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Should I Bank Hemp and CBD Customers?

The most frequently asked question of Wisconsin bankers in 2019 thus far:  should I bank customers engaged in hemp or CBD-related activities?  Here’s the bottom line:  whether or not you choose to bank these customers, and the extent to which you bank such customers, is a business decision.  Here are some important considerations to help you make those business decisions:

   1 - Legality

There are two important questions when determining if these customers are engaging in legal activities:  (1) Are the activities legal at the federal level and (2) Are the activities legal at the state level? 

   Federal Legality

First, at the Federal level, the 2014 Farm Bill legalized the growing, cultivating, and marketing of industrial hemp (THC of .3% or less) for research purposes in states where growth and cultivation of industrial hemp is legal under state law.  After the inception of this law, states now had the authority to legalize hemp, which in turn, made it legal under federal law.  As described below, several states, including Wisconsin, chose to move forward with legalizing hemp and developing a research pilot program pursuant to authority under the 2014 Farm Bill.  However, because hemp remained a Schedule I Controlled Substance under the Controlled Substances Act (CSA) and, furthermore, because hemp was not an insurable crop, apprehension in this industry remained. 

Enter the 2018 Farm Bill.  In December 2018, President Trump signed the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”), which marked a significant shift for the U.S. hemp industry.   Most significantly, the 2018 Farm Bill removed hemp (including cannaboids, such as CBD derived from hemp) from the Schedule I Controlled Substances List under the Controlled Substances Act (CSA).  Now, pursuant to the 2018 Farm Bill, so long as individual growers, processors, and sellers operate consistent with a state-approved hemp program, there are, generally speaking, no restrictions from a federal standpoint on growing/processing/selling hemp and hemp derivatives (e.g. CBD oil derived from hemp) or transporting or selling hemp or hemp derivatives across state lines; however, FDA’s regulations may restrict such movement of certain products.  

Note that though hemp was removed from the CSA list of Schedule I Controlled Substances (along with CBD derived from hemp), CBD, generally, was not removed.  More specifically, marijuana-derived CBD oil still remains a Schedule I controlled substance.  In practice, this means that not all CBD oil is legal – only CBD oil derived from the hemp portion of the plant which is grown and processed in authorized states is legal.  Otherwise, CBD oil, along with marijuana, remains a Schedule 1 Controlled Substance. 

Finally, the 2018 Farm Bill amended the Federal Crop Insurance Act to include industrial hemp as a covered crop.  Though hemp is now eligible for federal crop insurance, risks to a bank still remain when taking the hemp crop as collateral for a loan.  For example, if a borrower grows industrial hemp outside of the Wisconsin Pilot Program parameters (e.g. crop testing fails), the crop will be burned and, as we understand the existing state of the Federal law, the burning of the crop would not be a covered loss under 7 U.S.C. 1508(a)(1) because the “fire” did not result from “natural causes”. 

   Wisconsin legality

As described above, so long as individual growers, processors, and sellers operate consistent with a state-approved hemp program, there is, generally speaking, no restriction from a federal standpoint on growing/processing/selling hemp and any hemp derivative (e.g. hemp-derived CBD oil) or transporting or selling hemp or hemp-derivatives across state lines.   Therefore, the key question to determine legality is whether or not a person engaged in hemp-related activities is compliant with state law.  If so, the activity is legal at both the state level and the Federal level. 

In 2017, Wisconsin enacted an industrial hemp pilot program, which was implemented by the Wisconsin Department of Agriculture, Trade, and Consumer Protection (DATCP) by Emergency Rule EmR1807, which became effective on March 2, 2018.  The Emergency Rule specifies the application process for obtaining a license to grow and a license to process industrial hemp, and how to comply with ongoing monitoring under the Wisconsin Pilot Program (e.g. DATCP testing of the crop). 

Obtaining documentation from individuals engaged in hemp-related activities in Wisconsin is critical to determining whether or not such individual is operating consistent with the Wisconsin Pilot Program and, as a result, consistent with Federal law.  To the extent a bank wishes to bank these customers, the key to determining compliance with Wisconsin and, in turn, Federal law, is to ask the right questions and obtain the proper documentation to ascertain whether the individual is and continues to comply with Wisconsin’s Pilot Program.  We suggest that banks use a Checklist or Questionnaire, and possibly a Certification, from the customer to document this information at the time of application.  When considering such a document, banks should be mindful of applicable policies and procedures.  More on this below….

   2 - Regulator Viewpoints

It’s our understanding that the Wisconsin Department of Financial Institutions (DFI) does not currently examine banks for CBD and hemp-related business and will not write-up a bank for banking these businesses.  At the FDIC level, it’s our understanding that FDIC is advising banks to do their due diligence and engage counsel.  FDIC has characterized this issue as a “safety and soundness/know your customer” issue.  Furthermore, based on what has been seen to date, FDIC has not pursued banks for banking these businesses. 

Finally, we recently discussed with FDIC the applicability of the 2014 FinCEN Guidance for banking Marijuana-Related Businesses to banking customers engaged in lawful hemp-related activities.  According to a representative of FDIC, the Guidance does NOT apply to customers engaging in legal hemp-related activities.  FDIC’s representative confirmed that because hemp was removed from the CSA as a Schedule 1 Controlled Substance via the 2018 Farm Bill, the definition of “marijuana” in the Guidance no longer includes hemp.  In other words, if you have a hemp grower operating consistent with the Wisconsin Pilot Program, the Guidance will not apply and the Bank will not need to file a marijuana-limited Suspicious Activity Report (SAR), for example. 

Importantly, the representative from FDIC excluded CBD oil from this general “exclusion” statement.  The FDIC representative stated that that to the extent the activities of the customer are related to “CBD oil” the BSA Guidance may need to be followed and a SAR may need to be filed.  Our understanding of FDIC’s direction on the BSA Guidance as it relates to CBD oil is as follows:  If CBD oil is legal (i.e. derived from hemp grown and processed pursuant to an authorized state’s program), the BSA Guidance does not apply; if CBD oil is illegal, the BSA Guidance will apply.  

   3 - Risks/Practical Considerations

Overall, there is a broad spectrum of risk involved in banking customers engaged in hemp-related activities, ranging from low to high.  We suggest the Bank determine, as an organization, to what extent it wishes to bank these customers.  Once that decision is made, we suggest drafting a policy and procedure, or incorporating such practice into existing policies and procedures.  One policies and procedures are established, we suggest the Bank develop a Checklist or Questionnaire in order to obtain the relevant information from each individual customer to make decisions as to whether or not to open the account or make the loan, consistent with policies and procedures.  The Bank may also consider having a customer agree/certify to comply with applicable laws and report any changes to the bank, among other things.  Finally, if the Bank chooses to open a deposit account or make a loan, we suggest designating these customers as High Risk for BSA purposes.   

For banks considering use of a Questionnaire or Checklist, the Wisconsin Bankers Association and FIPCO are now offering EHEMP – a Questionnaire and Certification – designed to help banks who wish to consider banking customers engaged in hemp-related activities in Wisconsin.  Contact Rick Blasing for more information at fipcoforms@fipco.com.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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