AS NEW MAR­I­JUANA LI­CENSES DE­LAYED IN­DEF­I­NITELY, GLOBAL AC­COUNT­ING FIRM POCK­ETS $7M FROM STATE TO RANK AP­PLI­CANTS

As new pot li­censes in­def­i­nitely de­layed, KPMG pock­ets $7M from Illi­nois to rank ap­pli­cants

Chicago Sun-Times - - FRONT PAGE - BY TOM SCHUBA, STAFF RE­PORTER tschuba@sun­times.com | @TomSchuba

When the op­er­a­tors of Illi­nois’ med­i­cal mar­i­juana busi­nesses were given first crack at grow­ing and sell­ing recre­ational weed in the state, ev­ery­one else look­ing to break into the new in­dus­try was forced to wait months to even ap­ply for li­censes. They then saw their prospects put on hold when the COVID-19 pan­demic brought ev­ery­thing to a halt.

Mean­while, one com­pany that doesn’t even deal in cannabis has prof­ited hand­somely in that time.

KPMG, a “Big Four” ac­count­ing firm based in the Nether­lands with nearly $30 bil­lion in rev­enues last year, was awarded nearly $7 mil­lion in no-bid con­tracts to grade ap­pli­ca­tions for new recre­ational pot li­censes, ac­cord­ing to records ob­tained by the Chicago Sun-Times.

KPMG is get­ting nearly $4.2 mil­lion through a con­tract with the Illi­nois Depart­ment of Fi­nan­cial and Pro­fes­sional Reg­u­la­tion, which over­sees dis­pen­saries, and $2.5 mil­lion from the Illi­nois Depart­ment of Agri­cul­ture, which is tasked with reg­u­lat­ing cul­ti­va­tion op­er­a­tions and other cannabis busi­ness.

The pay­ments to the firm amount to more than 12% of the state’s $52.8 mil­lion in cannabis tax rev­enues dur­ing the first six months of recre­ational legalizati­on.

State of­fi­cials didn’t open the con­tracts up to com­pet­i­tive bid­ding to speed up the process. But as it turned out, the delay in is­su­ing 75 li­censes to run pot dis­pen­saries came in part be­cause of a travel ban KPMG in­sti­tuted in the wake of the COVID-19 out­break and a pro­vi­sion in its con­tract with the state re­quir­ing the ap­pli­ca­tions be picked up by hand.

And while of­fi­cials’ de­ci­sion to go with an out-of-state firm was to

pre­vent in­sid­ers from get­ting a leg up in the process, the de­lays length­ened the head start al­ready given to the ex­ist­ing clout-heavy pot firms, in­clud­ing some that are pub­licly traded and an­other that counts a high-pow­ered lob­by­ist as an in­vestor. That’s helped them profit even more from the ro­bust weed sales dur­ing the pan­demic.

“They’re fur­ther strength­en­ing their sort of stran­gle­hold on the mar­ket in Illi­nois, which is go­ing to be for a long time one of the top mar­kets in the U.S.,” said Akele Par­nell, an at­tor­ney for the Cannabis Eq­uity Illi­nois Coali­tion who rep­re­sents ap­pli­cants for the new li­censes.

State aimed to re­duce bias

Toi Hutchin­son, Gov. J.B. Pritzker’s se­nior ad­viser on cannabis con­trol, said the key rea­son of­fi­cials con­tracted out-of-state eval­u­a­tors was to “re­move as much bias in the grad­ing as we pos­si­bly could.” In ad­di­tion to scor­ing ap­pli­ca­tions, KPMG em­ploy­ees are tasked with de­ter­min­ing whether con­flicts of in­ter­est ex­ist be­tween their graders or state eval­u­a­tors and any ap­pli­cants or their as­so­ciates.

“How do you best re­move any pos­si­bil­ity for any­one grad­ing these things to know some­one from Illi­nois? [That is] the largest driver for why we went with a third-party grader, plus all the chal­lenges in other states,” said Hutchin­son, a former state se­na­tor who helped lead the legalizati­on push.

