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BSA officers: Institutions face risks from servicing Delta-8 THC businesses

Jan 27, 2022

The rising popularity of Delta-8 THC, a hemp-derived cousin of cannabis, has led to much debate about its legality. Erroneous assumptions from the public have arisen about its supposed legalization in the 2018 Farm Bill, and little lab testing or production oversight currently exists.

The result: The proliferation of businesses selling synthesized Delta-8 THC without a marijuana license have created high risks for financial institutions offering financial services to businesses selling Delta-8 THC. Violations could implicate institutions in a variety of white-collar crimes. 

While there is a narrow pathway to the legal distribution and sale of Delta-8 THC, the favored method of synthesizing Delta-8 THC may not offer its production or distribution a legal status. If a business is selling synthesized Delta-8 THC without a marijuana license, that business may be in violation current laws.

Financial institutions that provide services to healthcare stores, gas stations, convenience stores, and marijuana, CBD and hemp businesses need to be aware of their potential liability. Institutions should screen for Delta-8 THC even for businesses that don’t appear to be marijuana-related businesses (MRBs).

Legal complexities

New drugs can appear on the market quickly, making it hard for state governments to keep rapidly changing products under control. As a result, financial institutions may be unintentionally supporting MRBs due to a lack of screening during the onboarding process. And it’s important to classify Delta-8 THC as high risk to fully assess the business hazards associated with the compound, including ongoing monitoring of all hemp clientele.

Delta-8 THC naturally occurs in small quantities in cannabis. However, MRBs have synthesized the most commercially available Delta-8 THC through a conversion process that uses various chemicals to convert hemp-derived CBD into Delta-8 THC. MRBs can derive Delta-8 THC from both hemp and cannabis. Due to the lack of current regulation, it is difficult to determine how MRBs derive the compound in commercial products without regulation specific to Delta-8 THC. 

The legality of Delta-8 THC is a complex issue that requires a review of several factors. Consider these three critical factors: state law, federal law and institutional risk tolerance. Strong arguments exist for and against the legalization of the compounds. The legalization of the Delta-8 THC compounds relies heavily on whether the manufacturers created it through synthetization. Under current law, federally legal Delta-8 THC must be an extract or derivative from a cannabis plant with lower than 0.3% Delta-9 THC.

There is no regulatory consensus on the what constitutes a legal level of Delta-8 THC. The debate on the federal legality of Delta-8 THC is whether the process of making Delta-8 THC from a legal hemp product is an extraction or whether Delta-8 THC synthesized from CBD is hemp and whether the Delta-8 THC compound should also be lower than 0.3%.

Greater research needs

The 2018 Farm Bill’s definition of hemp also raises the question of liquid extraction weight calculation, since the current provision addresses only dry weight. More research is needed to determine how Delta-8 THC and other THC compounds should be classified. Research also suggests there are additional THC compounds with more potency than Delta-9 THC. If this comment is correct, the industry will likely see more regulation related to individual compounds in the future.  

Financial institutions could benefit from a reevaluation of marijuana-related business risk, to incorporate the varying degrees of the legality of Delta-8 THC. This reevaluation could lead financial institutions to risk rate all MRBs, including hemp businesses, as high risk. Institutions should consider investigating all relevant customers to determine whether the customers are conducting Delta-8 business. Just as important is educating BSA officers on the legal status of the compound for their jurisdiction.

To effectively risk rate cannabis, it is proposed that banks, at minimum, create a cannabis program that identifies the three subtypes of cannabis: THC under 0.3%, THC above 0.3% and CBD. Until the government clarifies whether Delta-8 THC is synthetic and removes the compound from Schedule 1, financial institutions should consider filing SARs for these business transactions.

It appears that states are beginning to classify Delta-8 THC as marijuana, and financial institutions should prepare for these upcoming changes. Financial institutions may avoid the complications associated with the ever-changing hemp laws by taking a conservative position regarding BSA MRB compliance.

Compliance officers could achieve this goal by either disallowing all hemp businesses or classifying hemp businesses as high risk. Ideally, financial institutions will achieve sound risk management through enhanced screenings and unannounced site visits of customers at higher risk of having Delta-8 THC products.

How Wipfli can help

Visit our regulatory compliance services web page to learn how our financial institutions team brings real-world experience to provide the compliance solutions you need.

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Wipfli Editorial Team