What went wrong with Uruguay’s cannabis legalization and what Canada can learn

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The pharmacist stuffed a fistful of crumpled peso notes into a drawer in the counter, then leaned against it with a sigh. “It’s like time travel,” he said. “I’ve gone back to the 1950s. They closed my bank account, all my services – I can’t even write a cheque.”

He began to sell marijuana in his pharmacy nine months ago, when, with great fanfare, Uruguay became the first country in the world to legalize – and fully regulate – the sale and use of every type of cannabis product. There were lines out the door of his small shop on a leafy residential street in the capital.

And then, just weeks later, the pharmacist found himself cut off from the entire financial services market when Uruguay’s banks announced they would shut down the accounts of every business associated with the newly legal industry, after they were warned that they risked being in violation of U.S. drug laws and could lose their access to U.S. banks and dollar transactions.

Marijuana legalization: How Canada is planning on regulating recreational cannabis

Overnight, this pharmacy – and a half-dozen other businesses – were turned into cash-only concerns.

“This is the most regulated, traceable product in the entire world, but I can’t have a bank account,” the pharmacist said with heavy scorn. “A major drug dealer was arrested in Montevideo last week, and he had accounts in several banks – operating just fine. They didn’t close those, but they closed mine. The government spent years and years debating this law and designing this program but, apparently, they didn’t see this coming.”

The abrupt financial isolation of Uruguay’s cannabis businesses raises questions about how U.S. banks and lawmakers, led by anti-legalization Attorney-General Jeff Sessions, will respond to the process in Canada – just one of many aspects of the experiment in this tiny country in the far end of South America that offer lessons for Canada as the moment of legalization rapidly approaches.

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The Montevideo pharmacist refused to be quoted by name, even though he is running an entirely legal business. The reason he must remain anonymous, he said, is that as angry as he is with the government for landing him in 1950, he is nevertheless dependent on its goodwill to negotiate a way to make his business viable.

Nine months into its bold experiment, Uruguay is still very much finding its feet, stumped by obstacles that were perhaps predictable. Only a handful of businesses across the country will sell the recreational product, and even they are chronically understocked due to bureaucratic backlogs. The ramp-up of medical cannabis and industrial hemp production has also moved painfully slowly. The financial isolation remains a major challenge – particularly to the industrial sector, on which the country had pinned its hopes for new business.

But the country can also claim successes: There has been no outbreak of marijuana-related crime, as doomsayers had feared, no plunge in national productivity and no epidemic of drug-addicted tweens. The stereotype of the recreational marijuana user has begun to change – in the pharmacy, there were as many women in their 60s, carrying string bags of groceries, in line to buy marijuana as there were scruffy university students – and public approval for legalization is slowly inching upward as people watch the orderly rollout.

And while the problems are rife, the fact is that Uruguay is actually doing it, something no other country has ever done, said Diego Olivera, director of the government’s Institute for the Regulation and Control of Cannabis (IRCC).

“It’s a transformation, from a reality where for decades the state was invested in prosecuting the consumption and production of cannabis as an illegal drug to a reality where this is a legal substance” managed by the government, he said.

The pharmacies are selling, grow clubs are harvesting, 10,000 people have registered plants at home, medical research labs are at work on new cannabidiol oil treatments for epilepsy and Parkinson’s disease, and the first crop of industrial hemp is about to be harvested.

“It’s predictable to have problems when you’re the first,” Mr. Olivera said. The banking issue in particular was a blow. “But lots of the problems we had will be resolved when other countries legalize.”

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Uruguay, with a population of 3.4 million people, cannot exert much influence over the United States – but maybe, would-be entrepreneurs here say, Canada can tip the balance and convince the U.S. government to re-examine its finance laws.

Mr. Olivera has held a number of meetings with visiting delegations from the Canadian task force overseeing legalization. His main message to them: “Be prepared to be very creative in solutions.”

Uruguay’s legalization project began under José “Pepe” Mujíca, the guerrilla-fighter-turned-president who vaulted the country to previously unknown levels of global celebrity by driving his VW Bug to work, eschewing the presidential residence for his humble farmhouse and arguing for a radical egalitarianism. Private consumption of marijuana had been legal in Uruguay since 1974, the era of the military dictatorship, and President Mujíca disliked the hypocrisy that permitted consumption but criminalized buying or producing. He was also motivated by rising concerns about security (Uruguay has by far the lowest rates of violent crime in the region, but its citizens are preoccupied by the idea they can no longer leave the front door unlocked.)

Legalization campaigners noted that marijuana buyers were being pushed into contact with the same drug distributors who were importing a cheap and highly addictive cocaine byproduct called pasta base and driving up crime rates. So Mr. Mujíca pledged that the country would legalize marijuana, and Congress made it law in 2013.

