Written by André G. Herrera, Chief Compliance Officer at Hypur
On December 3, 2019, federal banking regulators released guidance stating that Suspicious Activity Reports (SARs) would not need to be filed on hemp-related businesses solely on the basis of banking hemp. Given the relatively limited guidance surrounding the banking of both cannabis and hemp, regulatory comments are welcome and help to reduce uncertainty.
The Ambiguous Nature of Hemp
Generally speaking, most bankers are conservative in nature when it comes to compliance and they do not like surprises. Black and white is usually better than gray or the unknown. Although I never filed a SAR on a federally legal business without suspicious activity and few financial institutions were filing hemp-related SARs following the passing of the 2018 Farm Bill, the recent guidance removed any doubt if there was any.
Even though hemp became federally legal under the Farm Bill, there are still risks and caveats. While some bankers think that banking hemp is no problem, with little to no risk, I disagree with that thought and actually believe the opposite.
The main problem is that hemp is federally legal only if the THC content, the part that induces psychotropic or euphoric effects does not exceed 0.3% of dry weight. If a crop exceeds the THC threshold, it no longer conforms to the federal legality and would theoretically need to be destroyed and properly disposed of. Although companies that sell hemp seeds will often make claims that a certain seed produces a 0.3% THC plant, it is still a plant subject to various growing environments. Sunlight, altitude, temperature, water, humidity, and soil conditions all contribute to how plants grow. A particular seed planted in one location may conform to the Farm Bill, and that same seed planted in a different environment may not.
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Cannabis Banking vs Hemp Banking
I mentioned cannabis earlier in this article and would like to compare and contrast hemp and marijuana banking. Although both plants are in the same cannabis family, marijuana is still a federally illegal Schedule I drug, while hemp not exceeding the 0.3% THC and complying with the Farm Act is federally legal. Infused CBD products must also conform with the 0.3% threshold to be considered hemp.
Businesses involved in state-legal marijuana generally go through a strict licensing and due diligence process with their state. States utilize inventory tracking systems that monitor the cultivation and sale of marijuana throughout the life cycle. Financial institutions banking the marijuana space have tailored policies and procedures that include enhanced due diligence, transaction monitoring, and specialized technology. Although not the subject of this article, marijuana banking is straightforward with a number of financial institutions already providing financial services to those businesses.
Hemp, on the other hand, can be a bit ambiguous. Many states need to create or refine their laws regarding hemp and don’t forget the involvement of the US Department of Agriculture. Although some states already have hemp regulations on the books, generally speaking state laws are fluid at the moment. In addition, it can be easy for hemp to become marijuana. For example, in California in November 2019, a hemp farm contained ten million plants worth a billion dollars that did not conform to the 0.3% limitation, making them illegal marijuana plants. So, what was supposed to be hemp was actually marijuana.
Another issue occurs when the plant is processed. You may have a hemp product that after processing exceeds the THC limitation. Some circumstances where hemp “became” marijuana have had their product seized and those involved charged with the illegal possession and transportation of marijuana.
So given this discussion, are financial institutions able to safely bank hemp-related businesses? I will respond with a common regulator response of “It depends”. The financial institution must have the appropriate policies, procedures, and monitoring commensurate with the risk associated with the activity.
From a regulatory standpoint, the main question is if the financial institution will be considered the de facto regulator of the hemp related business. I have experienced circumstances where although I was not the de facto regulator of my customer, my banking regulator seemed to hold me to that standard. Supervisory expectation at times may exceed the written word of the law, falling under the category of appropriate risk mitigation. As banking federal legalized hemp is relatively new, the answer to the de facto regulator question will play out in time.
Policies and Procedures for Banking Hemp
Assuming that the banking of hemp-related businesses is appropriate for a particular institution, here are common issues to be addressed:
- Appropriate testing and documented results to demonstrate Farm Bill compliance
- Ensuring that products being sold as hemp/CBD are not marijuana
- Ensuring that the hemp-related business is not a front for marijuana activity
- Checking that any medical claims being made are in compliance with FDA regulations
- Ensuring that the hemp-related business is properly licensed with the state or local municipality requirements
- Proper Enhanced Due Diligence and underwriting
- Those involved in hemp are often also involved in marijuana or have close marijuana connections. Pay a close eye to beneficial ownership and potential red flags. Specifically ask if a hemp prospect has ties or ownership in marijuana-related businesses
- Appropriate transaction monitoring for BSA/AML compliance
I am often asked if providing payment services to hemp-related businesses poses the same risks as depository relationships. The short answer is yes. Large credit and debit card processors have entered and exited the hemp space due to compliance burdens. It is not a payments problem; it is a banking and compliance issue.
Although hemp is federally legal under certain defined circumstances, it is not risk free. This is a permissible activity but be sure to apply sound banking principals when considering or providing financial services to hemp-related businesses.