Authored By: Becky Postar
My banking colleagues often ask me this question, “Now that hemp is legal, should I bank it?” My answer is, “Yes, but you need to know the risks.”
Before exploring the risks, let’s visit some other commonly asked questions:
Question 1: What is hemp?
Question 2: What is CBD? And how is hemp different from marijuana?
Question 3: What is the USDA’s and the FDA’s role regarding hemp?
Question 1: What is hemp?
In the U.S. “industrial hemp” is classified as cannabis containing no more than 0.3% tetrahydrocannabinol or THC (by dry weight). This classification was defined in The Agriculture Improvement Act of 2018 or better known as the 2018 Farm Bill. The 2018 Farm Bill was refined to include hemp-sourced extracts, cannabinoids, and derivatives in the definition of hemp, and it also removed hemp from the Controlled Substance Act (CSA).
Hemp is way more than CBD oil.
There are countless uses for hemp. Here are a few examples:
Industrial Textiles: ropes, canvas, brake/clutch linings, caulking…and more.
Consumer Textiles: fabrics, diapers, denim…and more.
Agriculture Benefits: soil improvement in crop rotation, weed suppression…and more.
Paper: newspaper, cardboard, printing paper…and more.
Building Materials: fiberboard, cement, stucco, insulation…and more.
Foods: salad oil, milk, supplements, granola, bird seed…and more.
Industrial Products: printing inks, fuel, putty, coatings…and more.
Personal Hygiene: soap, shampoo, lotions…and more.
Question 2: What is CBD? And how is hemp different from marijuana?
Cannabidiol or CBD is one of the two most prevalent cannabinoids found in the cannabis plant, the non-intoxicating cannabis compound. The beneficial properties of hemp-derived CBD are numerous and as it works with the human endocannabinoid system it is thought to have an impact on hundreds of biological conditions. CBD may be taken in multiple ways (e.g. inhalation, oil, hemp extract oil, a capsule, an ingestible, etc.). CBD can be derived from either hemp or marijuana.
To clarify, CBD derived from hemp (which contains no more than 0.3%, THC, by dry weight), is not regulated as a controlled substance and is federally legal; however, CBD derived from marijuana is NOT federally legal.
Marijuana also belongs to the cannabis genus and is a term most commonly used to describe the cannabis sativa species. Tetrahydrocannabinol (THC) is the second cannabinoid prevalent in cannabis plants, specifically found in higher concentrations in marijuana. Although marijuana is high in THC, you can also find other cannabinoids in varying amounts. The THC compound is what causes the psychotropic or “high” that cannabis is known for. To generalize, marijuana contains around 10% to 30% THC.
For the sake of time, I will simplify the difference. Let’s go back to Question 1. The legal difference from hemp and marijuana is that hemp has been removed from the CSA. Marijuana is still listed as a Schedule I controlled substance, right along with heroin and meth.
Question 3: What is the USDA’s, FDA’s and DEA’s role regarding hemp?
Hemp and the USDA
The 2018 Farm Bill was signed into law on December 21, 2018 and it directed the United States Department of Agriculture (USDA) to establish a national regulatory framework for hemp production. On October 31, 2019, the USDA released its Domestic Hemp Production Program.
There are several requirements in the interim rule* and I have listed six below:
- State and Tribal Hemp Production Plans will have primary authority (after receiving USDA approval).
- Cultivators must give specific land coordinates where the hemp will be produced.
- Sampling and testing requirements for Delta-9 Tetrahydrocannabinol (THC) and the disposal of non-compliant plants. Note: The USDA has already modified a requirement for testing. The original interim rule required all testing to be facilitated by a DEA-registered lab. On February 27, 2020, the USDA released a statement which delayed that requirement, and modified/clarified the disposal requirement for “hot” hemp crops.
- Compliance with enforcement procedures including annual inspection of hemp producers.
- Information sharing.
- Certification of resources…and much more.
Hemp and Crop Insurance
On February 6. 2020, the USDA announced details of two risk management programs eligible for hemp producers (MPCI and NAP). However, if the crop is classified as “hot” (over 0.3% THC), it becomes ineligible for the insurance.
Hemp and Lending Guidance
The USDA released guidance on making direct and guaranteed loans to hemp producers earlier this year. Even though this document has been rescinded, due to the extension of the 2014 hemp pilot program, this document is relevant therein as it will be similar to the final guidance that is expected to be release in 2021.
Which States are participating?
Here is where we are as of November 2020:
- 15 States plus are operating under the 2014 pilot rules for 2020
- 25 States have USDA approved plans under the interim final rule (it should be noted that some states will continue to operate under the 2014 plan even though they have received USDA approval)
- Six (6) States’ plans are under USDA review
- One (1) State’s plan (Idaho) is pending state legislation
- Three (3) States did not draft programs and their producers will operate under a USDA license.
Tribes and Territories
As of November, 38 Tribal plans have been approved, four (4) Tribal plans are under review, and three (3) are currently drafting plans. Also, the Northern Marianas Island’s plan is under review and both Puerto Rico and the U.S. Virgin Island’s plans have been approved.
Hemp and the FDA
The relationship between hemp and the FDA is a complicated one and is widely misunderstood. To simplify, the FDA does not have the research necessary to make the approvals that are in high demand. Proper research has not been conducted because, until recently, hemp and hemp-derived CBD has been listed as a Schedule I substance. Another issue is that the FDA has approved a drug (Epidiolex) that contains CBD. Once something (like CBD) has become an FDA approved drug it technically cannot be added to human or animal food.
I believe that the FDA is working towards obtaining the research needed. In December, 2019 the FDA completed its evaluation of three generally recognized as safe (GRAS) notices for hemp seed-derived food ingredients.
