Regulated businesses like marijuana, alcohol, production of nuclear fissile material, etc., are subject to intense levels of scrutiny. That scrutiny doesn’t always come from regulators, though, as businesses keen on avoiding any penalties often hold themselves to higher standards. This is a good thing, and informed, inquisitive compliance teams (either internal or external) can save them from significant heartache down the line. Even the best businesses can sometimes break the rules. Sometimes a rogue employee will steal marijuana for his own use. Sometimes a financier can lie about his state of residency to avoid scrutiny where state residency is required. Inaccurate product tallies can be entered into the software traceability system. And so on.
Clients often come to our cannabis lawyers with these issues, asking us what they should do. How do they fix the problem? Invariably, we advise full voluntary disclosure to the regulating agency. This may seem like buying your own ticket to jail, but voluntary disclosure can be the difference between a slap on the wrist and losing your business.
In fact, many state regulations explicitly provide for mitigating penalties when the business has demonstrated business policies and/or practices that reduce the risk of future violations. These same states typically treat voluntarily disclosing rule violations as a business policy that reduces the risk of future violations.
In our experience, we have found time and time again that voluntary disclosures lead not just to reduced penalties, but virtually always lead to no penalty at all. When our clients have gotten into trouble and we have disclosed the situation to the appropriate regulatory body, the investigators and enforcement officers at the regulatory bodies have worked with us to resolve the issue without filing a formal complaint. Money can be returned to an out of state investor and that investor’s ownership in the business terminated. An incorrect entry in the traceability system can be remedied through allowed amendments to old entries. Marijuana stolen by an employee and reported can be accounted for.
Regulatory agencies know that while the goal is 100% compliance, the reality is that even the best companies are made up of humans that are sometimes prone to make mistakes and a 99.9% compliance and a 0.1% violation rate with full disclosure is still pretty good. This is especially true where the voluntary disclosure also includes information about the business having implemented a stricter compliance plan in an effort to eliminate such violations in the future. Regulators too are human and they appreciate companies that have strong compliance systems in place, do their utmost to comply with state regulations, and promptly and honestly report any and all compliance failures.
One word of caution: voluntary disclosures of the same rule violation can sound either benign or alarming based on how it is communicated. There is a delicate art to telling your regulator that you messed up. When we go to the regulators, we want to be able to tell them what our clients did before the violation to prevent the violation, but why it happened anyway. Most importantly, we want to be able to explain to the regulators in great detail exactly what our client will be doing not just to prevent the particular violation, but to beef up its compliance systems overall.