A recent development in the debate over the legalization of cannabis has been the potential involvement (or willful blindness) of the People’s Republic of China (PRC)—and therefore the Chinese Communist Party (CCP)—in the illicit growing of that plant by Chinese organized crime elements in the American states that have legalized cannabis for medical or recreational purposes.REF It is troublesome to learn of the domestic involvement of parties who are committed enemies of the United States and the American way of lifeREF in the cultivation and distribution of a drug that has numerous adverse long-term effects on American users.REF It also is troublesome to realize that the public is largely unaware of this development. But it is even more troublesome to know that the parties who profit from the state-legal sale of cannabis certainly will not educate political decision-makers or the public about a development that could dilute their income stream.
The public needs to be aware of the harms that China’s involvement in this enterprise has brought and will continue to inflict on the American people. That is particularly important given that the percentage of Americans who use cannabis daily has increased over the past decade and now exceeds the number of people who drink alcohol on a daily basis.REF The media need to highlight this aspect of the cannabis legalization debate. The President needs to use his bully pulpit to educate the public and his law enforcement agencies to stop this illegality, and Congress should give the President some additional tools to employ.
States that Have Legalized Cannabis Have Not Eliminated an Illicit Market
Whether cannabis should be legalized and regulated as cigarettes and alcohol are regulated has been a controversial public policy issue since the 1960s.REF Then, some parties, particularly college students and people in their 20s through 40s, extolled cannabis use as an avant-garde expression of freedom and rebellion, while others condemned it as a dangerous steppingstone to far more serious and debilitating types of drug use.REF Following the end of the Vietnam War, the legalization debate largely (but not completely) died down for the ensuing decades.
Beginning in 1996, however, state law began to change significantly. First out of the gate, California voters passed a popular initiative to permit cannabis to be used for medical purposes.REF Numerous other states have followed California’s lead, and a majority now permit cannabis to be used for medical or recreational purposes.REF The federal drug code still treats cannabis as contraband,REF but the Biden Administration initiated a re-examination of the proper treatment of cannabis under federal law. U.S. Attorney General Merrick Garland left office without issuing a final decision on the matter, and that proposal is pending before the Trump Administration.REF
Advocates of reform have always made two primary arguments for the legalization of cannabis. One is that, when compared against other psychoactive drugs such as heroin or methamphetamine, cannabis is a relatively harmless pleasure-inducing intoxicant.REF The other argument is that legalization would generate numerous benefits, among them being the elimination of black (or grayREF) markets for the illicit sale of that drug.REF Liberalizers might concede that black markets will always exist to meet a consumer demand,REF but they argue that people would prefer to purchase lawfully sold weed from legitimate, respectable businesses if that option were available.REF That would eliminate any risk of arrest, prosecution, and imprisonment. It also would permit the public to obtain safe strains of the plant from local stores with a reputation for quality that owners are interested in maintaining instead of buying nickel bags of ganja in “back alleys” from unknown or disreputable never-to-be-seen-again parties selling plants of uncertain potency with potentially dangerous adulterants. Illicit markets, we were told, would disappear through the ordinary work of basic economics and consumer choice in a lawful market.REF
History has proved the reformers wrong; illicit markets are still with us today, nearly 30 years after California rolled the first cannabis snowball downhill.REF According to estimates made by Whitney Economics, which analyzes the cannabis industry, the illegal markets constitute approximately 75 percent of the $100 billion industry, and two-thirds of the cannabis sold in these markets is grown domestically.REF Even the Supreme Court of the United States has acknowledged that “there is an established, albeit illegal, interstate market” for cannabis in the United States.REF Parties who grow and sell cannabis without a license have continued to prosper in states where it may be lawfully distributed under state law. The illicit industry in some states—California, where the contemporary cannabis revolution began, is a prime example—is larger than the lawful one that was supposed to drive the former out of business.REF
The reason for the black market’s survival is Economics 101 “with a dose of convenience thrown in.”REF Unlicensed growers do not pay the taxes that licensed businesses pay, nor do they comply with the environmental and labor regulations that increase the operating costs for regulated firms. The result is that they can sell cannabis at a lower price than state-licensed stores can charge.REF Additionally, some people will fear being “outed” as users because it could cost them their jobs or damage their reputation, so they will continue to purchase cannabis on the sly. Cannabis grown for medical or personal uses, which are not subject to any business taxes and regulations, can be sold locally in competition with retail stores.REF Finally, cannabis has been grown illegally in federal and state parks, which adds to the amount available for sale to the public.REF Illicit sales have become a fixture of the cannabis market, and there is no evidence that cannabis’s thriving black market will disappear, whether soon or ever.REF
The upshot is that cannabis’s legalizers have sold the public a bill of goods—a fugazi, and one that the PRC is fully exploiting for its own ends, which is yet another fact that legalization’s supporters don’t want to acknowledge, let alone defend. But that aspect of the cannabis problem can no longer be ignored.
