Dan Yerushalmi is the CEO of AU10TIX, a global technology leader in identity verification and management.
Cannabis cultivation, distribution and consumption have transformed from what was once a heavily stigmatized and illegal activity in the United States into a thriving and legitimate industry at the state level. As of this writing, 23 states have legalized the recreational use of cannabis for adults, and more are expected to pass legal adult recreational policies in 2023.
On a federal level, cannabis’s legal status hasn’t changed since the 1970s—it’s still illegal, and possession with intent to distribute is still a felony. Even so, the federal government has to grapple with legalization on the state level and its ramifications for national enforcement.
The Cole Memo guides state-regulated cannabis programs, including regulations prohibiting sales across state lines, sales to minors and implementing tracking systems that prevent divergence. At a minimum, retailers of medical and recreational cannabis must adhere to four principles.
1. Patient Verification: Medical cannabis programs typically require patients to register with the state and obtain a valid recommendation from a qualified healthcare provider. Distributors must verify the patient’s eligibility before selling products.
2. Age Restrictions: Both medical and recreational cannabis distribution typically has strict age restrictions to prevent minors from accessing cannabis products. Most jurisdictions require consumers to be at least 21 years old to purchase recreational cannabis and to have a valid medical recommendation for medical cannabis.
3. Licensing And Compliance: Both types of distribution require businesses to obtain licenses and permits from regulatory authorities. These licenses come with ongoing compliance obligations, including proof of age verification, adherence to daily limits, regular inspections and reporting to verify that everyone follows the rules.
4. Purchasing Limits: Both medical and recreational cannabis distribution have regulations regarding daily purchasing limits. The limits prevent excessive consumption, diversion to the illicit market and other potential risks associated with the use of cannabis. The specific limits can vary depending on the jurisdiction and the type of cannabis product.
However, challenges arise with individuals who seek to exploit these regulations. For retailers selling restricted products, particularly in the cannabis sector, the use of fake identification has been a longstanding issue. These fake IDs enable identity fraud, allowing individuals to obtain cannabis illegally and take advantage of customer rewards programs both online and in physical dispensaries.
A practice known as “looping” has emerged as a significant challenge. Looping involves exploiting legal ambiguities to exceed purchase limits and manipulate loyalty programs, ultimately undermining the integrity of the industry. It comes in two forms: the “daily max” loop, where customers rapidly move between dispensaries to accumulate excessive cannabis, and the “loyalty loop,” which involves multiple purchases to gain unearned perks.
To address these challenges, identity verification (IDV) has proven effective in ensuring regulatory compliance. Some states mandate IDV, considering it an affirmative defense that shields retailers from liability. IDV technology offers real-time tracking across dispensaries, preventing repetitive purchases and closing the loopholes exploited by loopers.
This technology counteracts looping in the following ways.
Real-Time Tracking Across Dispensaries
One of the primary strategies employed in looping involves customers visiting multiple dispensaries in rapid succession to exceed daily purchase limits. Identity verification disrupts this tactic by establishing real-time tracking across various locations. As customers attempt to flout their limits, the system promptly detects these attempts and sends automated alerts to dispensary personnel.
Preventing Unauthorized Purchases
Customers often attempt to provide false or altered identification to execute looping successfully. Identity verification uses advanced technology to authenticate government-issued IDs in real time. This process ensures that only eligible adults can access cannabis purchases and that an audit trail is created to demonstrate compliance and prevent looping. By verifying both age and identity, the system effectively prevents unauthorized transactions.
Safeguarding Loyalty Programs
Looping can exploit loyalty programs by using multiple purchases to accumulate unearned rewards. Identity verification acts as a gatekeeper for loyalty program integrity. Retailers can implement sensible reward accumulation and redemption restrictions by accurately verifying customer identities and purchases. This ensures that participants genuinely earn their rewards without resorting to unfair tactics.
Digital Trail And Data Analytics
Beyond immediate prevention, IDV provides a digital trail of transactions and data analytics to minimize fraud risk and demonstrate compliance with regulations. Retailers can showcase a robust record of purchases, safeguarding against accusations of noncompliance.
Potential Limitations
While identity verification technology has proven effective in addressing many challenges within the cannabis retail sector, it’s also important to acknowledge some potential limitations and considerations when choosing a vendor.
For the cannabis industry especially, regulations can evolve rapidly at both state and federal levels. Identity verification systems must remain adaptable to stay compliant with changing laws, potentially requiring frequent updates and adjustments.
Some IDV systems are not infallible and can occasionally produce false positives (rejecting legitimate customers) or false negatives (allowing underage or unauthorized individuals to make purchases). Striking the right balance between strict verification and customer convenience can be challenging.
Additionally, there can be implementation and operational challenges associated with IDV systems, including the initial costs of setup, staff training and maintenance. Smaller businesses may find these costs to be a barrier to entry, potentially creating disparities in compliance among different retailers.
But overall, identity verification can transform compliance from a reactive process into a proactive one, effectively thwarting looping tactics, preventing underage sales and promoting integrity in the cannabis retail sector.
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