Pubdate: Mon, 14 Oct 2013
Source: Denver Post (CO)
Copyright: 2013 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: John Ingold
Page: 1A

STATE READIES FRAUD DEFENSE

Officials Face a Complex Challenge in the Regulation of Colorado Pot Stores.

As Colorado prepares for the opening of historic recreational 
marijuana stores, state officials are preparing for something equally 
as unique- a regulatory challenge of almost maddening complexity. 
Consider the headaches:  Regulators must precisely audit the 
transactions of every pot store, even though those stores currently 
can't take credit cards and do business almost exclusively in 
slippery $10 and $20 bills.

They must track the inventory weight of every business down to the 
gram, even though the weight of the same amount of marijuana can 
fluctuate daily based on things as variable as humidity.

They must guard against both cash and marijuana leaking out of the 
legal market and into the black market, all while the federal 
government watches over their shoulder.

Faced with these challenges, marijuana regulators in Colorado stop 
short of guaranteeing an airtight system. But Ron Kammerzell, the 
state Department of Revenue's deputy senior director of enforcement, 
is confident the department will be able to catch most fraud.

"No control system is going to give you absolute assurance," 
Kammerzell said. "It's going to give you reasonable assurance."

Colorado's recreational marijuana regulatory plan - as well as its 
revised plan for regulating medical-marijuana dispensaries - will 
rely on two systems that dovetail together, Kammerzell said. The 
first is an inventory-tracking system. The second is a store's 
sales-tracking system. Together, Kammerzell said they should allow 
the state to monitor marijuana from the grow room until it leaves a 
store's showroom.

The inventory-tracking system, known as MITS, is intended to track 
the growth of radio frequency tagged marijuana plants and also record 
the weight of the marijuana buds that are harvested off the plant. 
All marijuana businesses are required to enter inventory data into MITS.

Over time, Kammerzell said, the system will give regulators 
statistical information about how much certain varieties of marijuana 
plants grown in certain conditions are expected to produce, as well 
as how much marijuana buds typically lose in weight as they dry out. 
The more fine tuned the numbers are, the better regulators will be 
able to spot anomalies in a store's reporting.

"We're flying right now without that data," he said.

Once the pot hits the shop, regulators will check the 
inventory-tracking system against the store's sales tracking system. 
For every purchase recorded in the latter, Kammerzell said, there 
should be a decrease in inventory reported in the former.

Kammerzell said the Department of Revenue has other procedures - 
which he declined to elaborate on - for making sure cash is accounted 
for that were derived from the department's regulation of casinos. 
Mandated surveillance cameras and video storage and onsite visits by 
auditors should also help keep businesses in line, he said.

As with the casino industry, Kammerzell said it will be tough to stop 
someone in the marijuana industry from pocketing a couple of bucks 
(or buds) here and there.

"The internal controls are going to catch when people get greedy," he said.

Matt Cook, the revenue department's former director of enforcement, 
said he is confident the marijuana industry can be regulated but said 
state officials could be doing more to catch fraud. Cook, who now 
works as a consultant on marijuana regulatory issues, said the 
department could require stores to use a common sales-tracking system 
or better standardize how transactions are recorded. He said the 
state could also better integrate the inventory, sales and video 
surveillance systems into a master system so auditors don't have to 
do so much manual cross-checking.

"Anytime you have a very large cash business, it breeds corruption. 
That's just human nature," Cook said. "From a regulatory standpoint, 
you want the most records and checks and balances in place."

But Cook acknowledged that those suggestions come with technical 
complexities, and Kammerzell said the goal initially was to make 
rules that are easily followed and enforced.

State Rep. Dan Pabon, a Denver Democrat who helped write the new laws 
for marijuana stores, said Colorado is putting marijuana stores "on 
the honor system, in some respects." But he said he expected 
regulators to be diligent in checking on stores and asking questions 
about discrepancies - as much to keep pot out of the black market as 
to make sure the state is getting what it's owed in taxes.

"The last thing we want is tax cheats," he said.

Store owners, meanwhile, have pledged they will be an ally in 
regulatory efforts, to ensure their own survival.

Norton Arbelaez, a partner in the RiverRock dispensary and a board 
member for the Medical Marijuana Industry Group, said his business 
has had to hire a "cash comptroller" specifically to keep track of 
the in-house books. Employees are schooled on how to keep proper 
records, Arbelaez said.

Because federal prosecutors could decide to crack down on stores that 
stray outside of state laws, Arbelaez said marijuana businesses have 
an extra incentive to follow the rules.

"If you're an irresponsible business owner in this business," he 
said, "you lose your freedom."

Kristi Kelly, an owner of the Good Meds dispensaries and a board 
member of the Cannabis Business Alliance, said her stores have 
developed internal protocols for keeping track of cash and "shelf 
shrink" of marijuana. At the end of every day, she said store 
employees square up their sales to their remaining inventory.

"If something's off," she said, "we make sure we stay there until 
it's reconciled."

Steps like those could make state regulators' jobs easier. But 
Kammerzell said auditors plan to do ample checking themselves. 
Because people from across the country and the world will be watching 
to see whether Colorado can effectively regulate pot, Kammerzell said 
Colorado must get this right.

"We're taking all reasonable steps and precautions to minimize 
diversion," he said.
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MAP posted-by: Jay Bergstrom