Mexico Moves Toward Cannabis Legalization with estimates of $12 billion from a Legal Market

Mexico Moves Toward Cannabis Legalization with estimates of $12 billion from a Legal Market

In a move expected to advance Mexico’s slow march toward decriminalizing cannabis, the nation’s Supreme Court has ordered the Health Ministry to draft regulations for medicinal cannabis use by mid-February.

Juan Francisco Torres Landa, who is Hogan Lovells’ office managing partner in Mexico City and has argued in favor of decriminalising cannabis for more than a decade, said the ruling, handed down in August, “sets the clock ticking” for the government to outline regulations for medicinal use after many bumps in the road.

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At the same time, a proposal to regulate marijuana commercialization and use as a whole is under analysis in congress.

Advocates are hopeful that the administration of President Andres Manuel López Obrador, who took office on December 1, will decriminalize cannabis entirely after the previous administration blew through a court-ordered deadline to update the health and penal codes.

Interior Minister Olga Sánchez has called for decriminalization and regulation of all illicit drugs, including opium, so as to take away power from drug cartels.

Mexico is one of the biggest producers of illicit cannabis in the world, with the plant grown across thousands of acres. Much of that growth, though, is for the export market.

Market intelligence firm New Frontier Data puts the annual value of the Mexican cannabis market at $2 billion, with an estimated 1.4 million consumers (less than 1% of the total population). Mexican Sen. Cora Cecilia Pinedo Alonso says the Mexican market for legal cannabis could be worth $12 billion by 2029 – about half that of the current Canadian market.

The potential work for lawyers on legal cannabis ranges from advising the government on tax options and how to monitor the retail chain, to helping cannabis entrepreneurs secure permits, set parameters for product attributions and labeling, to sourcing raw materials and manufacturing.

Hogan Lovells is advising a number of cannabis prospects who want to be the first out of the gate once regulations are in place.

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Drug prohibition is a “lousy” policy, said Torres Landa, who filed an amicus brief in favor of the most recent court ruling through his involvement with the Mexican Society for Responsible and Tolerant Personal Use, known by its Spanish acronym, SMART.

“We would rather have regulation in the hands of the government than organized crime,” he said.

As it stands, Mexican users of illicit drugs have no clarity on where those substances are produced or how strong they are. Nor is there a restriction on age for those who partake.

Cannabis users may appeal directly to the courts for individual permission to consume the plant and its derivatives.

“The fact that we call some drugs legal and some illegal is just a historic mistake,” said Torres Landa, who believes this dynamic allows drug traffickers to generate cash flow that fuels other, more unsavory activities.

Those activities include rampant extortion and demands by traffickers that bar owners offer exclusive distribution on their premises of drugs from one gang or another. The White Horse strip club in the Gulf state of Veracruz appears to have been set ablaze in the final days of August in retaliation against the management for not complying with demands from organized crime. Assailants blocked the exits and more than two dozen people died.

“We need to get the money out of the equation and weaken their structure,” Torres Landa said.

Twelve years of full-frontal combat against drug cartels has left many casualties. A 2019 Congressional Research Service report estimates that organized crime has played a role in roughly 150,000 murders – as many as half of all killings in Mexico – since former President Felipe Calderón launched the government’s drug war in 2006.

López Obrador has vowed not to take on the criminal chiefs.

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Advocates for drug decriminalization believe cannabis could be the first of several illicit drugs that become legal in Mexico. Putting users in jail is a misuse of scarce government resources, they say, while targeting drug dealers diverts from fighting violent crime.

“The problem with the narrative of being very hard on drugs is that we’re not talking with the same magnitude about crimes that largely go unpunished, such as homicide and kidnapping,” said Lisa Sánchez, director of a civil organisation called Mexicans United Against Crime that has filed numerous legal briefs to support decriminalisation, alongside SMART.

Sánchez expects congress to decriminalize marijuana before the end of 2019.

Mexico’s high court has ruled five times that prohibition of recreational marijuana consumption is unconstitutional; the number of rulings sets an unusual precedent that should force Mexico’s congress to act.

A series of forums is scheduled for September to help legislators assess the landscape.

A top concern is how to track an eventual “legal” market for cannabis and what sort of taxes to levy on the products. Legislators will debate a framework similar to the so-called vice taxes on alcohol and tobacco that could generate much-needed revenue for the government.

Juvenal Lobato, a fiscal lawyer who has pushed for higher taxes on tobacco and sugary beverages, expects the government to adopt a mixed approach for cannabis that applies a flat percentage tax per value, gram, plant or seed – plus the country’s 16% sales tax.

Nearly 70% of the value of a package of cigarettes in Mexico goes toward taxes, which generates revenue while also serving as a disincentive for consumers to smoke.

But Lobato advises against slapping a similar “sin” tax on cannabis, at least initially.

“If you start with a high rate, you’re going to motivate the illicit market,” he says. Instead, he favors gradual tax hikes as legal cannabis finds its footing.

Lobato views the progress on cannabis as “the key to open the door” to a broader softening of drug laws and, he hopes, an eventual reduction in drug cartel-related violence.

Despite large-scale marijuana farming in patches of rural Mexico, cannabis is not massively popular in the country.

A 2018 survey by Mexico’s Center for Social Studies and Public Opinion said half of Mexicans polled oppose legalization of marijuana and seven out of 10 disapprove of its recreational use. When asked specifically about legal use for medicinal purposes, however, nearly 90% said that was acceptable.

Torres Landa dismisses suggestions that decriminalizing drugs like cannabis will result in a proliferation of the products, or their use, in Mexico.

“This will not expand the availability of drugs – it will allow government to monitor its use,” he said. “I’d rather have the government protecting us with a lot of information.”

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