As new pot licenses delayed indefinitely, global accounting firm pockets $7M from state to rank applicants

KPMG, a global accounting firm, has offices at the AON Center in downtown Chicago. | Sun-Times staff photo

KPMG was given two no-bid contracts to grade firms applying to open new cannabis businesses, but the process hit a standstill because of the firm’s ban on travel during the pandemic and a contract provision requiring it pick up applications by hand.

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] 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.

Ashlee Rezin Garcia/Sun-Times file photo

‘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 percent, 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 after finally picking them up months after they were submitted Jan. 2, Slaby said.

Rich Hein/Sun-Times

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 spokeswoman for Hutchinson, 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’

Unlike other applicants, those seeking craft cultivation licenses were required to establish they already had property that can be used for a grow operation. As a result, the delay in issuing licenses puts an additional financial strain on would-be business owners attempting to break into a highly competitive industry with strict regulations.

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.