The high risk of fraud in the cannabis industry

As jurisdictions across the globe legalize cannabis and entrepreneurs look to grow their fortunes, fraudsters lie in wait ready to exploit this burgeoning multibillion-dollar industry. The author, an accountant with expertise in legal cannabis businesses, details the types of schemes affecting the industry and what fraud examiners should know about preventing fraud in this growing field. 

The first sign of trouble for medical cannabis firm Juicy Fields appeared in July 2022 when its investors couldn’t access their accounts. They’d been able to watch their plants — and fortunes — grow on Juicy Fields’ online platform, but now they were locked out of the site. The firm’s owners froze investors’ accounts and scrubbed Juicy Fields from social media platforms. Then they disappeared like a puff of smoke. 

As it usually goes with Ponzi schemes, the Juicy Fields’ operation had imploded, becoming one of the biggest scams to hit the legal cannabis industry.

Seeded in Berlin in 2020, the online investment firm Juicy Fields billed itself as a “cannabis-crowd-growing platform” that needed investors, or “e-growers,” who’d get rich by funding medical cannabis growing operations. According to a 2022 article by Vice, Juicy Fields’ marketing team used Telegram, small news sites and online cryptocurrency forums to promote the business and, for investments of 50 to 180,000 euros, e-growers could reap returns of 70% and 168% per year, once their plants were harvested and sold. At one point, its owners boasted having 500,000 investors. 

Eager investors hailed from Europe, Africa, Asia and Latin America. In Telegram chat groups, they reported early profits. But Juicy Fields had its critics, and some pointed out that the operation resembled a Ponzi scheme, especially considering that no one could explain how profits were actually being generated. Just months before investors lost access to their accounts, Spain’s financial regulator put Juicy Fields on a list of companies not authorized to conduct investment business. The German Federal Financial Supervisory Authority banned it from operating in Germany because it hadn’t reported financial information on its investments. Juicy Fields then moved its operation from Berlin to Amsterdam. 

Investigations revealed that Juicy Fields’ owners allegedly defrauded its investors by lying about partnerships with cannabis cultivators and using new investments to pay off the old ones — a classic Ponzi scheme. When the operation crashed, the owners locked investors out of their accounts and ostensibly fled with their money. Nearly 200,000 of Juicy Fields’ “potpreneurs” lost approximately 645 million euros to the scheme.

In April 2024, a joint law enforcement operation coordinated by Europol that spanned 11 countries and was carried out by Spanish, German and French police, arrested nine suspects tied to Juicy Fields. Authorities seized cash and cryptocurrency, froze bank accounts, and seized luxury cars, real estate and art in the operation.

The Juicy Fields scheme is just one example of several types of schemes that fraudsters have cultivated in the global legal cannabis industry. As more jurisdictions have legalized cannabis, money has flowed into the legal cannabis operations — and so too have people looking to exploit a burgeoning industry based on the world’s most-used substance. Here, we examine the legal cannabis industry, the various fraud schemes affecting it, and what fraud examiners should know about preventing fraud in this fast-growing business.

A ‘growing’ industry

Cannabis, also known as marijuana, weed, pot or ganja, etc., is a genus of plant bred for its flower, which has a psychoactive effect caused by the chemical tetrahydrocannabinol (THC). Whether smoking or ingesting cannabis edibles, THC enhances the user’s mood, creating a sense of calm, relaxation or euphoria depending on the plant strain. The World Health Organization names cannabis “the most widely cultivated, trafficked and abused illicit drug” in the world. But over the years, attitudes about cannabis have evolved and jurisdictions across the globe have legalized it, creating a legitimate industry for it.

As of October 2025, 10 countries and 24 U.S. states have legalized recreational use of cannabis, and nearly 50 countries, including 40 U.S. states, have legalized it for medicinal use. The global spread of reforms is underscored by growing public acceptance of its use. For example, U.S. public-opinion firm Gallup shows how much American sentiment to cannabis use has shifted over four decades. In 1980, only 25% of respondents thought cannabis should be legal, but by 2024, 68% of respondents thought it should be legalized — quite the shift considering the public service campaigns of the 1980s like U.S. First Lady Nancy Reagan’s “Just Say No” campaign and the Drug Abuse Resistance Education (D.A.R.E.) program that tried to convince an entire generation to eschew drugs. 

