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Did Regulators Let CannTrust (TSX:TRST) Get Off Too Easy?

CannTrust Holdings (TSX:TRST)(NYSE:CTST) shrouded the cannabis industry in scandal after authorities found secret grow rooms and unauthorized inventory in CannTrust facilities. Illegal marijuana producers use similar tactics to distribute the product in the black market.

The news brought the stock down from its 52-week high of $15.50 to the current price of $1.20.

Legalizing an entire industry presents many challenges, including bringing order to what was once lawless enterprises.

In a panel discussion on money laundering at the Brookings Institution in Washington, D.C., Juan Zarate, a former Deputy National Security Advisor to the president of the United States under George W. Bush, commented on the risk of cannabis legalization: “If I’m the bad guy, I’m going to find a way to blend my operations and network in through what is considered legal and otherwise legitimate networks.”

The bottom line is that many of the marijuana enterprises popping up post-legalization could be a part of criminal organizations that are excited for the opportunity to hedge organizational risk.

CannTrust scandal response

The CannTrust board of directors fired former CEO Peter Aceto in July after Health Canada found the secret grow rooms. Eric Paul, the former president, was also asked to resign.

These moves are a step in the right direction, but they may not be enough. When scandals like this come to light, there are always those few leaders who take the fall while guilty parties remain behind.

While possible, it may be unlikely that Eric Paul and Peter Aceto were the only CannTrust leadership involved in the plans to grow and distribute marijuana illegally.

The cannabis corporation also lost its licensing and will be destroying $77 million worth of inventory. These are undoubtedly expensive repercussions for the young corporation at a critical time when marijuana stocks are competing for market share.

The primary question is if CannTrust will lay low, get smarter, and try a different strategy to get around regulators.

U.S. SAFE banking act

The United States House of Representatives recently passed new legislation to make it legally safer for banks to serve cannabis-related enterprises.

Contrary to popular belief, not all marijuana dispensaries are cash only. A person can go into a store and purchase CBD and THC products with a credit card. The claim that there are loads of legally earned, undeposited funds lying around because banks will not serve the marijuana industry is a myth.

Banks do offer banking services to cannabis dispensaries.

In Colorado, Hawaii, Arizona, and California, local banks jumped on board to service the cannabis industry first, according to a New York Times article published on January 2018.

Moreover, the Treasury Department issued guidance to banks in 2014, permitting the banks to service cannabis corporations as long as they do due diligence in vetting customers and reporting transfers.

The SAFE Banking Act merely solidified what regulators had already communicated. The risk that the federal government would slap a fine on banks for facilitating money laundering is low as long as the banks file the appropriate paperwork to report the financial activities of the budding dispensaries.

If I were to open a medical marijuana dispensary, I would not do it without a bank. I would research and find a bank willing to do business with me, and those have existed since the U.S. states first legalized marijuana.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Debra Ray has no position in any of the stocks mentioned.

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