The con­tracts with KPMG weren’t com­pet­i­tive be­cause deals made in ac­cor­dance with the im­ple­men­ta­tion of the law aren’t sub­ject to the Illi­nois Pro­cure­ment Act. Hutchin­son said that ex­emp­tion was made to ac­com­mo­date of­fi­cials who “were go­ing to have to get up and run­ning fast and put peo­ple in place fast.”

KPMG de­clined to an­swer a se­ries of ques­tions about the con­tracts.

‘Per­fect storm’ of de­lays

Pritzker, Hutchin­son and other Illi­nois Democrats pre­sented recre­ational pot legalizati­on as a way to re­form the crim­i­nal jus­tice sys­tem, bol­ster fund­ing for blighted ar­eas and cre­ate op­por­tu­ni­ties for mi­nor­ity busi­nesses to par­tic­i­pate in the lu­cra­tive — and al­most ex­clu­sively white — weed in­dus­try.

But a se­ries of de­lays prompted by the COVID-19 cri­sis have stymied the goal of pri­or­i­tiz­ing li­censes to so-called so­cial eq­uity can­di­dates. So far, new li­censes to grow, sell, trans­port and in­fuse cannabis prod­ucts have all been pushed back in­def­i­nitely.

“I can’t un­der­score enough how much of a per­fect storm it’s been,” Hutchin­son said.

Dur­ing a meet­ing in June of the Cook County Cannabis Com­mis­sion, Hutchin­son ex­plained that a “na­tion­wide travel ban” KPMG im­posed on its em­ploy­ees “re­ally slowed down ev­ery­thing on the dis­pen­sary side.”

Un­der the con­tract, KPMG em­ploy­ees are re­quired to re­trieve ap­pli­ca­tions from the IDFPR in per­son. KPMG has an of­fice in Chicago, but the firm did not re­spond to ques­tions about why em­ploy­ees here were un­able to re­trieve the con­tracts.

That snag contribute­d to Pritzker is­su­ing an ex­ec­u­tive or­der on April 30 de­lay­ing the is­suance of the 75 dis­pen­sary li­censes that were sup­posed to be doled out the fol­low­ing day.

The move ul­ti­mately gave way to a more oner­ous is­sue: Li­censes are be­ing awarded based on nu­mer­i­cal scores, but the emer­gency rules for re­solv­ing ties among dis­pen­sary ap­pli­cants ex­pired on June 5. Now state law re­quires at least 90 days be­fore new rules can go into ef­fect, though the re­view process could po­ten­tially take longer.

“Once those tiebreaker rules are in ef­fect, I think we’ll be ready to go,” Hutchin­son said of is­su­ing the li­censes, adding the IDFPR could start award­ing some of the per­mits ear­lier if there are “clear win­ners.”

In ad­di­tion, Pritzker has twice pushed the dead­line to sub­mit ap­pli­ca­tions for the 40 craft cul­ti­va­tion and in­fu­sion li­censes and an un­told num­ber of trans­porta­tion per­mits. The Depart­ment of Agri­cul­ture was ex­pected to is­sue those li­censes on July 1, but Pritzker used an­other ex­ec­u­tive or­der two days ear­lier that pushed back the dead­line.

As pan­demic played out, KPMG’s take in­creased

Amid the de­lays, KMPG’s to­tal haul in­creased to nearly $6.7 mil­lion.

KPMG’s ini­tial con­tract with the IDFPR, dated Feb. 21, was for $2.5 mil­lion, records show. But on June 22, the value of the con­tract was in­creased by nearly 70%, to $4.2 mil­lion, be­cause there were “more unique ap­pli­ca­tions sub­mit­ted than ini­tially an­tic­i­pated.”

