By: Mark A. Mangano
Serving customers engaged in growing, cultivating, handling or processing industrial hemp present significant opportunities. As a banker considering pursuit of these opportunities, you should consider legal authority, Bank Secrecy Act (BSA), and credit risks associated with a new and rapidly expanding industry.
Cultivation, processing and sale of industrial hemp and its byproducts has grown rapidly since 2017. According to the West Virginia Department of Agriculture, the acres of hemp grown in the State increased from 155 acres in 2018 to 641 acres in 2019. Applications for licenses to grow hemp in 2020 have more than quadrupled from 2019.
Fortunately, the rules for legally growing and banking hemp have become much clearer. In 2019, the USDA published an interim final regulation governing growth and production of hemp and the banking regulators issued a statement reducing the Suspicious Activity Report (SAR) filing requirements. In June of 2020 the Financial Crimes Enforcement Network (FinCEN) published further guidance.
Serving hemp growers and producers continues to present heightened risks that require special considerations. Safely banking hemp growers and producers requires understanding and documenting the legal authority to grow hemp, ensuring Bank Secrecy Act procedures are appropriately adjusted, and evaluating the unique credit risks of a new and rapidly expanding industry.
Legal authorization
Federal
For decades production of hemp in the United States was illegal because Schedule 1 of the Controlled Substances Act included Marihuana (now more commonly spelled marijuana). Marijuana is a name used to describe the plant Cannabis sativa L. The psychoactive chemical in Marijuana is tetrahydrocannabinol (THC). However, it is possible to breed Cannabis sativa L. plants producing very low levels of THC.
The Agricultural Improvement Act of 2018 (2018 Farm Bill) removed hemp from Schedule 1 of the Controlled Substances Act by defining hemp as “the Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives…with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.”1 Basically “marijuana” plants meeting the definition in the 2018 Farm Bill are no longer considered marijuana.
In November 2019, the USDA published an interim final rule setting forth the framework for regulating the production of industrial hemp.2 The interim final rule addresses the minimum standards for states and tribal lands to administer regulation of the hemp production industry and provides a federal system for regulating hemp growers in states and tribal lands that have authorized hemp production but do not choose to administer the regulation of the industry.
State
In June of 2019, West Virginia amended the Industrial Hemp Development Act to authorize hemp, as defined under federal law, as an agricultural crop subject to statutory requirements.3 In order to legally grow hemp in West Virginia, a person must be licensed by the State and renew that license annually. West Virginia Department of Agriculture (WVDA) submitted a proposal to the USDA that would give it authority to continue regulating the hemp production industry in West Virginia. The USDA approved the WVDA plan in April 2020. The approved plan will go into effect in October 2020 after the 2020 growing season.
The licensing and regulation requirements relate to, cultivating, handling and processing hemp. There are currently no license or regulatory requirements for handling, transporting or selling products made from legally produced hemp products. This includes CBD oil that is derived from legally produced hemp.
BSA
On December 3, 2019, the federal regulatory agencies in collaboration with the Conference of State Bank Supervisors issued the statement “Providing Financial Services to Customers Engaged in Hemp-Related Businesses”4 (Statement). The Statement makes clear that banks are not required to file a SAR on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.
The Statement reaffirms the continued requirement that banks maintain BSA programs that address customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers.
On June 29, 2020, FinCEN issued new guidance “FinCEN Guidance Regarding Due Diligence Requirements under the Bank Secrecy Act for Hemp-Related Business Customers”5 to help banks better understand how to conduct due diligence for hemp-related businesses and identify the types of information and documents banks can collect to comply with BSA regulatory requirements. The guidance augments the instructions provided in the Statement related to BSA documentation and suspicious activity reporting. The guidance applies only to hemp-related businesses and does not apply to marijuana-related businesses.
Credit Risk
The industrial hemp industry in the United States is in a fledgling state. This presents increased risks for those producing hemp. Most hemp producers have no more than a few years of experience. As with any credit decision, it will be important to not only know your customer but also understand the industry.
Some of the risks include:
- Producing a crop that violates the THC limits of state and federal law;
- Uncertain demand for hemp;
- Oversupply of hemp that depresses prices; and
- Future regulation of hemp products that limit demand or increase costs.
There is great optimism around the expansion of the industrial hemp industry in West Virginia. Regulators are moving rapidly to provide greater clarity. The regulatory efforts continue to reduce but do not eliminate the special risks related to banking hemp-related businesses.
1 7 U.S.C. 1639o(a)(1).
2 7 CFR 990
3 WV Code §19-12E-4
4 https://www.fincen.gov/sites/default/files/2019-12/Hemp%20Guidance%20%28Final%2012-3-19%29%20FINAL.pdf
5 https://www.fincen.gov/sites/default/files/2020-06/FinCEN_Hemp_Guidance_508_FINAL.pdf