One of the biggest arguments in favor of federal legalization of marijuana is the opportunity for regulation to pull an industry off the black market, and into the world of compliance and transparency — ultimately promoting consumer safety. Proponents of legalization have said that consumers are using marijuana products for recreational and medicinal purposes, whether it's legal or not. State and federal regulation can ensure that those consumers are using safe products.
With many in the industry anticipating federal-level legalization of the cannabis market, the sector remains with one foot in state-level regulation and one foot in the shadow market. Though regulation may pull it out of the shadows, Kerin Law, chief scientific officer at plant genetics company LeafWorks, said product fraud still runs rampant in the legal cannabis market.
"Fraud, in the herbal world, is a very common occurrence," she told PYMNTS in a recent interview. "Whenever you have a lot of money to make, people will always try to cut corners. In this case, they may add less valuable plant material into a product as bulk or filler."
That fraud doesn't stop just because a product is legalized, either. Indeed, a legal cannabis product may receive significant hype and demand, further enticing manufacturers and sellers to be less than genuine with the products their labels claim to be selling.
This is the pain point that LeafWorks aims to address with its recently announced Supply Chain Certification solution. The company uses plant DNA validation technology to track a product as it moves throughout the supply chain, and ensure that, whenever it changes hands, the quality and characteristics of that product remain the same.
By looking at product verification and compliance practices within federally regulated markets, LeafWorks is able to identify key checkpoints throughout the supply chain that provide the biggest window of opportunity for fraudsters. Industry companies may have their own in-house product testing tools, but third-party verification is essential for transparency, said Law.
For consumers, that means being able to trust that they're consuming what the product packaging claims. However, as Law explained, consumer trust isn't the only benefit to supply chain verification in this sector. As supply chain certification becomes "a necessary aspect of our industry," she said, compliance pressures on retailers and their vendors will continue to grow.
She added that the cannabis market is looking toward other markets, like the rest of the herbal products space, in anticipation of nationwide legalization that will bring cannabis products under the regulatory scope of the Food and Drug Administration (FDA).
Mitigating Risk For Third Parties
Supply chain verification is instrumental in mitigating the risk of noncompliance for marijuana firms regulated at the state level. However, particularly for companies in an industry considered to be high-risk for third-party service providers (and as many regulations remain in limbo), supply chain transparency and product verification can also mitigate risk for those business partners considering a deal with a cannabis company.
Perhaps one of the biggest opportunities here is in the financial services sector, a massive challenge for cannabis companies unable to access banking products with financial service providers operating at the federal level — at which cannabis remains illegal.
"I see a direct application for companies that need financial services, and need a way to show they're good business actors," Law said of the Supply Chain Certification solution. "If you're able to show you're doing things by the book, that you're doing things compliantly because you want to show people you're a legitimate company, then — absolutely — it mitigates risk. I would imagine a financial institution would [value that], for doing what they need to do to show they're a legitimate, serious company."
Today, the financial industry continues to explore ways to provide legal services to marijuana businesses. If expectations of nationwide legalization come to fruition, though, the banking sector will open wide to cannabis companies. However, any issues of product fraud within the supply chain are likely to hamper a firm's ability to access products like loans or trade finance.
Nationwide legalization would also open the door to a surge of compliance requirements for these businesses. Validating products as they move from growers, breeders, packagers, producers and distributors to buyers is part of a proactive compliance and risk mitigation strategy for legal cannabis companies today, said Law.
"Supply chain certification is something that is currently optional in the cannabis industry, but as soon as legalization happens, you'll be subject to regulation by the federal government and the FDA," she said. "The companies that will make it, that will be the most successful, are the ones that set up their [companies] to be compliant with forward-thinking protocols. One, it's the right thing to do, and two, it's going to set your company up for success."