China Has Come to Dominate the Cannabis Market in the United States
The public might have thought that legalization would lead to 1960s-era “counterculture pioneers, outlaws, and rebels” opening boutique cannabis stores.REF There were some, to be sure, but the majority of cannabis businesses were large-scale operations,REF and “[t]he people running companies in the cannabis industry far more closely resemble recent 2020 MBA graduates than members of the 1950s Beat Generation or 1960s Hippies.”REF Many observers (myself included) predicted that large businesses would displace small-scale cannabis enterprises, because the former could achieve economies of scale that “Mom and Pop” farms and retail stores could not and also could afford the slew of professional lawyers, accountants, lobbyists, and others necessary to get their operations going.REF Regardless of the size of the state-legal cannabis industry, predictions focused on American-owned wholesale and retail cannabis markets.
But that was before the PRC decided to make money for itself and trouble for Americans from the cannabis business made lawful by numerous states.
China Enters the Domestic U.S. Cannabis Industry. According to the U.S. Drug Enforcement Administration (DEA), “Chinese and other Asian TCOs [transnational criminal organizations] have taken control of the marijuana trade” in the United States.REF Over 10 years, “Chinese TCOs have come to dominate the cultivation and distribution of marijuana across the United states, a phenomenon from California to Maine.”REF Most of the Chinese TCOs’ cannabis cultivation occurs in states that have legalized cannabis production under state law, although the TCOs often relocate to other states once they are discovered.REF
The DEA does not stand alone in making those findings. State and local law enforcement officers, Members of Congress, and investigative journalists have uncovered evidence of the PRC’s infiltration of state-lawful cannabis businesses. Chinese aliens, some of whom entered the United States unlawfully from Mexico, along with members of the Chinese “diaspora,” have worked at illicit cannabis farms (or “grow houses”) in a host of different states.REF This phenomenon has occurred in states from coast to coast such as California,REF Maine,REF Massachusetts,REF Oregon,REF New Mexico,REF and possibly elsewhere as well.REF Oklahoma turned out to be a particularly attractive site for the rise of cannabis farmsREF because there is no effective state-law cap on the amount of cannabis a farmer may grow.REF The Oklahoma Bureau of Narcotics, for example, is said to believe that 2,000 of the 7,000 cannabis farms in that state “have a Chinese connection—supplying workers, funding or both.”REF
The Involvement of Chinese Organized Crime Elements. There is a serious concern that local Chinese cannabis growers are involved with elements of organized crime in ChinaREF and that their activities in the United States have the implicit blessing of the PRC and CCP.REF Last year, ProPublica reported that “U.S. and foreign national security officials have alleged that the Chinese state maintains a tacit alliance with Chinese organized crime in the U.S. and across the world.”REF Chinese mobsters “overtly support pro-Beijing causes and covertly provide services overseas,” ProPublica noted, “engaging in political influence work, moving illicit funds offshore for the Chinese elite and helping persecute dissidents, according to Western officials, court cases and human rights groups….”REF According to Brookings Institution drug policy expert Vanda Felbab-Brown, “[t]he Chinese government has a complicated relationship with organized crime.”REF The triads operate global fentanyl and methamphetamine drug trafficking networks, which the PRC ostensibly condemns while using them as “extralegal enforcers for the government,” a role that the triads willingly play “to curry favor with the CCP.”REF What is more, on at least one occasion, a Chinese government official visited cannabis farms in Oklahoma, indicating that this is a matter of concern to the PRC.REF
How to Expose and Eliminate the PRC’s Involvement in America’s State-Sanctioned Cannabis Industry
We know that China bears a large part of the blame for the illicit fentanyl plaguing America.REF With regard to cannabis, perhaps the Chinese government has willfully blinded itself to what Chinese organized crime elements are doing.REF Congress and the executive branch are aware of the PRC’s infiltration of the state-sanctioned cannabis industry,REF but they have not yet fully exposed and eliminated that enterprise. They should.
