David George-Cosh

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Health Canada seized hundreds of kilograms of cannabis from CannTrust Holdings Inc. (TRST.TO) following an inspection three years ago, demonstrating a history of compliance failures by a company that’s been thrust into the spotlight this week for a foul-up that could potentially cost the Vaughan, Ont.-based firm its licence to produce and sell cannabis in Canada.

The seizure in February 2016 resulted from one of a series of violations that Health Canada found to have taken place over the past four years, according to a review of inspection findings detailed by the federal regulator. From April 2015 to March 2018, there were 15 major or critical observations made by Health Canada during site inspections at CannTrust locations.

That seizure of more than 377 kilograms of pot took place following a targeted review by federal inspectors who found the company stored four times more cannabis in a security vault than it was licensed to hold, resulting in about $6 million worth of medical pot being taken away by Health Canada.   

“There has been some compliance issues in the past with CannTrust,” said Sherry Boodram, chief executive officer of regulatory consulting firm CannDelta and a former enforcement officer with Health Canada, in an interview with BNN Bloomberg. “Those are things that Health Canada will take into consideration when they are trying to make a decision on enforcement.”

Shares of CannTrust have lost approximately 40 per cent of their value since going into a tailspin Monday when the company disclosed that Health Canada determined it was growing thousands of kilograms of cannabis in unlicensed rooms at its Pelham, Ont. facility between October 2018 and March of this year.

And late Wednesday, The Globe and Mail cited a former CannTrust employee who alleged the company’s staff installed fake walls at the facility to hide illegally grown cannabis to evade detection during Health Canada inspections.

“Clearly, the major concern among investors at this point is whether Health Canada will look to make an example out of CannTrust and potentially pull the company’s production licence,” said Derek Dley, an analyst with Canaccord Genuity, who slashed his price target on CannTrust’s stock to $5 per share from $12 in a report on Thursday. “While we had originally viewed this as highly unlikely, we are now acknowledging this could be within the realm of possibility.”

As a result of Health Canada’s recent inspection, the regulator placed about 5,200 kilograms of cannabis on hold, while the company voluntarily placed another 7,500 kilograms produced at its Vaughan, Ont. facility on hold until the investigation is concluded.

Based on BNN Bloomberg’s review of an online inspection database, some of the other infractions the company was found to be in violation of between 2015 and 2018 include security issues with storage vaults, mould in grow rooms, and the absence of a traceability system needed to ensure illicit pot wasn’t shipped to medical patients, said a source directly familiar with the matter.

All issues were later addressed by the company under Health Canada’s guidance, the source added.  

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A CannTrust spokesperson acknowledged in an emailed statement to BNN Bloomberg that “mistakes were made” and the company is working with Health Canada to address its compliance issues with new processes and a company-wide re-training program.

“We have implemented a number of corrective actions including retaining external advisors for an independent review of compliance processes and procedures, and we have bolstered our quality and compliance department through the hiring of a seasoned vice president of quality, and the hiring and training of an additional 17 quality and compliance professionals,” the spokesperson said in a statement.

CannTrust has until July 18 to respond to Health Canada’s recent non-compliance inspection report. After that, Health Canada will review the information provided by the company and determine any appropriate enforcement action. That could range from a warning letter, to a fine of up to $1 million, or the revocation of the company’s licence to cultivate and sell legal cannabis.

“Again, as CannTrust announced earlier this week, we owe our full response to Health Canada regarding specific details and responsibility. That is the road back to compliance.  Until that time we are unable to comment on specific details,” the spokesperson said. 

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.