Richmond dispensaries hid possibly millions in sales, profited illegally, DA report finds

While performing an internal audit of Richmond’s medical marijuana dispensaries in 2014, accountant Kevin Harper said he saw an industry that, in his words, was operating “in the shadows.”

Banks leery of holding money used to purchase a drug still illegal under federal law forced dispensaries to deal mostly in cash, Harper said, creating the potential for corruption in the industry.

Cash transactions allow dispensaries to potentially misrepresent their profits when reporting them to the city, Harper said in an interview this month. It would be relatively easy for the dispensaries to underreport their sales, he said, and thereby pay less in Richmond business taxes. Richmond hired Harper to determine whether the dispensaries were paying the correct amount of taxes to the city, but Harper said he was unable to do so.

“None of the three collectives provided all information necessary for this audit,” he wrote in the report, dated Oct. 8, 2014.

While Harper’s audit found “no direct evidence” of tax evasion or fraud among the city’s dispensaries, those cash transactions made him suspicious, he said. A year later, another report—this one a forensic analysis conducted by the Contra Costa County District Attorney’s office—appeared to confirm his hunch. A copy of the DA report received by Richmond Confidential last month indicates that the DA’s office estimated that Richmond’s dispensaries may have concealed up to nearly $7 million in unreported sales.

The DA report, dated Sept. 10, 2015, found that Richmond’s three medical marijuana dispensaries—Green Remedy Collective, Holistic Healing Collective and 7 Stars Holistic Healing Collective—and their owners appeared to have manipulated financial data in order to profit from their sales “in direct conflict with state law.”According to state law, medical marijuana dispensaries must operate as nonprofits and the revenue generated must not exceed the amount necessary to cover the dispensary’s overhead and operating costs.

“A portion of these profits appear to have been disguised through manipulation of financial data,” concluded the report. “In addition, it appears that the members of the management team at all these dispensaries are misappropriating these profits for their own personal benefit.”

Harper’s audit and the DA report highlight the turbulent history of medical marijuana in Richmond—a new chapter of which has unfolded in recent months, as the city’s three dispensaries have battled an anti-trust lawsuit filed by another dispensary that has accused the three of monopolizing the local medical marijuana trade.

The District Attorney’s forensic analysis indicates that trouble for Richmond’s three dispensaries and their owners began years before that lawsuit was filed.

The DA’s analysis, performed by Contra Costa District Attorney Forensic Accountant Bassem Banafa with data from 2012 to 2015, identified several instances in which the dispensaries appeared to have neglected to record transactions and hidden sales from regulators.

According to the DA report, Green Remedy Collective, operating out of a location on Hilltop Mall Road, is responsible for the lion’s share of unreported sales—potentially an estimated $6 million in “receipts that have not been reported to the City of Richmond or any regulatory authority.”

The DA accountant also wrote that the data Green Remedy provided “bears strong signs of manual manipulation.” In other words, the report suggests, it is possible that even more sales were concealed.

Similarly, the data that 7 Stars Holistic Healing, located on Pierce Street, provided the DA’s office “do not appear to be an accurate reflection of their sales activity,” according to the report. The report documented nearly 1,500 instances in which the 7 Stars cash register was opened but no sale was recorded.

“The register was opened for the benefit of the security camera and the customer, and the cash was placed in an alternative location or simply pocketed by the cashier,” the report stated.

Using this method, the report indicates, the 7 Stars dispensary may have not reported nearly $900,000 in sales.

According to the report, the third dispensary, Holistic Healing Collective on San Pablo Avenue, had about $113,000 in unexplained cash transactions on their books, along with several discrepancies in receipt numbers, which, the report states, is a sign of manual data manipulation.

Natalia Thurston, Holistic Healing’s attorney, said that neither she nor her client “have ever seen or heard about an alleged report from the Contra Costa District Attorney’s Office,” but that the report’s findings sounded “false” to her.

“Holistic Healing has no accounting discrepancies, there has been no unreported income, there has been no manual data manipulation,” Thurston said.

Zeaad Handoush, one of the owners of 7 Stars, denied the report’s findings and said he hadn’t realized the DA’s office was looking into his dispensary.

“This is all a surprise,” he said in an interview. “As far as I know, to my knowledge, I’m in good standing with the city.”

An attorney for Green Remedy, Barry Himmelstein, also denied the report’s findings.

“There is no unreported income at Green Remedy,” he said, adding that the dispensary uses the software program MJ Freeway to track all sales.

“Absolutely everything goes through that system,” Himmelstein said.

Himmelstein, Handoush and Thurston each said the dispensaries have been fully compliant with past audits or requests for financial records, and that dispensary owners do not profit from their businesses.

The DA report estimates that the three dispensaries combined may have underreported their sales by a total of nearly $7 million between 2012 and 2015. That means the City of Richmond, which imposes a 5 percent tax on dispensary sales, may have been short close to $350,000 in taxes during that time.

Since 2011, when the city established the tax, dispensaries have paid Richmond about $1.7 million, said Antonio Banuelos, the city’s revenue manager. That means dispensaries may have withheld about a fifth of the total amount of money the city was due in accordance with the medical marijuana sales tax.

Yet the city was unaware of this possible loss of revenue—even though the DA report was completed more than a year ago.

“To the best of my knowledge, we haven’t received evidence of any criminal behavior,” said Richmond City Manager Bill Lindsay.

Lindsay said that if the city were presented with such evidence it would seek “back taxes, plus penalties” from the dispensaries.

Lindsay said he did remember Harper’s report and that it “raised concerns” that he thought had since been addressed. But he said he didn’t know about the DA report.

Nor did Banuelos, the city’s revenue manager.

Contra Costa District Attorney Mark Peterson confirmed, via email, that the DA report is genuine. He also said that the report is confidential and was “generated as part of a law enforcement investigation.”

Peterson said that he was concerned that publicizing the report “could cause irreparable harm to the investigation.” He did not respond to questions about how the year-old report could harm the investigation, which he did not specify was ongoing.