Unlike illicit fentanyl use, cannabis use does not confront a user with risk of immediate death.REF But it does put a massive number of our dollars into the pockets of the organized crime elements of our principal Second Cold War enemy. Congress and the President should act in partnership with the states to prevent Chinese organized crime elements from profiting from the illegal cultivation and distribution of cannabis. At a minimum, we must prevent our current predicament from worsening.REF The Trump Administration recently expressed its belief that Chinese ownership of U.S. property raises serious national security concerns. As Secretary of Agriculture Brooke Rollins pithily told the PRC, “The Trump Administration has a message for China: Keep off the farm.”REF The Administration said that it plans to work with state lawmakers to prohibit any such prospective land sales and to unwind ones that have already occurred.REF State law generally governs the subject of real estate transactions, and there is work for the states to do, as discussed below.
This problem, however, also raises national security concerns that are principally in the federal government’s bailiwick. The President and Congress therefore should also consider some responses that only the federal government can make. Just this year, the federal political branches have worked together to stem the sale of illicit fentanyl by passing into law the Halt All Lethal Trafficking (HALT) Fentanyl ActREF and the Fentanyl Eradication and Narcotics Deterrence Off (FEND Off) Fentanyl Act,REF the two most recent federal efforts to address that scourge.REF Thus, both ends of Pennsylvania Avenue see the need to cooperate to resolve drug problems. Some actions do not require the passage of new legislation, but some do. Both approaches are worthwhile.
Recommendations for the States. The Chinese purchase of U.S. real estate is not a new or isolated phenomenon.REF Since 2017, the Chinese have been purchasing land near U.S. military bases and in other strategic locations around the country, and it is unlikely that they have done so to be able easily to commute to work after enlisting.REF Recently, “Chinese-owned agricultural land…has increased rapidly,”REF and “the number of farms funded by sources traceable back to Chinese investors or owners has skyrocketed.”REF With respect to cannabis, the PRC has used shell corporations and other “cutouts” to obscure their purchases of farms and rentals or homes and other structures for cannabis cultivationREF by possible PRC agents,REF elements of Chinese organized crime triads acting with (at least) the deliberate indifference of the CCP,REF or Americans acting on their behalf for the purpose of growing cannabis or making a profit by obscuring the identity of the real parties in interest when purchasing or renting real property.REF
States that have not yet legalized cannabis under their own laws therefore should hold the line against doing so. We now know that the black market will not disappear. The only difference will be that Chinese organized crime will run it, not 1960s-era hippies that have made it this far. How many state legislators would want to encourage lawlessness in their jurisdictions? If the media and public make their opinions known, the legalization movement might be stopped in its tracks.
States should also prevent the use of land in their jurisdictions for Chinese organized crime’s cannabis farming. As my colleague Bryan Burack has explained, states can take various actions to protect the nation against the PRC’s interest in acquiring real estate for spying or illegal drug activity.REF For example, to increase the identification of foreign nations, companies, and individuals with an interest in particular real estate transactions, the states (certainly with and perhaps even without the blessing of the federal government) could require real estate purchasers and lessees to identify all foreign individuals and foreign-owned or foreign-controlled companies with a legal or financial interest in their purchases or rentals.REF That would help to prevent the PRC from using third parties or sham corporations to obtain property for use as a listening post or an indoor cultivation (or production) site for illegal drugs.REF
Recommendations for the Department of Justice and the President.The U.S. Department of Justice should undertake aggressive criminal investigations into and prosecution of the actions of Chinese organized crime elements for violations of one or more of several federal criminal laws. The most obvious place to start is with the federal controlled substances laws. Cannabis is a Schedule I drug, the category for drugs that lack a current medical use, have a high potential for abuse, and are dangerous even when used under a physician’s supervision.REF The cultivation and distribution of cannabis is a felony punishable by a lengthy term of imprisonmentREF that depends on the weight of a “mixture or substance” containing a detectable amount of THC.REF The department charged the parties in Maine and Massachusetts cases noted above with such offenses.REF
The President should reject the Biden Administration’s proposal to reschedule cannabis from Schedule I to Schedule III of the Controlled Substances Act of 1970. That is the right action for the President to take on the merits of the rescheduling issue. Today’s cannabis is far more potent than when legalization’s efforts began in the 1960s,REF and numerous medical studies, including some recent ones, have corroborated earlier arguments that heavy or long-term cannabis use can generate severe physical or psychological harms in users.REF
That is particularly so in the case of minors because of the juvenile brain’s labile nature.REF There are manifold potential costs from cannabis use by minors or young adults: dropping out of high school or failing to attend (or complete) a college education due to amotivational syndrome; absenteeism from or accidents in the workplace; motor vehicle accidents; increased national health care costs due to emergency department visits or cannabis use disorder (CUD); cardiovascular disease; compromised fetal development; and so forth.REF All things considered, there is no persuasive medical, legal, or policy justification for increasing the availability of cannabis throughout the United States.REF
