The importance of legal compliance in cannabis

A robust program can provide more than just defense

Compliance is more than defensive protection; it is affirmatively necessary to progress as a viable business. Internal controls to prevent and detect misconduct are attractive to investors and to merger and acquisition partners.

Maneuvering companies without compliance “seatbelts” gets increasingly reckless as companies advance beyond the startup phase.

If you want capital and want to avoid lawsuits, you better have robust and comprehensive compliance that addresses not only cannabis and hemp regulations, but also employment, intellectual property, securities, environmental, antitrust and other considerations.

While the purpose of a compliance program is to prevent and detect wrongdoing, a well-designed compliance program will also reflect a company’s commitment to compliance. This commitment could be a material evaluation factor in regulatory enforcement actions.

A robust compliance program helps legitimate businesses differentiate themselves, especially where compliance with cannabis and hemp regulations is often far from clear-cut. Regulators and companies alike are still navigating the implementation of nascent and evolving rules that must balance practical realities with social objectives. And in this unsteady beginning, regulators are trying to weed out the bad actors.

Intentionally failing to comply with cannabis and hemp regulations risks federal criminal enforcement, threatens trust and hurls a business’s reputation into murky waters.

Effective legal compliance programs have several essential elements: (a) a clear understanding of the laws and the objective, which is verified and updated on a regular basis; (b) standard operating procedures to implement and maintain the compliance measures; (c) a culture and engagement that reinforce compliance protocols; and (d) measures to monitor compliance and remediate when necessary.

 

Understand the law

Primary for any compliance program is assuring a clear understanding of implicated areas and the applicable laws.

Cannabis and hemp businesses face significant regulatory headwinds as state and local regulations vary by jurisdiction and shift frequently. These companies must account for strict cannabis laws as well as laws in all other areas, all the while competing for an increasingly shallow pool of capital.

Although the U.S. government is not enforcing cannabis prohibition against companies complying strictly with state cannabis laws, all other federal laws still apply to state licensees. You are not immune from, for example, environmental or employment laws because you are a cannabis company.

Be clear on what laws apply to which aspects of your operations and engage legal and compliance experts in the impacted areas. For example, do not rely on your favorite patent lawyer for securities advice, such as when officers can sell stock.

 

SOPs and employee handbooks

If the first element is the “what,” the second element is the “how.” Employee handbooks and standard operating procedures help implement the legal obligations into specific protocols integrated into the business.

Think of employee handbooks and SOPs as the manual for legal compliance. SOPs should have discrete parts for different aspects of compliance and be simple enough for even a new employee to understand and follow.

In other words, the SOP for a driver’s manual would not say “Insert the key and drive”; instead, it would describe each action (adjust your seat and mirrors, put your foot on the brake and turn the ignition key, move the transmission to drive, etc.).

In addition, SOPs should be specific to the state where operations occur, because cannabis and hemp laws differ by state.

 

Culture of compliance

A company must prioritize compliance, both operationally and culturally. Missions and values matter.

Establishing a culture of compliance begins with the company’s management and leadership. Employees take express and implied leads from officers, even from signals like leadership using cannabis not in compliance with the law.

If you prioritize making money at any cost, employees will hear that, assume you are only giving lip service to compliance, and they will act accordingly.

Communicate expectations clearly; provide useful training; ascertain employees’ understanding of, and willingness to comply with, compliance policies and SOPs; and retrain them at regular intervals.

Obtaining an employee’s certification that they have been trained on, understand and will follow compliance policies and SOPs can help to ensure that the compliance program is well integrated into the company’s operations and workforce. Establish an efficient and trusted way for employees to confidentially report suspected misconduct without fear of retaliation.

 

Monitor and remediate

Monitor compliance regularly. The activity and the law will determine the needed frequency. Assess whether employees know when to seek advice and whether they would be willing to do so.

Have procedures to remediate any non-compliance — who gets informed and how noncompliance gets documented and handled.

Under best practices, an outside attorney helps oversee compliance. Once a company employs its own lawyer or compliance specialist for this area, the outside attorney’s role can be reduced to: keeping you informed of changes in laws; helping you interpret the law; helping you know about and maintain best practices; and providing guidance on reporting violations to government agencies. The attorney can track changes in law, provide continuity and help make risk-based decisions.

Your compliance program will only be as strong as its weakest link. In a very fast-moving industry, still susceptible to poor judgment and fraudsters, your internal controls may save your company — and will definitely make it more valuable.

 

Eric Berlin, partner at Dentons, is one of the nation’s leading cannabis law authorities, advocating full-time for clients in, or impacted by, the state-legal cannabis industries and tensions with federal law. He has more than two decades of courtroom and jury trial experience in high-stakes matters.

Ausra Deluard, counsel at Dentons, is a member of the firm’s national Health Care practice group, resident in the Oakland office. Her current practice focus is on helping clients in the nascent cannabis industry achieve their business objectives by advising them on the sector’s rapidly evolving laws and regulations.

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