A top regulator for Colorado’s Marijuana Enforcement Division acknowledged in a private meeting with industry representatives that the amount of chemically converted hemp being illegally sold as marijuana is far greater than the agency has publicly disclosed.

The remarks confirmed testing by The Denver Gazette and ProPublica, which found signs of hemp in marijuana vapes sold at dispensaries, as well as reporting that regulators have discovered that some hemp-derived vapes were contaminated with a toxic chemical.

The virtual meeting, an audio recording of which was reviewed by the news organizations, was convened by members of Colorado Leads, a marijuana industry trade group, in March to discuss a problem they said had “metastasized” and now posed an “existential threat” to the nation’s first legal recreational marijuana market.

During the meeting, Kyle Lambert, the enforcement division’s deputy senior director, said the number of hemp-derived products is “larger than we can quantify.” He said the agency feared the prevalence of banned hemp was driving down the price of marijuana in the state and helping facilitate the diversion of high-grade marijuana out of Colorado and into the black market in other states.

Describing anomalies in the system the state uses to track marijuana production and sales, Lambert told the industry players that the extent of suspicious transactions in the system “would probably explode your minds.”

Two weeks after that meeting, the division sent a bulletin to the industry that it plans to crack down on companies that illegally sell cheaper and potentially hazardous hemp products as marijuana and that it would pursue emergency rules.

But it hasn’t done so yet, and other reform efforts failed during this year’s legislative session. Despite the regulators’ concerns, Colorado lawmakers, who weren’t at the March briefing, abandoned a bill that would have let voters decide whether to overhaul how marijuana products are tested for contaminants. (The Denver Gazette and ProPublica investigation found that other states have adopted stronger safety measures.)

Dominique Mendiola, the senior director of the Marijuana Enforcement Division, said in a statement that the agency has “consistently been proactive in pursuing the necessary rules, legislation and authority to combat this issue.”

“Lambert was speaking frankly to highlight the scale and complexity of the problem, as nominal-dollar transactions do not amount to definitive evidence of non-compliance,” Mendiola said. She added that investigations into such transactions require extensive resources and can take significant time.

The problem of companies substituting hemp for marijuana dates to 2018, when Congress legalized hemp, a close cousin of marijuana that has only trace amounts of THC, the psychoactive compound that makes people high. Federal lawmakers had hoped to support farmers while satisfying advocates who believe the high levels of the nonintoxicating compound CBD in hemp help with seizures, pain and sleep.

But hemp manufacturers quickly figured out how to convert CBD in hemp into THC through a process that involves toxic solvents, creating products that sometimes contain harmful chemicals and that can be more potent than products made from marijuana.

Colorado became one of the first states to ban that chemical conversion process and prohibit the sale of intoxicating hemp products to its residents.

But manufacturers were allowed to produce hemp products for export to other states, and some companies continue to rely on hemp within Colorado because it is cheaper than using marijuana to make the honey-colored THC distillate that goes into vapes and edibles, industry insiders say.

“This has become pervasive to where it’s, like, half the market,” said Jordan Wellington, a marijuana industry lobbyist and consultant, during the meeting with Lambert and a four-person investigative team that handles the agency’s most difficult cases. “We’re past Stage 1 cancer of it being, like, one spot. It’s fully metastasized.”

He said “rampant” use of hemp and other illicit material was putting pressure on honest manufacturers to cut corners to survive.

“It might be the most important and existential threat we’ve ever faced as an industry,” Wellington said.

When the state legalized recreational marijuana in 2012, it promised to establish a “seed-to-sale” system to track marijuana from the initial planting to the purchase of pot, vapes and other products in dispensaries. Close tracking would prevent marijuana grown in Colorado from being diverted to states where it remained illegal, supporters promised. Tracking also was supposed to assure consumers that they were buying safe, quality products.

But during the March video conference, Colorado regulators confided to industry lobbyists that the tool for rooting out fraud isn’t working.

“There’s a lot of really crap data in there that is hard for us to proactively go take action on,” Lambert said of the tracking system.

Extensive fraud in sales transaction reporting likely means the state has lost out on millions of dollars in marijuana excise tax revenue while businesses that follow the law have paid more than their fair share, industry insiders claim.

Unprocessed marijuana typically can fetch more than $600 a pound on the open market, depending on the category, but manufacturers often report to the state’s tracking system unrealistic nominal sales, often as low as a penny or dollar a pound, Lambert said.

When pressed by regulators, businesses typically defended those valuations, arguing that they had submitted placeholder numbers while they were still negotiating the price of products, Lambert said.

The division, which employs 26 investigators to monitor roughly 2,100 marijuana businesses, doesn’t have the resources to investigate all cases adequately, he said.

“We’d love to set up, you know, surveillance on places and track vehicles and see where they come from,” he said. “Did they come from a hemp plant? Did it come from here? Where did it go? We’re not resourced or equipped to do those types of investigations.”

In April, state Sens. Kyle Mullica, D-Thornton, and Marc Snyder, D–Colorado Springs, introduced the Cannabis Consumer Protection Act, which would have placed a ballot measure before voters this fall to overhaul how marijuana products are tested for contaminants, bringing Colorado in line with other states.

The ballot measure would have put private labs in charge of collecting marijuana samples for the testing required before products go to dispensaries. Currently, manufacturers can select their own samples. Regulators have caught companies gaming that system by substituting samples that were different from what they sold in stores or by treating the samples with chemicals.

The act also would have shifted oversight of safety and testing from the Marijuana Enforcement Division to the Colorado Department of Public Health and Environment and funded a program in which regulators would randomly collect marijuana products from dispensaries to test them for contaminants.

But the legislation collapsed as different segments of the marijuana industry clashed over a provision tucked into the bill that would have increased taxes on products with higher amounts of THC. Manufacturers of highly concentrated THC products argued that the proposed potency tax would cut into their profits while lowering costs for manufacturers of edibles like gummies. Consumer safety groups also weren’t satisfied and wanted the bill to be tougher, pushing for a strict cap on potency like Vermont has.

Ultimately, the main industry trade group opposed it, and Gov. Jared Polis, through a spokesperson, said he feared the bill would cause too much regulation.

The bill died, though Snyder, the cosponsor of Senate Bill 26-161, said he plans to revisit the issue in the 2027 legislative session.

Snyder said he had hoped to give regulators more tools to tackle fraud.

“One of the problems in being first, like Colorado was, into the legalizing of cannabis,” he said, “is that you have to learn all the unintended consequences and unforeseen outcomes the hard way.”