Recommendations for Congress.Congress should consider whether federal legislation is necessary to protect uniquely national interests. The federal government has a surpassing interest in preventing any foreign power or nationals from purchasing or renting property that enables it or them to spy on sensitive federal locations (such as military bases), to commit federal offenses, or to generate illegal funds that can be used to undermine American interests in other ways. As the Supreme Court explained in Haig v. Agee, “[i]t is ‘obvious and unarguable’ that no governmental interest is more compelling than the security of the Nation.”REF
The Supreme Court’s decision in Zschernig v. Miller is instructive in this regard.REF Zschernig involved the question of whether state or federal law governed the intestate distribution of property previously owned by an Oregon resident to the only next of kin, who were residents of East Germany before the Berlin Wall came down. Construing the 1923 Treaty of Friendship, Commerce and Consular Rights, which the federal government had said was still in force, the Oregon courts allowed for the transfer of realty but not personalty because an Oregon resident had no corresponding right to inherit personalty from an East German resident who had died intestate. The Supreme Court reversed. The Court reasoned that, as construed by the Oregon courts, Oregon probate law “affect[ed] international law in a persistent and subtle way”REF because it empowered state courts to make comparative judgments about the relative merits of the property rights protections afforded by Communist versus Western nations.REF That approach “illustrate[d] the dangers which are involved if each State, speaking through its probate courts, is permitted to establish its own foreign policy.”REF Those judgments, the Court concluded, were within the exclusive province of the federal government to make.REF
The President and Congress should act to establish a uniform cannabis land-use rule across the states.Zschernig makes it clear that the President and Congress have broad power to define the nation’s foreign policy and protect its residents against harms resulting from foreign powers. Cannabis use, particularly by military age men and women, can weaken our national security by reducing, perhaps greatly, the number of potential soldiers, sailors, airmen, and Marines who are qualified and fit to serve.REF
Moreover, the federal government has a powerful interest in having this issue decided and applied uniformly across the nation, which cannot happen if each state is free to develop its own, potentially conflicting rules and policies.REF It is widely recognized that Delaware’s law is favorable to corporations, which is why many such entities are incorporated under Delaware law.REF Corporations want to be able to take advantage of the benefits made available by Delaware’s corporate law and knowledgeable Chancery Court system. That benefits those companies as well as the public. By contrast, the country would be considerably worse off if one state (or a small number of them) was more willing than the rest of the nation to disguise the real parties in interest in a land transaction. Accordingly, Congress should consider taking up this issue rather than waiting to see how different states resolve it.
There also are steps that the President and Congress should consider taking independently of the states. For example, Congress could expand the authority and role of the U.S. Committee on Foreign Investment in the United States (CFIUS).REF Established by President Gerald FordREF pursuant to the Defense Production Act (DPA) of 1950,REF CFIUS is an interagency committee authorized to review certain transactions involving domestic foreign investment,REF including certain real estate transactions by foreign parties.REF The committee has the authority to review such deals and advise the President as to whether to prohibit the transaction or allow it to go forward under whatever conditions he deems appropriate if he finds “credible evidence” that the transaction “threatens to impair the national security of the United States.”REF
Nevertheless, the CFIUS screen is porous.REF Not every type of real estate transaction must be reported.REF CFIUS has concluded that so-called greenfield or start-up investments are outside of its jurisdiction.REF Additionally, some parties have not made the necessary disclosures even for a “covered transaction,” thereby depriving CFIUS and the President of the information needed to decide whether to allow a particular transaction to go forward.REF Congress could revise the DPA to make it clear that there is no greenfield exception to CFIUS jurisdiction.REF
Conclusion
The PRC and CCP are committed to making China the world’s greatest commercial and military power. One step that they have taken is to use or willingly ignore the operation of Chinese organized crime elements in the United States. China has benefitted from the cultivation of cannabis in states with medical or recreational use programs because increasing cannabis use by military-age Americans weakens this country militarily. Both the President and Congress need to take the various steps outlined in this Legal Memorandum to address this serious, ongoing problem.
Paul J. Larkin is the John, Barbara, and Victoria Rumpel Senior Legal Research Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation. The author wishes to thank Bryan Burack, Bertha K. Madras, John Malcolm, Luke Niforatos, and Bill Poole for valuable comments on an earlier draft of this paper. The author also wishes to thank Amanda Badalamenti for excellent research assistance. Any mistakes are the author’s.