Public opinion may have shifted over the years due to some research suggesting that cannabis may have the potential to ease the symptoms of numerous health conditions, including chronic pain, neuropathy, heart disease, Alzheimer’s disease and dementia, opioid addiction, epilepsy, cancer, and mental health and sleep disorders. The shift in public opinion is also reflected in the billions of dollars the global legal market is worth. In 2022, the global cannabis market was valued at $44 billion and is projected to grow to $444 billion by 2030.

Yet while public opinion may have shifted on cannabis, it’s still illegal in most of the world, including at the federal level in the U.S. These conflicting levels of legality, even within the borders of a nation, complicate things for legal cannabis business owners. With the lack of legal uniformity, cannabis-related business owners often find themselves in a sort of netherworld between legal and illegal statuses, with various laws and regulations to follow.  

The legal cannabis industry itself is divided between two types of business operations. One type is the “plant-touching” side of the business — the part of the industry that works directly with cannabis products, including cannabis growers, manufacturers and processors of cannabis extracts, and dispensaries where consumers purchase legal cannabis products. Then there are the ancillary businesses, which support the plant-touching side of the industry. These services include product packagers, point-of-sale (POS) display systems, and the lawyers, accountants and third-party testing businesses that test cannabis products for potency and contaminants. Depending on the jurisdiction, there are also delivery services that bring products to consumers.

To run a cannabis business, operators must navigate a series of licensing and bureaucratic processes where it’s legal. In most jurisdictions, cannabis business owners must pay taxes, obtain and pay licensing fees, and comply with various other rules and regulations to operate. From seed-to-sale tracking, cash-only transactions, and lack of tax and revenue oversight, there are many points of entry for unscrupulous business owners and criminals to perpetrate fraud. (See table “Cannabis fraud schemes, red flags and controls” at the end of this article for a breakdown of cannabis industry schemes, their red flags and how to detect them.)

Circumventing tax laws

Jeffrey Edmondson of Minneapolis, Minnesota, filed his 1974 taxes like many other business owners in 1975. But unlike many of his other fellow business owners that year, Edmondson was running an illegal operation as a drug dealer. Despite his below-the-board business, Edmondson was above the board in reporting his cost of goods sold (COGS). According to Forbes, Edmondson had a particularly good year, selling 1.1 million amphetamine pills, five ounces of cocaine and 100 pounds of marijuana. He reported $105,300 in costs related to selling his illegal wares and itemized the miles he put on his car, a flight, and food and entertainment expenses he incurred on a “business trip.” He deducted purchases on a scale and packaging supplies. He even deducted a portion of his rent because he ran the operation from his apartment.  

The U.S. Internal Revenue Service (IRS) denied his deductions; however, the judge sided with him in a U.S. Tax Court decision in 1981, and Edmondson was able to recoup his expenses. But the following year, in 1982, U.S. Congress made it illegal for those who sell controlled substances to claim standard business deductions by enacting IRC § 280E. As they can’t claim standard business deductions and they’re taxed gross profits, tax liabilities for legal cannabis businesses can fall anywhere between 50% and 80% of their gross earnings. As Forbes reports, this can be a heavy financial burden. According to a 2024 Cannabis Business Times survey of 7,500 dispensaries in 21 U.S. states, annual sales ranged from three-quarters of a million to $16.8 million, with an average of $3.5 million in sales for dispensaries. 

In each jurisdiction where cannabis is legal, business owners are subject to a variety of tax laws and regulations. For example, in Canada, where recreational cannabis use has been legal at the federal level since 2018, businesses pay federal and provincial duties and goods and services taxes. In Uruguay, the first country to legalize recreational use in 2013, cannabis can only be sold in pharmacies, and producers must pay federal taxes and income taxes. There are also limits on how much cannabis producers may cultivate, and they must report the quantities they produce and distribute.  

