The financial services industry has been waiting with bated breath for guidance from its regulators on banking hemp and hemp-derivatives like CBD. On Tuesday, December 3, federal regulators issued a joint statement attempting to “provide clarity” on the issue. Unfortunately, that guidance had landed with a distinct thud.
Rather than providing practical guidance to the industry or a roadmap to banking hemp businesses, the regulators simply directed banks to confirm that their customers are operating in compliance with all federal and state laws, and to call the USDA or FDA if they have any questions about what that means. In the statement, financial institutions were also directed by FinCEN to stop automatically filing SARs in connection with hemp business activities, so long as the businesses are operating in full compliance with laws. Again, financial institutions are urged to call other non-banking federal and state agencies, such as the USDA or FDA (or states or tribes), if they need help figuring that out.
“But, we can bank hemp because it’s legal after the 2018 Farm Bill, right?” Not quite. The 2018 Farm Bill removed hemp and hemp-derivatives from the federal Controlled Substances Act ("the CSA") and legalized the sale and transportation of hemp in interstate commerce. This means federal law no longer prohibits producing, processing, distributing, or selling hemp or hemp products (subject to federal and state rules and regulations). However, hemp can only be legally grown under the 2018 Farm Bill if done in accordance with the 2018 Farm Bill’s implementing regulations.
Here’s where things get complicated (if it’s not already): Among those 2018 Farm Bill requirements is that states or tribes must have prepared and submitted “hemp production plans” to the USDA for approval in accordance with USDA guidance. However, USDA guidance did not even exist until late October 2019 when the USDA published its interim final rule. And as of today’s date, we are not aware of any plans that have actually been approved by the USDA. However, we anticipate this will soon change, as several states (including Washington and Oregon) are currently seeking approval with the USDA with the hopes of rolling out their plans by the start of 2020.
One bit of good news from Tuesday’s joint statement: Because hemp is no longer prohibited under the CSA, banks are not required to file SARs on customers solely because they are engaged in hemp production. The bad news, though, is this presumes the production is done in accordance with all applicable laws and regulations (which are still being developed or are in the process of being approved). The NCUA also recently issued interim guidance that similarly suggests SARs are not required to be filed in connection with a lawfully operating hemp-related business, provided the activity is not unusual for the business. However, the materials from these various federal regulators fail to address the elephant in the room: Bankers are not well-suited to interpret and apply the complex laws and regulations surrounding hemp and hemp-derivative products, all of which are in a state of extreme flux right now. To do so, many financial institutions would need to work closely with their legal counsel and other advisors to wrap their heads (and written policies) around the intricacies of the hemp industry.
Even if interested financial institutions could become experts on the myriad of laws and regulations that apply to their hemp customers/members to ensure compliance, confirming compliance at the outset of a banking relationship will presumably not be enough. Like other BSA obligations, there are ongoing monitoring obligations to ensure the activities of these hemp customers/members continue to comply with all laws and regulations, and to file SARs if they detect violations (or any other suspicious activity). And, that’s only the beginning: There are a multitude of other issues—such as those involving CBD and CBD-infused products (which can be derived from hemp or marijuana, which is still illegal under the CSA)—that many banks and credit unions have probably not even thought about yet, but would need to learn and build into their risk assessments and due diligence policies before onboarding those in the industry. These extreme compliance and monitoring costs may become too costly for many banks and credit unions to have any interest in serving the industry.
It is certainly refreshing to see this additional guidance given the developments in the legislation and regulation of hemp. However, the guidance seems to oversimplify the issue, while only briefly noting the fact that the laws and regulations applicable to the hemp industry are extremely complicated and still maturing, and that hemp and hemp-derivative products are only “legal” in certain circumstances. Rather than addressing these complications head-on, the joint statement encourages banks to contact other non-banking federal and state agencies with their questions, such as the USDA and the FDA. This is an impractical solution and one that really serves to drive financial institutions toward trusted advisors with experience with the hemp industry to help fill in these gaps.
So where does that leave the industry? Our best guess for now is that the uncertainty and perceived riskiness of hemp businesses will persist. And this may continue to deter many financial institutions from banking the industry, because the costs of monitoring and compliance might quickly outweigh any benefits—that is, at least until the hemp industry has had an opportunity to mature and become more familiar with bankers. There is a path forward. But for now, it seems, that path may involve a few too many calls to your local USDA or FDA field office or visits with legal counsel to be appealing to many financial institutions.