The 2018 Farm Bill, signed into law by the President on December 20, 2018, included provisions related to industrial hemp. The bill amended The Controlled Substances Act to exclude hemp and hemp-derived products from the definition of marijuana, provided certain conditions are met. Regulatory and licensing requirements for hemp producers were established alongside the allowance of insurance coverage for hemp farmers. The transfer of hemp-derived products within and across state lines for commercial and other purposes and the sale, transport, or possession of these products have no legal restrictions as long as the products were produced consistent with the law. In addition, research and pilot programs established under the 2014 Farm Bill have been continued.
Financial institutions in states that have appropriate infrastructure in place to comply with the provisions of the 2018 Farm Bill may now bank hemp farmers; however, institutions should have internal controls in place to determine the risk profile of the entity based on the nature of the business. Appropriate due diligence should be conducted at account opening, and throughout the relationship as necessary, to guarantee compliance with all federal and state regulatory requirements.
Industrial hemp can be used in a multitude of products, including fibers, textiles, paper, construction materials, food, beverages, clothing and more. Throughout the history of the U.S., hemp was a common agricultural product. George Washington grew hemp at his Mount Vernon estate. Hemp was used in wars as late as World War II in uniforms, canvas, and rope. Since the 1970s, however, all cannabis varietals, including hemp, have been considered a Schedule 1 controlled substance.
The 2014 Farm Bill began to change hemp’s treatment as a Schedule 1 controlled substance by allowing farming for the purpose of agricultural research, and the 2018 Farm Bill furthered that legislation. The 2018 Farm Bill was significant in that it included the legalization of the cultivation and production of hemp for agricultural purposes. Hemp was officially removed from the federal list of controlled substances, which allows for hemp to be sold as a commodity. The USDA will maintain federal regulatory oversight over farmers, which will include monitoring and testing to verify that no hemp is grown with THC levels above the legal limit of 0.3%.
Regulatory Authority and Enforcement
Regulatory authority over industrial hemp will fall under a shared federal-state regime. A state or Indian tribe may become the primary regulator, subject to approval by the U.S. Secretary of Agriculture. Whether regulatory enforcement is through the federal government, the state government, or Indian tribe, an enforcement regime must be adopted as outlined in Section 297B(d) of the 2018 Farm Bill. Included within the regulatory text are provisions describing how violations of the law by hemp producers will be treated.
While regulatory guidance has not been issued as of April 2019 through FinCEN, it is expected that federal agencies will issue additional guidance in the future. In the interim, each state may begin the process of devising a regulatory program to meet the minimum requirement stated above. Currently, most states have laws and regulations in place, each of which will need updates based on the 2018 Farm Bill and full approval by the U.S. Secretary of Agriculture.
Financial Institutions and Industrial Hemp
With the ability of farmers to now legally grow hemp for purposes other than research, and commercial enterprises to sell hemp-derived products, financial institutions can offer their products and services to previously unbanked entities. Proceeds derived from hemp-related businesses should no longer prompt special anti-money laundering concerns; however, financial institutions should implement internal controls based on their risk tolerance. In addition to an awareness of each state’s primary regulator, financial institutions may want to consider coding industrial hemp producers in such a way that the customer may be monitored in a similar fashion as other high-risk businesses. This is not to say that hemp farmers and businesses will automatically be on the high-risk list, but financial institutions should risk rate them at the time of account opening to determine if the entity is high risk.
At account opening, financial institutions should verify any entity involved in industrial hemp production has obtained a properly issued license from the primary regulator, along with any accompanying renewals. Additional monitoring of licensing should be completed as required by regulatory guidance and the financial institutions’ program.
Financial institutions should be aware of the 0.3% THC dividing line separating a legal and illegal cannabis plant and have procedures in place to ensure their customers comply with regulatory expectations. The testing of THC concentration will be an important qualifier for legalized hemp production, but how this will be verified is subject to additional state regulatory guidance. Due diligence should be completed by financial institutions banking hemp farming operations to determine how the entity has tested the THC levels to confirm the institutions do not inadvertently facilitate the making of a Schedule 1 drug.
Due to the level of enforcement surrounding hemp producers, financial institutions are encouraged to have procedures in place to identify potential industrial hemp producers. Where a hemp producer has violated any legal or regulatory requirement, financial institutions should decide whether to continue with the relationship or increase the amount of monitoring.
In addition to the considerations above, financial institutions should update not only their risk assessment but also their BSA policies and procedures to include any enhanced due diligence performed on industrial hemp customers. With careful planning and risk-based monitoring, industrial hemp producers could prove to be some of your best customers.
The following customer due diligence/enhanced due diligence is recommended until additional regulatory guidance is published:
- The BSA/AML risk assessment should be updated to outline the potential risks and the mitigates that control those risks.
- Financial institutions should risk rate the customer at the time of account opening, or reevaluate the risk rating when it is determined that the customer is a hemp farmer or business owner.
- Financial institutions should understand anticipated transaction volume and type.
- Financial institutions should determine where the business is sourcing its hemp products, such as cannabis/cannabinoids (CB/CBD) oil, from because hemp-based products must be produced in a manner consistent with the Farm Bill, associated federal regulations, associated state regulations, and by a licensed grower; all other cannabinoids produced in any other setting, such as shipped from another country, remain a Schedule I substance under federal law and are thus illegal.
- Financial institutions should have a detailed understanding of the hemp farming operation, including to whom the farm sells crops to.
- Financial institutions should ensure the hemp farming operation is compliant with all state and federal licensing and THC testing requirements.
- The customer would be treated in the same manner as any other high-risk customer subject to regulatory scrutiny if they are risk rated as high.
For financial institutions that want to bank hemp farming operations or related hemp-based businesses, Wipfli LLP can assist you in implementing a risk-based monitoring program for hemp farmers and other high-risk entities.