There’s a dirty word in the cannabis industry — diversion — and these days, it’s on many lips.
In Idaho, state police in 2017 confiscated nearly three times as much pot during traffic stops as in 2016.
In Oregon, the U.S. attorney said pot leaking from the state is a “formidable” problem and he plans to “do something” about it.
And in Washington, the system designed to track pot was hacked at launch and had industry-disrupting technical issues. For months, the state has relied not on state-of-the-art software, but thousands of spreadsheets to surveil the industry.
Whether marijuana from Washington state’s legal market is being diverted to other states is something of a mystery.
But with the state’s pot-tracking system hobbled earlier this month, marijuana production soaring here, and wholesale prices for a gram of weed going for less than the cost of a gallon of milk at Safeway, some marijuana retailers, growers and analysts say the market forces have never been stronger for Washington pot to leak across state borders.
“The incentives are all lined up perfectly [for diversion] … but it’s anyone’s guess. We don’t have the traceability system to tell us,” said Logan Bowers, co-owner of Seattle pot shop Hashtag Cannabis, earlier this month as that system floundered.
Others say the issue has always been a topic of discussion on the pot industry’s never-ending rumor mill, but they’re still waiting for hard evidence.
Preventing diversion was a priority of the Obama administration. Last month, U.S. Attorney General Jeff Sessions rescinded Obama-era guidelines, but took no further action and has seemingly left discretion on enforcement to U.S. Attorneys, like Oregon’s Billy Williams.
Annette Hayes, the Acting U.S. Attorney for Western Washington, declined to comment, through a spokeswoman, on the issue of diversion. Joseph Harrington, the U.S. Attorney for Eastern Washington, did not return multiple calls.
On Monday, Sessions, a consistent critic of marijuana, told the National Sheriffs’ Association that he “cannot and will not pretend that a duly enacted law of this country — like the federal ban on marijuana — does not exist.”
‘Flying blind’
In response to federal uncertainty, state officials, including Gov. Jay Inslee, have touted Washington’s system as tightly regulated and enforced, often citing the traceability system.
Since pot stores first opened, the state Liquor and Cannabis Board (LCB) has used that system to track the flow of marijuana.
But the board’s original software and database contract expired last November, and pot businesses have been submitting data — in the form of more than 404,000 spreadsheets — to a storage server until a new system is operating.
The manual system still allows regulators access, but makes it more difficult to pull files, spot check or audit businesses, said Mikhail Carpenter, an agency spokesman.
“Practically speaking, the LCB has been flying blind with respect to the inventory status of the market,” said Jim MacRae, a data scientist who uses traceability data for his analytics business.
Carpenter said the “blind” characterization was unfair because businesses upload the same required data and enforcement officers have continued site visits, following tips and writing violations. Eventually, all of the spreadsheets will be uploaded into the new system for review, he said.
“What changed in this period was the method to report,” he said, noting that officers conducted more than 1,400 site visits and discovered 12 traceability violations. About 5 percent of marijuana licensees had not been following temporary reporting procedures by late January, Carpenter said. That doesn’t necessarily indicate an attempt to subvert the system, he said, but could mean some are shutting down or didn’t understand requirements.
Already three months behind, the LCB on Feb. 1 attempted to transition to a new software and data program, called Leaf Data Systems. Shortly after it launched, the new system was hacked and other technical confusion slowed or stopped wholesale transactions for more than a week. In response, the LCB extended its deadline for companies to upload data to the new system until month’s end.
Big harvest
Meanwhile, a glut of marijuana harvested after the fall outdoor growing season has driven down wholesale prices to some of the market’s lowest levels, MacRae said. After analyzing plant start data from last summer, MacRae expects marijuana production to have risen 60 percent over fall’s harvest.
“It will be the biggest pulse of product that is harvested and produced that the state will have seen,” MacRae said. He projected sales would rise only 20 percent during that period.
Some growers say low prices and stiff competition has stressed cash flows. With business disrupted earlier this month, the market flooded with pot, and a gap between traceability software, MacRae said he thinks a minority of desperate growers could resort to fudging numbers and slipping product into the black market.
“Most of the farmers I know are honest people, but I don’t think people are wanting to lose their farms, licenses, businesses, houses and mortgages and stuff. If they can’t sell, they will either wither and die on the vine or they generate revenue (illicitly),” he said.
That’s speculation, but MacRae said he might be able to spot suspicious production data, if he had it. Since switching to spreadsheets, the LCB has not been publishing as much marijuana data on its website. MacRae said he asked for traceability data spreadsheets in a public disclosure request, but has not received any yet.
Vicki Christophersen, the Executive Director and Lobbyist representing the Washington Cannabusiness Association, said she doubted talk of diversion went beyond rumor.
“I have yet to see evidence,” she said, adding that anyone selling to the black market risks losing their license and criminal prosecution.
Christophersen said it was “unfortunate” to have a gap between traceability vendors, but she didn’t think growers would see it as an opportunity to divert.
“The traceability is just but one piece of a robust regulatory structure that includes cameras and spot checks,” she said.
Although marijuana certainly leaves Washington, the leaks are not clearly tied to the state’s legal system.
Corporal Curt Sproat of the Idaho State Police said 1,375 pounds of marijuana were discovered last year during traffic stops when more than a pound was seized. That’s nearly triple 2016’s reported haul of 507 pounds, he said. Many drug seizures involved drivers with Washington licenses or plates, but traffickers are rarely forthcoming about where pot originated, he said.
After Thanksgiving last year, troopers noticed the pace of seizures increasing.
“With all the recent seizures, 2018 is going to blow 2017 out of the water,” Sproat said. “The black market of marijuana is thriving because of the surplus, and there’s a lot of money to be made transporting across states.”
Attorney Sam Méndez, who studied marijuana production as the former Executive Director of the University of Washington’s Cannabis Law & Policy Project, said he recognized pressures on growers.
“The prices are low now. The supply is high, so I do think there is an incentive toward struggling businesses to risk closure and enforcement,” he said. “I think there’s evidence to point at overproduction.”
But Méndez said he thought the illicit market within Washington would fade over time, and more study was needed on whether diversion elsewhere had increased since legalization.
“There always has been diversion. There was plenty of cannabis being produced before legalization,” he said.
Méndez said he was skeptical that diversion, if it’s happening, would prompt further federal scrutiny.
“Jeff Sessions hates marijuana regardless of the evidence and regardless of how well it’s regulated at the state level,” he said. “I don’t think Sessions has his thumb on the pulse of the industry.”
This story was originally published February 18, 2018 8:00 AM.