KPMG was orig­i­nally con­tracted to grade 1,000 ap­pli­ca­tions at a rate of $2,500 each. How­ever, the firm’s pay­day in­creased sub­stan­tially af­ter reg­u­la­tors re­ceived more than 1,667 to­tal ap­pli­ca­tions seek­ing up­wards of 4,000 li­censes, ac­cord­ing to IDFPR spokesman Chris Slaby, who noted that ap­pli­cants were able to put in for mul­ti­ple per­mits.

The firm is now in the process of re­view­ing those ap­pli­ca­tions, Slaby said.

The new deal with the IDFPR came af­ter the Agri­cul­ture Depart­ment en­tered into its own con­tract with KPMG on May 14 that’s worth $2.5 mil­lion.

Un­like the other con­tract, ap­pli­ca­tions for li­censes is­sued by the Agri­cul­ture Depart­ment have been mailed to KPMG for grad­ing, ac­cord­ing to agency spokes­woman

Krista Lisser. Char­ity Greene, a Pritzker spokes­woman, couldn’t of­fer a spe­cific time­line for when the li­censes will be is­sued but said the Pritzker ad­min­is­tra­tion “is work­ing as quickly as pos­si­ble to process ap­pli­ca­tions.”

As part of the con­tract, KPMG will rate all 819 ap­pli­ca­tions the Agri­cul­ture Depart­ment has re­ceived at the same rate of $2,500 each, Lisser said. That in­cludes 455 ap­pli­ca­tions for craft cul­ti­va­tion li­censes, 250 for trans­porta­tion li­censes and 114 for in­fu­sion li­censes. Du­pli­cate ap­pli­ca­tions will be re­viewed at a rate of $1,250 each.

The money to pay KPMG is be­ing drawn from the Cannabis Reg­u­la­tion Fund, which is used to finance the im­ple­men­ta­tion of the recre­ational pot pro­gram with taxes, fees and other money col­lected un­der the legalizati­on law. As of last month, the fund had an end­ing bal­ance of $9.1 mil­lion.

‘We never thought it was fair’

Those seek­ing craft cul­ti­va­tion li­censes were re­quired to iden­tify the phys­i­cal ad­dress of their pro­posed lo­ca­tions. Some hope­ful busi­ness own­ers ul­ti­mately chose to lease or oth­er­wise lock down prop­er­ties, putting an ad­di­tional fi­nan­cial strain on star­tups at­tempt­ing to break into the highly com­pet­i­tive in­dus­try.

Par­nell, the at­tor­ney rep­re­sent­ing mul­ti­ple so­cial eq­uity ap­pli­cants, said he fears some won’t be able to “with­stand the same de­lays as we’ve seen with the dis­pen­sary li­censes” be­cause of mount­ing costs.

Both Par­nell and Edie Moore, an eq­uity ap­pli­cant and the ex­ec­u­tive direc­tor of the Chicago chap­ter of the Na­tional Or­ga­ni­za­tion for the Re­form of Mar­i­juana Laws, also ex­pressed con­cerns over the state award­ing KPMG the con­tracts with­out open­ing them up for bid­ding.

“We never thought it was fair that it was no-bid con­tact in the first place. But you wouldn’t have been able to bid on it, you couldn’t do it and still meet all the time­lines that were set out in statute,” Moore said.

Now, the state’s ex­ist­ing, over­whelm­ingly white-owned cannabis firms are con­tin­u­ing to “rake in prof­its with­out com­pe­ti­tion,” Par­nell said.

Re­tail sales of recre­ational pot hit nearly $48 mil­lion in June, mark­ing a new monthly high.

SUN-TIMES PHOTO STOCK.ADOBE.COM

Global ac­count­ing firm KPMG has of­fices at the AON Cen­ter in down­town Chicago.

RICH HEIN/SUN-TIMES FILE PHOTO

There hun­dreds more ap­pli­ca­tions than the state an­tic­i­pated for the sec­ond round of dis­pen­saries, in­clud­ing from Jas­mine Turner, seen here ap­ply­ing at the Thomp­son Cen­ter on Jan. 2.

Toi Hutchin­son

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