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The United Nations protested that Uruguay was violating its commitment to international conventions on drug control. Mr. Mujíca’s government responded that the country also had commitments to human rights, which were being violated by repressive drug laws. This attitude reflected a regional softening on the issue; Colombian President Juan Manuel Santos had recently declared the “war on drugs” a failure, and the Organization of American States was urging members to consider new approaches to drug regulation.

But no one had proposed to go as far as Uruguay, and most citizens of the country, it turned out, didn’t like the idea: Public opposition to legalization was almost 70 per cent when the law passed. Undeterred, Mr. Mujíca pressed ahead, slowly. In 2014, the government began to allow people to register to grow at home, and it was another 18 months before sales began in pharmacies. The regulations on recreational use are tight: No tourists can buy marijuana, each registered user is allowed just 40 grams a month and must choose either to grow or to buy from the government – but not both. The IRCCA has gone to great lengths to ensure the traceability of every plant and every peso in the business.

But that wasn’t enough for the Trump administration, which took less than a month to invoke the Patriot Act and shut Uruguay’s new cannabis business out of the global financial market. The act prohibits U.S. banks from handling funds for distributors of “schedule 1” controlled substances – and in U.S. federal law, that includes marijuana. (The ostensible targets are terrorist organizations that make money from narcotrafficking.)

International banks – both those with U.S. headquarters, such as Citibank, and European banks such as Santander – told their Uruguayan corresponding branches they could not provide services to distributors of marijuana, even though IRCCA was assuring them the businesses and their revenue were entirely legal.

The banks, in turn, notified the pharmacies that their accounts would be closed if they participated in the government’s new distribution scheme. Thirteen pharmacy chains originally signed up, but only four independent outlets stayed in the program. “It’s a very small part of my business. It’s not worth it to me – it’s been a complete nightmare,” the pharmacist who spoke to The Globe and Mail grumbled. “But I’m doing this because I think it’s socially important. People should be able to buy a high-quality product they know is safe.”

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In theory, the Patriot Act applies only to recreational drug use – 29 states have legalized some form of medical use of cannabis – but most banks seemed inclined to play it safe and drop any business associated with marijuana.

The situation is similar in Colorado and the other seven states that have legalized recreational marijuana use. Businesses have been forced to operate in cash, and many have been targeted for robbery as a result.

In Canada, the country’s largest banks have been reluctant to take on cannabis businesses as clients. Instead, growers have relied mainly on local credit unions. In 2015, for example, Royal Bank of Canada cut off the corporate bank accounts of industry leader Canopy Growth Corp. But this has slowly started to change. Bank of Montreal has co-led two recent stock sales this year in the cannabis sector, becoming the first major Canadian bank to do so when it participated in a January equity financing for Canopy. After spending months reviewing the risks, BMO is jumping into the sector, even though it has an extensive retail banking network in the U.S. Midwest, as well as major U.S. capital markets operations. Reasonably priced corporate debt, however, is still hard for cannabis companies to come by.

The bank ban caused outrage in Uruguay, a sovereign country where these businesses were fully compliant with federal law. Even Banco República, state-owned and the largest in the country, closed the accounts of cannabis businesses. “Banco República anticipated this problem and, internally and together with other institutions, we worked to find a solution before making the decision not to maintain commercial relations with clients linked to the commercialization and production of cannabis,” said president Jorge Polgar in an e-mail.

He called it a “risk management issue,” saying Uruguay “would be isolated from the international financial system” if it hadn’t dropped the accounts. “This would make it impossible for the bank to make transfers, to take part in foreign trade operations, and to buy and sell securities outside the country … with the consequent loss for Uruguay, the bank and its customers.”

Mr. Olivera, the regulatory chief, said the bank ban came as a shock. “When we did [legalization], Obama was in office and there was a much more favourable environment in terms of U.S. federal regulations,” he said. But Mr. Sessions is a fierce opponent of legalization. Nevertheless, Uruguay had no choice but to press on, Mr. Olivera said in an interview in his office in the presidency building, and all his office can do is guarantee the banks that cannabis funds have legal origins. “We can’t hinge the creation of a Uruguayan law on the political context of the U.S.”

Leonardo Costa, a lawyer and former government drug czar who advises cannabis businesses in Montevideo, says the government knew what was coming. “I warned them two years ago this would happen – because I had hemp clients who could not open a business [in other places],” he said.

The country was an obvious target for the selective application of the Patriot Act, he said. “Uruguay doesn’t exist – it’s easy to pick on,” he said. “They apply [the act] when they want.”

