The Current State of Hemp Banking

by Marc Adesso and Kevin Tran, Waller

Evolution of Federal Hemp Legislation

For decades, federal law failed to distinguish hemp from other varieties of the cannabis plant, all of which were made illegal under the Controlled Substances Act of 1970 (the “Controlled Substances Act”).  With recent sentiment regarding hemp and hemp-related products shifting towards wider acceptance, the passage of the Agriculture Improvement Act of 2014 (the “2014 Farm Bill”) legitimized industrial hemp research by distinguishing industrial hemp from marijuana (and therefore not within the scope of illegal cannabis products set forth in the Controlled Substances Act), which led to small-scale expansion of hemp cultivation for limited purposes.  In late December 2018, President Trump signed the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) into law, which removed many legal hurdles and significantly expanded the scope of permissible hemp-related activities.

Among other provisions, the 2018 Farm Bill legitimized hemp by removing hemp as a controlled substance under the Controlled Substances Act (under which marijuana remains illegal) and defining it as an agricultural commodity under federal law. As a result of the 2018 Farm Bill, farmers can now treat hemp as they would any other agricultural commodity, by legally importing and exporting hemp both domestically and internationally, and even participating in U.S. Department of Agriculture (“USDA”) programs, such as low-cost crop insurance.  Although hemp cultivation and production remain heavily regulated by state agencies, the 2018 Farm Bill effectively legalized hemp for both personal and commercial consumption and industrial production.

Current State of Hemp Regulation and Guidance

It should be noted, however, that the recent enactment of the 2018 Farm Bill (and contrary to many media reports) has been met with somewhat limited regulatory developments and guidance from federal government agencies in relation to the now-fully legal hemp businesses.  Further, the 2018 Farm Bill does not prohibit or materially change state-level regulations relating to hemp (so long as such regulations comply with federal law, including the 2018 Farm Bill), although the bill does limit the level of punishment that can be imposed upon hemp producers by state regulators. Interestingly, however, financial services regulators have been some of the first movers in promulgating guidance for providing services to hemp-related businesses. 

First, the National Credit Union Administration (“NCUA”), which regulates and insures federal credit unions, has issued interim guidance for credit unions interested in banking businesses “dealing with hemp and hemp-derived products.” The NCUA’s guidance states that “[c]redit unions may provide the customary range of financial services for business accounts, including loans, to lawfully operating hemp-related businesses within their fields of membership.” In particular, the NCUA’s guidance stated that credit unions, among other steps, need to (1) incorporate appropriate Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance programs, (2) maintain appropriate due diligence procedures for hemp-related accounts, (3) file Suspicious Activity Reports (SARs) for any activity that appears to involve illegal or suspicious activity, and (4) understand the federal and state laws and regulations that prohibit, restrict, or otherwise govern hemp-related businesses and their activity.  The NCUA intends to issue additional guidance once the USDA’s forthcoming regulations and guidelines for legal hemp are finalized (the USDA issued an interim final rule regarding hemp regulations on October 29, 2019, with a 60-day public comment period ending December 30, 2019). 

Then, in early December, the Federal banking agencies (e.g., the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency), in conjunction with the Financial Crimes Enforcement Network (“FinCEN”) and the Conference of State Bank Supervisors, issued a joint statement clarifying the legal status of hemp in relation to the Bank Secrecy Act (“BSA”) for banks desiring to provide financial services to hemp-related businesses.

Because hemp growth and production are legal under current federal law, the joint statement asserted that banks are no longer required to file suspicious activity reports (“SARs”) for customers solely because these customers are engaged in the business of hemp, according to the Dec. 3 statement.  Of course, as with any line of business (hemp or otherwise), banks are still expected to follow standard SAR procedures and should file a SAR relating to a hemp client if there are indications of suspicious activity.

To avoid any confusion between hemp and marijuana, the statement affirms that the FinCEN guidance issued in 2014 for state-legal marijuana businesses remains in effect, which does require a heightened obligation to file SARs for those banks wishing to provide financial services to state-legal marijuana businesses.

The joint statement also indicates that FinCEN will issue additional guidance after further reviewing and evaluating the USDA’s interim final rule on the production of hemp.  Of course, any remarks or guidance in the hemp banking space tend to emphasize that providing financial services to lawfully operating, hemp-related businesses is permissible; however, the decision actually to engage with such businesses depends on the risk tolerance level of each individual financial institution and any such determination should be evaluated against that financial institution’s risk management, due diligence, and customary underwriting procedures.

The Status of Hemp in Alabama

In 2016, the Alabama Legislature passed the Alabama Industrial Hemp Research Program Act (the “Alabama Hemp Act”), which tasked Alabama’s Department of Agriculture and Industries (“ADAI”) with the development of a licensing and inspection program for the production of industrial hemp.  Alabama launched its Industrial Hemp Research and Pilot Program on January 22, 2019, which began the first year that hemp could be grown legally in Alabama.  The application process for the 2020 hemp program recently closed on November 14, 2019, following a slight delay to provide the ADAI time to review the USDA’s interim final rule.

Like most state legislation regarding hemp, the Alabama Hemp Act did not specifically address banking the hemp industry.  Accordingly, even with the recent guidance discussed above, for those Alabama financial institutions wanting to provide financial services to hemp-related businesses and participate in one of the fastest-growing sectors in the United States, it remains incumbent upon the bank to assess and determine its own comfort with banking the hemp industry.  Achieving this comfort can be done by developing robust risk identification and risk management, due diligence, and ongoing monitoring policies and procedures. 

Marc Adesso and Kevin Tran both serve as counsel with Waller Lansden Dortch & Davis, LLC.