The FDA has also created a resource document that is updated regularly titled “FDA Regulation of Cannabis and Cannabis-Derived Products, Including Cannabidiol (CBD)”.
Some of the confusion over the FDA’s stance regarding hemp-derived CBD is because it has released the two sentences below…within the same paragraph.
“FDA is aware that some companies are marketing products containing cannabis and cannabis-derived compounds in ways that violate the Federal Food, Drug and Cosmetic Act (FD&C Act) …”
“FDA recognizes the potential opportunities that cannabis or cannabis-derived compounds may offer and acknowledges the significant interest in these possibilities.”
A bi-partisan bill (H.R.8179) to legalize CBD as a dietary supplement was introduced in Congress in September, 2020. If past, this bill would “make hemp, cannabidiol (CBD) derived from hemp and any other ingredient derived from hemp lawful for use under the Federal Food, Drug and Cosmetic Act as a dietary ingredient in a dietary supplement, and for other purposes”. Without this bill (or other bills currently pending) the consumption of CBD will continue to be an issue.
An oversimplified conclusion to this section is that The 2018 Farm Bill legalized the production and transportation of hemp; however, the FDA has yet to approve several hemp-derived products.
Hemp and the DEA
The DEA released their Interim Final Rule (IFR) on the Implementation of the Agriculture Improvement Act of 2018 on August 21, 2020, which is designed to align the agency with the 2018 Farm Bill.
However, there has been much controversy over their interpretation of THC. The DEA’s IFR states, “In order to meet the definition of ‘hemp’ and thus qualify for the exemption from schedule I, the derivative must not exceed the 0.3% delt-9-tetrahydrocannabinol [THC] limit [by dry weight]. The definition of ‘marijuana’ continues to state that ‘all parts of the plant Cannabis sativa L.,’ and ‘every compound, manufacture, salt, derivative, mixture or preparation of such plant’ are schedule I controlled substance unless they meet the definition of ‘hemp’…or are from exempt parts of the plant…As a result, a cannabis derivative, extract or product that exceeds that 0.3% [THC] limit is a schedule I controlled substance, even if the plant from which it was derived contained 0.3% or less [THC] on a dry weight basis.”
The definition, if left as is, would essentially criminalize the hemp extraction process. There are several different variations in which to extract cannabinoids or CBD from hemp; however, all of them result in an increase of THC. Although a part of the extraction process is to dilute the THC back to 0.3% or less, the DEA’s rule would leave processors of hemp vulnerable to technically possessing a schedule I controlled substance and in violation of the law.
Let’s Talk Risk.
These risks below are topics to be considered and discussed with your Board of Directors before implementing a hemp banking program.
Risk 1: Monitoring hemp may not be as stringent for financial institutions, but due diligence must be enhanced. Here is what the regulators are saying:
On December 03, 2019, there was a Joint Statement issued titled, “Providing Financial Services to Customers Engaged in Hemp-Related Businesses”. I will highlight three points. 1) The agencies state that banks are not required to file a Suspicious Activity Report (SAR) solely because they [the customer] are engaged in the growth or cultivation of hemp. So, there will not be a “Hemp Limited”, “Hemp Priority” or “Hemp Termination” SAR requirement. 2) The statement requests for banks to conduct risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers. 3) The statement also advises financial institutions to contact the FDA regarding hemp-related food, drug and cosmetic questions.
FinCEN intends to issue additional guidance after reviewing and evaluating the USDA’s interim final rule. I have not seen an estimated date for this additional guidance.
The National Credit Union Administration (NCUA) released a Regulatory Alert titled “Serving Hemp Businesses” in August, 2019 that provides some guidance for credit unions. This is a resourceful document for any financial institution. It concludes that, “The NCUA encourages credit unions to thoughtfully consider whether they are able to safely and properly serve lawfully operating hemp-related businesses…” The NCUA will issue additional guidance once USDA regulations and guidelines are finalized.
On July 25, 2019, the Illinois Department of Financial and Professional Regulation released its “Industrial Hemp” memorandum. It states that banks are obligated to do the following: continue compliance with existing BSA/AML statues; implement an effective CIP; employ reasonable and effective EDD; file SARs when appropriate (for example, if a crop exceeds the legal limit); and stay up-to-date with the latest regulatory developments.
Summary: The onboarding of hemp-related relationships will still require enhanced due diligence as for all high-risk customers; however, the ongoing monitoring will not be as tedious as with marijuana-related relationships.
Risk 2: The global market for hemp consists of more than 25,000 products in nine submarkets: agriculture, textiles, recycling, automotive, furniture, food and beverages, paper, construction materials and personal care. The FDA has not approved a large portion of hemp-related products, as previously mentioned. However, the extent of the FDA’s enforcement is sending warning letters (for the most part).
Risk 3: The USDA has stated that “no State or Indian Tribe may prohibit the transportation or shipment of [legal] hemp”; however, currently there is no protocol for transportation or how law enforcement tests shipments.
Risk 4: What if a cultivator’s hemp tests “hot”? Or what if the DEA decides a cultivator’s legal hemp is illegal? See Apothio, LLC v. Kern County Sheriff’s Office filed 04/10/2020.
Risk 5: Hemp crops qualify for federal crop insurance, which will provide more certainty for cultivators. However, if the crop is “hot”, it is no longer eligible for the insurance.
Risk 6: Concentration and liquidity risks. What is your institution’s risk appetite and related thresholds?
Bonus: If you want to impress your hemp cultivators, watch this YouTube video.
HDCS, Inc. | Director of Product and Business Development
*It should be noted that the USDA released its 301 page Final Rule, effective March 22, 2021.