That’s not going to work when it comes to Canada, he said, and he’s optimistic Uruguay will benefit from whatever accommodation the U.S. government is forced to make for Canada after legalization.

Alejandro Antalich, CEO of International Cannabis Corporation Labs, a company traded on the Toronto Stock Exchange that is one of two licensed to produce recreational marijuana in Uruguay, said his firm had a backup plan in case of the bank ban but didn’t expect to need it. “In Uruguay there is no business more regulated than this one – and then the bank has problems with this 100-per-cent regulated system,” he said. “Nobody really thought that could happen because you can’t understand how a private bank could ignore a government law.”

In addition to being a recreational marijuana supplier, ICC Labs is growing industrial hemp at its 576-acre facility and has deals to export cannabidiol products to Germany, Australia and Canada. Mr. Antalich was cryptic about what, exactly, his backup plan entails. “We found a way with our company to avoid the difficulty so we can operate without any problem, but obviously I can’t tell you what that is because they will close my operations. … In the beginning it was very difficult, but with some good advice we found a way and can operate without any issues.”

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Ron Strauss, CEO of United Biogenics, a Canadian-Uruguayan medical research company based in Montevideo, was similarly vague about how his firm is coping. In an interview conducted while he was visiting the capital, he chuckled and called the financial work-around “our secret,” before noting that his firm has split the cannabis medical research business into cannabis-based products and technologies such as delivery systems – which have access to banking – and a combination of offshore banking, blockchain technology and, of course, cash. In fact, he said, the banking ban has pushed his company into an unexpected line of business. “We would like to be a technology provider, of systems that allow people to trade in the cannabis sector using these new technologies even without a bank,” he said.

Uruguay’s bank blockade has been complicated by politics. President Mujíca left office in 2015, forbidden by law from standing for president again in the next election. His party held on to government, but the new President, Tabaré Vázquez, had made it clear he was no fan of legalization. He is an oncologist who, when he was president from 2005-10, oversaw the adoption of some of the world’s most strict anti-tobacco laws. He views marijuana use through a public-health lens and has expressed concern about addiction and abuse.

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Mr. Costa, the lawyer, speculated that a president who didn’t have personal reservations about consumption might have done more to end the financial blockade by, for example, making it law that any bank in the country must serve cannabis businesses. “This is not a marijuana problem, it’s a de-risking problem, and we need a central bank policy against it.”

But Mr. Olivera said that President Vázquez, whatever his personal feelings, has presented no obstacles to the legalization rollout and has done everything in his power to make it run smoothly.

The industrial cannabis market was supposed to be a key step into agricultural diversity for Uruguay, a country where cattle make up almost 40 per cent of exports. Mexico, Colombia, Brazil, Argentina, Peru and Paraguay have all loosened or removed restrictions on the use of medicinal cannabis products, but Colombia is the only other country in the region permitting production. Uruguay allows cultivation of industrial cannabis with no limits on cannabidiol levels, unlike other countries that allow medicinal cannabis production. That’s what drew ICC Labs here, Mr. Antalich said – growing strains of marijuana with higher cannabidiol levels in Uruguay gives the country a significant cost and yield advantage.

Uruguay’s recreational marijuana market was never intended to be profitable; regulators opted to forgo tax revenues and set the price low to undercut the black market. But it is the most visible part of legalization and has been plagued with problems. While two growers were initially licensed, only ICC Labs managed to start producing marijuana that passed the Ministry of Health’s stringent testing. It took another five months for a second firm to come online. The 12 locations selling marijuana – in five-gram bags – are chronically out of stock. In the pharmacy, the phone rings all day long.

“We can’t take calls about anything else – no government office has a phone that rings like mine does. I wish [regulators] would come and spend a day here,” the pharmacist said. When he does get a shipment, every few weeks, as many as 3,000 people will be looking to buy from him, he said, but he can serve a maximum of 200.

Mr. Antalich at ICC Labs said the company has stock to meet demand, but the inspection and distribution problem is the bottleneck. “It takes time to do all the tests – it’s a very complex process with IRCCA that means each package has 100-per-cent traceability.”

Mr. Olivera said the institute is providing technological and production support for the growers. “This was never a cannabis-growing country, just a transit country for the drug trade, so we don’t have that expertise here,” he said. He expects the two domestic suppliers to produce 4,000 kilograms of marijuana this year, and his office is also trying to solve the supply-chain problem; he said it will offer new sales licences, perhaps for dedicated marijuana stores like those planned for Canada, to coax new providers into the sector. (They will have to be cash-only, indefinitely.)

