State Auditor Says Agency Acted Independently on Cannabis Investigation

The audit report, which is heavily critical of Oregon’s regulatory environment, was released the morning after reports surfaced that Secretary of State Shemia Fagan has been moonlighting for a major industry player.

Share this article!

The extent of Secretary of State Shemia Fagan’s involvement in and oversight of an audit of Oregon’s approach to cannabis regulation is under scrutiny following the revelation that since February, she has moonlighted as a consultant to a major dispensary chain.

State audits director Kip Memmott told reporters Friday that Fagan, who is his supervisor, provided guidance on the scope and scale of the audit — which was listed in Fagan’s 2021-22 audit plan — but did not provide more guidance than that.

“She can tell me what to audit, but what she can’t tell us to do is what to find in those audits,” Memmott said.

Fagan confirmed to Willamette Week Thursday that she recused herself from involvement with the audit Feb. 15. That’s when she began providing consulting services to an affiliate of La Mota, a large cannabis dispensary chain that holds more than 50 licenses from the Oregon Liquor and Cannabis Commission despite a troubled history that includes more than $7 million in tax liens and more than 30 lawsuits, most related to nonpayment of bills.

Shortly after Memmott spoke to reporters at a Friday-morning media availability on the audit’s findings, WW and Oregonlive reported that a draft of the audit was sent to OLCC for response Feb. 8 — meaning the bulk of the work of the audit was completed a week before Fagan’s recusal.

Memmott said Fagan’s recusal was the first time in his six-year history with the Secretary of State’s office that a Secretary of State has recused themselves from an audit. Fagan has not performed consulting work before.

Oregon ethics laws allow public officials to take outside employment, so long as they don’t use their public position, public resources or insider knowledge from their position to obtain outside work.

The report is critical of many aspects of the state’s relationship to the cannabis industry, saying OLCC regulations are financially burdensome to cannabis licensees and based on fears of federal intervention, which it argues are outdated.

Titled “Oregon Needs to Modernize Cannabis Laws to Help Grow the State’s Economy and to Ensure Equitable Opportunities and Benefits for all Communities,” the report said:

  • Oregon’s cannabis industry is subject to regulations that “create burdens the alcohol industry does not face” and are “clearly not based on a robust risk assessment, or the test of real-world effectiveness”;
  • Many of the state’s cannabis regulations are based on repealed federal guidance and are largely in place to prevent federal intervention in Oregon’s legal cannabis system, “a concern that no longer carries the same significance, risk or likelihood”;
  • The state should adopt creative strategies to mitigate caused by existing federal cannabis laws and barriers;
  • Oregon did not consider or include targeted equity provisions when developing its recreational cannabis program, and there are still limitations and barriers preventing significant progress;
  • The OLCC’s current licensing system isn’t capable of tracking demographic data, hindering efforts to mitigate disproportionate impacts in communities target by the War on Drugs.

The report is also highly critical of the state’s security requirements, saying “For example, a cannabis licensee may be fined thousands of dollars if their security system fails, or they fail to properly track a product. According to one cannabis licensee, a downed section of a fence on their property resulted in a violation of OLCC’s regulations that cost their business thousands of dollars.” The number of security-related fees issued is not listed in the report, nor is the fee schedule.

The audit also criticizes the state for not setting up a banking system allowing cannabis licensees to reduce their reliance on cash, which has made licensees and employees more vulnerable to crime, and criticizes Business Oregon — the state’s economic development agency — for failing to offer support to cannabis businesses.

Auditors attributed Business Oregon’s failure to assist the cannabis industry to concern on the part of agency leadership that “employees would be at risk of committing a federal crime by providing assistance to cannabis businesses.” Banks are also subject to federal oversight, and Oregon’s Congressional leadership has repeatedly championed legislation that would free up banking services to the cannabis industry. The Secure and Fair Enforcement Banking Act stalled in the last Congressional session, but was reintroduced earlier this week.

The audit repeatedly suggest state leadership’s concern about federal intervention are “based on repealed federal guidance,” referring to the Cole memorandum, a set of guidelines issued to all United States Attorneys in 2013 by then-Deputy Attorney General James Cole. In 2018 then-Attorney General Jeff Sessions rescinded the memo. Based on that gesture, and President Joe Biden’s decision to pardon federal marijuana offenses in 2022, the report suggests federal intervention in the marijuana industry is unlikely.

“Though some of these requirements were initially put in place to minimize risk of federal intervention in Oregon’s system, the lack of federal intervention in Oregon’s system to date, the changing social and political environments, and increasing number of draft federal bills focused on cannabis reform led auditors to conclude the risk of federal intervention is increasingly unlikely,” the report reads.

The report was not all critical, however: auditors praised the state’s actions to reduce the tax burden on cannabis businesses.

The report recommended ensuring the state’s cannabis industry receives similar supports provided to other industries that help bolster the economy, and said Oregon should adopt “creative strategies” to try to mitigate the risks associated with selling a federally illicit substance.

“Oregon’s cannabis industry faces significant regulatory issues, stemming from federal restrictions on cannabis. This audit revealed Oregon’s regulatory system for cannabis compounds these problems,” said Deputy Secretary of State Cheryl Myers, in the report’s accompanying press release. “Given the action taking place at the federal level, now is the time for Oregon to prepare its system for a future when cannabis is legal nationally.”

To subscribe to Oregon Business, click here