Black-market diversion, supply-chain fraud and inventory manipulation

Eight employees of the Green Light medical cannabis dispensary in Helena, Arkansas, were arrested in October 2024 by the state’s Alcoholic Beverage Control Enforcement Division (ABC Enforcement) for diverting legally produced cannabis products from people with prescriptions for medical cannabis and selling those products illegally. ABC Enforcement found that the dispensary employees were creating fake transactions and selling the products to customers without patient cards for medical-use cannabis.

In the uneven regulatory environment of the cannabis industry, it’s not uncommon for legally produced products to be sold in the illegal market or for illegally produced cannabis to be sold legally. Where there are deficiencies in compliance, inventory control and oversight, there are opportunities for exploitation. The goal for the perpetrators may be to undercut legal competition, profit from higher prices in the unregulated market or simply avoid paying taxes. 

In 2021, California-based cannabis grower and dispensary, Catalyst, filed a lawsuit against grower Glass House Brands, accusing it of funneling cannabis into the illicit market while operating with state-issued licenses. According to the lawsuit, Glass House used falsified manifests, inaccurate destruction reports and fake customer data to obscure its operation. State regulators lost millions in tax revenue and honest businesses were further squeezed by artificially low black-market prices. A judge dismissed the case, citing reluctance to interfere with the regulatory oversight activities of California’s cannabis regulatory agency.

In many jurisdictions, businesses are required to track the life cycle of their products, in a practice known as seed-to-sale tracking. Software like Metrc and BioTrack allow business owners to document everything about the cannabis product from the time it’s cultivated to the time it’s sold. These tracking systems help owners comply with regulations and provide transparency, but they can also be manipulated through various schemes including ghost crops, burner distributors and failing to document everything about the products. For example, in November 2024, law enforcement officers in New Mexico destroyed thousands of pounds of cannabis plants at greenhouses owned by NNK Equity LLC, and revoked the owners’ license to operate a cannabis business. During a compliance check of the business, regulators say the company exceeded the number of plants it was supposed to have and violated its tracking requirements for assigning numbers to each plant. A subsequent police investigation discovered plants at another location for which NNK’s owners didn’t have a license. 

Another scheme within the legal cannabis supply chain is the manipulation of inventory through “ghost crops”— fictitious cannabis harvests. Ghost plants may then be declared lost, stolen or destroyed. When these products are listed as missing, the business may avoid paying excise taxes, evade seed-to-sale tracking software or falsely reduce reported revenue. (See the sidebar “Manipulating inventory with ghost crops,” at the end of this article.)

While tracking systems are meant to provide transparency, they can be used fraudulently through “burner distributors” — distributors who purchase a license for the appearance of operating a legitimate business while funneling cannabis into the illegal market. They might document that the inventory was destroyed, then sell it illegally for a higher profit. In some cases, these licenses are purchased by front people who obscure the true ownership of licenses. A recent lawsuit filed by former Metrc executive Marcus Estes alleges that burner distribution is pervasive in California’s legal cannabis market. In the lawsuit, Estes claims that his former employer conspired with state regulators in California to ignore large-scale diversion operations. According to the lawsuit, burner distributors used California’s required tracking system to obscure illicit sales, including interstate transfers (because cannabis is illegal at the federal level, it can’t cross state lines for sale). 

Operators may also deliberately falsify inventory records to hide product diversion, inflate sales figures or reduce taxable income. Cultivators, distributors and dispensary owners all have opportunities to manipulate inventory, but cultivators have the best opportunity for this practice largely due to the quotidian problem of plant loss as cannabis is vulnerable to destruction by weather, insects, mold and power outages in greenhouses. Because crop losses are to be expected from time to time, using them to conceal illegal sales or reduce taxes can be a tempting option.