In Montevideo, it’s become a truism that legalization had the ironic effect of boosting the illegal drug market. Some people tried recreational marijuana when it was available in the pharmacy but now can’t buy it because stock is so short, so they and registered users who have felt the stigma ease are now turning to the local drug dealer in frustration. Mr. Olivera said there is no evidence that this is the case – but in fact there is no evidence of anything, a point of major frustration for the country’s sociologists and criminologists. The police do not separate marijuana from other substances in recording drug crimes, so they have no data on how marijuana consumption habits or associated crime have shifted since legalization. Mr. Olivera said the IRCCA is supporting independent studies on recreational marijuana use, and police are going to start separating crime statistics.

In the meantime, Uruguay will press slowly on, growing as much as it can as a cash-based industry.

“The financial service restriction is a reasonable cost if you look at the future,” Mr. Costa said, citing the value of early market entrant advantage. “This was a necessary cost of legalization.”

Uruguay’s cannabis law: How it works

Cannabis is licensed for production and use

in three areas:

RECREATIONAL

MEDICINAL

INDUSTRIAL

RECREATIONAL PROGRAM: There are three

ways that one can legally possess cannabis.

Participants can choose only one option. Only

citizens and permanent residents can participate

in this program and must register with the

Institute for the Regulation and Control

of Cannabis (cannabis tourists are out of luck).

1

YOU CAN BUY IT

- 480 grams per year in licensed pharmacies

(10 grams per week)

Approx. I gram

Fingerprint

scanner

confirms identity

at pharmacy

Approx. I0 grams

2

YOU CAN GROW IT AT HOME

- up to six female flowering cannabis plants

per household

- plants must be registered with IRCCA

Bud clusters

Pistils

Calyxes (buds)

Node

3

YOU CAN JOIN A GROW CLUB

- up to 99 plants in one place

- each member (maximum of 80) allowed up to

480 grams per year

- surplus harvest to go to IRCCA

- clubs must be registered with IRCCA

99 plant

maximum

80 member

maximum

RESTRICTIONS

No cannabis

while driving

No consumption

in enclosed

public areas

No advertising

CARRIE COCKBURN/THE GLOBE AND MAIL, RESEARCH:

STEPHANIE NOLEN, SOURCES: LEAFLY, PALLIATECH

Cannabis is licensed for production and use in three areas:

RECREATIONAL

MEDICINAL

INDUSTRIAL

RECREATIONAL PROGRAM: There are three ways that one

can legally possess cannabis. Participants can choose only

one option. Only citizens and permanent residents can

participate in this program and must register with the

Institute for the Regulation and Control of Cannabis

(cannabis tourists are out of luck).

1

YOU CAN BUY IT

- 480 grams per year in licensed pharmacies

(10 grams per week)

Approx. I gram

Fingerprint

scanner

confirms identity

at pharmacy

Approx. I0 grams

2

YOU CAN GROW IT AT HOME

- up to six female flowering cannabis plants per household

- plants must be registered with IRCCA

Bud clusters

Pistils

Calyxes (buds)

Node

3

YOU CAN JOIN A GROW CLUB

- up to 99 plants in one place

- each member (maximum of 80) allowed up to

480 grams per year

- surplus harvest to go to IRCCA

- clubs must be registered with IRCCA

Maximum of 99 plants

Maximum of 80 members

RESTRICTIONS

No cannabis

while driving

No consumption

in enclosed public

areas

No advertising

CARRIE COCKBURN/THE GLOBE AND MAIL,

RESEARCH: STEPHANIE NOLEN, SOURCES: LEAFLY, PALLIATECH

Cannabis is licensed for production and use in three areas:

RECREATIONAL

MEDICINAL

INDUSTRIAL

RECREATIONAL PROGRAM: There are three ways that one can legally possess cannabis.

Participants can choose only one option. Only citizens and permanent residents can

participate in this program and must register with the Institute for the Regulation

and Control of Cannabis (cannabis tourists are out of luck).

1

YOU CAN BUY IT

- 480 grams per year in licensed pharmacies (10 grams per week)

Fingerprint scanner

confirms identity

at pharmacy

Approx. I gram

Approx. I0 grams

- up to six female flowering cannabis plants per household

- plants must be registered with IRCCA

YOU CAN GROW

IT AT HOME

2

Bud clusters

Pistils

Calyxes (buds)

Node

- up to 99 plants in one place

- each member (maximum of 80) allowed up to 480 grams per year

- surplus harvest to go to IRCCA

- clubs must be registered with IRCCA

YOU CAN JOIN

A GROW CLUB

3

Maximum of 99 plants

Maximum of 80 members

RESTRICTIONS

No cannabis

while driving

No consumption in

enclosed public areas

No

advertising

CARRIE COCKBURN/THE GLOBE AND MAIL, RESEARCH: STEPHANIE NOLEN,

SOURCES: LEAFLY, PALLIATECH