations that must meet high standards and regulatory compliance regarding physical and cyber security systems, including Medical Cannabis and Critical Infrastructure. He has worked with cannabis companies for six years, helping them to understand and meet regulatory requirements, and succeed with technology.

Originally published in Security Info Watch