Investment schemes

Potrepreneurs can spend millions to a launch a cannabis business — not including the application and licensing fees and insurance to start a business and comply with laws and regulations. Given the high price of launching and running a legal cannabis business, the industry’s lack of financing and banking options, and the industry’s evolving regulatory system, it’s hardly surprising that fraudsters would exploit these conditions. Fraudsters take advantage of people’s enthusiasm for cannabis products and the uneven patchwork of regulations to run these schemes. The most common types of investment frauds in the cannabis industry are Ponzi schemes, like the Juicy Fields case at the beginning of this article, and pump-and-dump schemes. 

Ponzi schemes are often complex and intricate schemes in which existing investors are paid using funds from new investors. Perpetrators promise high returns, but these fraudulent operations aren’t sustainable — it becomes difficult to recruit new investors, and the funds to pay off older investors evaporate. Another example of a Ponzi scheme in the cannabis industry is WeedGenics, an operation run by Rolf Max Hirschmann and Patrick Earl Williams, a rapper better known by the moniker “BigRigBaby.” 

In 2019, Hirschmann and Williams started soliciting funds from investors to raise money for WeedGenics, which they claimed operated cultivation facilities and a distribution center. They promised a 36% return on investment and raised a total of $61.7 million from 350 investors to fund an expansion of a 52,000 square foot cultivation facility in Las Vegas, Nevada. Hirschmann and Williams told investors that their contributions would help them boost annual revenue to $35 million. It seemed like a solid operation — WeedGenics had 40,000 social media followers, and they posted images of videos depicting their facilities. But the facilities weren’t real and Hirschmann and Williams were funneling investor funds into their own coffers for luxury vehicles, jewelry and real estate. Williams, who worked mostly behind the scenes as “vice president” of the company, used the funds to bankroll his rap career. In 2023, the U.S. Securities and Exchange Commission shut down the operation and charged the pair with securities fraud.

Like the Juicy Fields and Costello cases, cannabis investment schemers create convincing fake business websites, spoof emails, or create dashboards for investors to track fabricated performance metrics (Juicy Fields allowed its investors to track the growth of their “plants” online) to make it all seem legitimate. Phishing emails trick investors into sending money to fraudulent accounts, making investors think their cash transfers are legitimate. Even licensing documents presented to investors can be forged using digital templates. 

Prospective investors should be wary of any solicitation for a cannabis business in which operators promise extremely high returns, use pressure tactics or urgency to get people to invest quickly, and lack of transparency with limited information about how profits are generated.

Preventing fraud in the legal cannabis industry

In 2022, the U.S. state of Missouri legalized cannabis for adult recreational use. In a 2025 report, the state auditor, Scott Fitzpatrick, implored state regulators to provide more oversight of legal cannabis businesses to detect and prevent fraud. “The department has now had more than four years with medical marijuana and more than two years with adult-use marijuana to develop a plan to audit these returns. Department officials should quickly finalize their audit procedures to ensure appropriate oversight of this new and growing industry.” Just like any industry, oversight and vigilance are necessary components to prevent fraud. 

Accountants with expertise and knowledge of the cannabis industry are crucial for business owners to comply with laws and regulations. In the U.S., accountants may receive training and certification from the National Association of Cannabis Accounting and Tax Professionals (NACATPros) to work with cannabis businesses. The following are specific activities that cannabis accountants do to prevent and detect fraud.

• Maintain accurate COGS segregation: Properly separate allowable inventory costs from disallowed operating expenses so that tax returns reflect the true taxable base, avoiding both over-deductions and overpayments.
• Reconcile seed-to-sale systems with financial ledgers: Perform monthly reconciliations between regulatory inventory data and accounting software ledgers to ensure that every gram reported to regulators in the jurisdiction matches what’s reported for tax and accounting.
• Manage cash transactions and comply with regulations: The cannabis industry largely operates on cash, so accountants must document cash deposits, prepare proper filings if transactions exceed a certain amount (in the U.S., business owners must file a form for transactions over $10,000) and create audit trails showing that deposits are the result of legitimate sales.
• Document cost allocations and inventory adjustments: Maintain written cost-allocation workpapers showing how cultivation, manufacturing and retail costs were calculated. This practice is critical if tax collectors, such as the IRS, challenge deductions or have questions pertaining to the possibility of ghost inventory.
• Review and file excise and sales taxes accurately: Track changing rates, reconcile POS reports to tax filings and ensure that payments match reported gross receipts.
• Vet related-party and vendor transactions: Confirm that vendor invoices, management fees and inter-company transfers are legitimate to detect product diversion or burner distributor schemes.
• Maintain a document retention system: Have a detailed and well-organized filing system so the business can respond quickly to requests from regulators and tax collectors. 
  

