In a new two-part blog series, “Marijuana, Hemp & CBD-Related Businesses: It’s Complicated”, we will examine how financial institutions are trying to sort through various regulatory challenges when serving this industry, even as some parts are still considered illegal.
Now that we have the language down, let’s begin with marijuana. If marijuana is legal in some states, shouldn’t marijuana-related businesses (MRBs) be able to get banking services instead of hauling around large amounts of cash?
Unfortunately, many banks are still concerned with violating anti-money laundering statutes and taking on risk, including hypothetically losing their Federal Deposit Insurance Corporation (FDIC) insurance protection, although those fears may be easing somewhat because there is no instance in which this has happened.
Steven Kemmerling, CEO of CRB Monitor, says he’s personally seen and heard regulators from multiple agencies, including the FDIC, Office of the Comptroller of the Currency, Federal Reserve Board, and the National Credit Union Administration say that they would not pull a bank’s FDIC insurance or generally penalize a bank for “just” banking marijuana – if the banks follow the guidance set forth by the Financial Crimes Enforcement Network (FinCEN) and implement effective and robust policies and procedures.
Indeed, the possible federal laws financial institutions can violate if they offer banking services to marijuana-related businesses include the Controlled Substance Act (CSA), the U.S. Patriot Act, the Bank Secrecy Act, and the Racketeer Influenced and Corrupt Organizations Act.
Kemmerling says the riskiest marijuana-related businesses for banks to server are those that literally touch marijuana at some point along the supply chain and most clearly manufacture, distribute, or dispense marijuana. Those companies are generally referred to as “Direct” MRBs by FinCEN. or “Tier 1” by Kemmerling. However, “Indirect” — called “Tier 2” or “Tier 3” companies — also pose a risk to financial institutions as they arguably “aid and abet” the illegal activity taking place at the Direct/Tier 1 MRBs.
Hemp: Let’s Get Growing and Banking
What about hemp? Isn’t hemp legal? President Donald Trump signed the 2018 Farm Bill into law, which effectively made hemp legal by removing it from the CSA and created a pathway for each state to create full-scale hemp production programs versus limited “pilot” research programs authorized under the 2014 Farm Bill.
But, again, it’s not quite that simple, says Kemmerling. The 2018 Bill did remove hemp from the CSA, but there are there caveats and restrictions. Hemp must contain less than 0.3% of Tetrahydrocannabinol (THC), the psychoactive ingredient which gives the user the “high” feeling.
Farmers who want to cultivate and grow hemp must secure a license either through their state (if available) or through the U.S. Department of Agriculture (USDA), (if their state does not have a program and does not otherwise restrict hemp cultivation). However, each state must create its own hemp program and submit it to the USDA for review and approval, subject to rules and regulations that the USDA has not yet completed writing. Hence, anyone cannot just start growing hemp in their backyards like tomatoes. The final rules from the USDA under the 2018 Farm Bill aren’t yet written, let alone in effect, but are expected to be completed by the end of 2019 and implemented in the 2020 planting season.
Until then, farmers need to follow the “pilot” regulations under the 2014 Farm Bill, Kemmerling says, and that difference does matter. “The 2014 Farm Bill didn’t legalize wholesale commercialization or interstate commerce,” he explains. “But instead allowed pilot research programs to study industrialized hemp.”
Bottom line — there is on-going uncertainty regarding hemp rules, regulations, licensing, and enforcement. And that confusion is likely to remain until the 2018 Farm Bill is fully in place.
The Final Word
Due to conflicting and still evolving federal and state laws, most cannabis-related businesses – including marijuana, hemp and cannabidiol (CBD) — remain cash-intensive and are perceived as very risky, if not illegal operations.
However, that perception and reality are slowly changing.
Financial institutions’ compliance officers need to be aware of and follow various legislative and political developments related the 2018 Farm Bill and other regulations like the SAFE Banking Act of 2019, which would forbid federal banking regulators from penalizing banks and credit unions for simply providing financial services to legitimate marijuana-related businesses.