Accountants and fraud examiners can help cannabis businesses prevent and detect fraud with the following activities:

• Establish strong internal controls: Set up clear segregation of duties. No single employee should control cash handling, inventory adjustments and recordkeeping. Implement approval workflows for inventory write-offs, vendor payments and transfers.
• Reconcile regulatory data to financials: Crosscheck seed-to-sale systems (e.g., Metrc) with the general ledger and POS data every month. Discrepancies between physical products, tracking reports and accounting records often reveal diversion or “ghost” activity.
• Monitor cash flow and bank deposits: Analyze daily cash reconciliations and compare them to reported sales. Look for round-number deposits, structured transactions under $10,000, or missing forms and filings — these are common indicators of concealment or money laundering.
• Scrutinize vendor and related-party transactions: Review vendor lists and inter-company payments for shell entities or burner distributors. Repeated payments to unverified vendors or unusual management fees are red flags of kickbacks or product diversion.
• Perform surprise inventory counts: Conduct unannounced cycle counts of inventory to uncover ghost crops, falsified destruction reports (reports documenting when products must be destroyed according to regulations), or inflated yield claims. Compare weights and waste logs against reported harvests and destruction manifests.
• Analyze gross margin trends: Note sudden spikes or drops in gross margins without clear operational changes, which can signal unrecorded sales, manipulated COGS or underreported revenue.
• Conduct periodic fraud risk assessments: Evaluate areas of the business that might be vulnerable to fraud risks, including cash, inventory, vendors, employee theft and financial reports. Internal controls should be tailored to the type of cannabis operation (cultivation, manufacturing, retail).
• Provide anti-fraud training for employees: Educate employees on what fraud looks like in the cannabis industry — falsified manifests, unrecorded returns, burner license transfers or fake customer sales — and create a hotline or a channel for employees to safely and anonymously report wrongdoing.
• Engage independent forensic reviews: Have periodic external reviews by a Certified Fraud Examiner (CFE) or forensic accountant who can validate control effectiveness, test data integrity and identify emerging schemes before regulators do.

As more jurisdictions legalize cannabis and the legal industry grows, fraud examiners and accountants who understand how the industry operates and have knowledge of schemes that affect it will have a crucial role to play. Meticulous oversight, anti-fraud training awareness and proactive risk management strategies are all necessary to mitigate fraud in the cannabis industry and protect its consumers.

Angela Mays, CFE, is founder and managing director of the Cannabis Accounting and Consulting Group. Contact her at Angela@cacgroupllc.com.

Manipulating inventory with ghost crops

Ghost crops are fictitious cannabis harvests that exist on paper but not in a grow room. Cultivators may invent these phantom plants to carry out an inventory manipulation or diversion scheme where they’re funneling undocumented plants into the illicit market, disguising yield discrepancies (e.g., plant losses, inventory shrinkage or theft) or laundering illicit cannabis into the legitimate market. 

A grower might falsely report that they’ve planted or harvested cannabis in a tracking system. They’ll enter fake batch numbers, strains and weights. On paper, it appears that the grower has a legal supply, but after falsely reporting the supply, they’ll sell or transfer the illegally produced product. An entity that receives the illicit product can then sell a product that isn’t being tracked. Regulators will see a digital trail, but it’s not for the actual product. A business owner may also record fake sales to fake customers under a related-party shell company.

Cannabis fraud schemes, red flags and controls