Signed into law on December 20, 2018, the 2018 Farm Bill may present a tremendous opportunity for banks and payments companies to provide banking, processing, and other services to the hemp industry. We expect a variety of companies to move swiftly in developing, marketing, and selling products (including CBD oil) that, until yesterday, were controlled substances. This means that banks and payment processors should be prepared for a flood of inquiries from the industry about opening bank, merchant processing, and other financial accounts.
While the Farm Bill “legalizes” hemp, there remain a number of open questions that financial institutions should consider before they start serving the industry. This article provides a brief overview of the Farm Bill’s impact on the legal status of hemp, highlights some of the open questions, and provides suggested best practices for banks and processors seeking to work with the hemp industry.
Summary of the Farm Bill’s Hemp Provisions
The 2018 Farm Bill mandates the creation of a new regulatory regime for the production and sale of hemp, and products made from hemp, which have been prohibited under federal law. The Controlled Substances Act (“CSA”) prohibits the possession, manufacture, and distribution of anything meeting the definition of “mari[j]uana.” Until yesterday, virtually all parts of the Cannabis sativa L. (“Cannabis”) plant, and anything containing a compound derived from the plant (but for a few limited exemptions), were deemed marijuana. The Farm Bill changes this by exempting hemp – including any part, extract, or derivative of the Cannabis plant with a delta-9 tetrahydrocannabinol (“THC”) concentration of not more than 0.3 percent on a dry weight basis – from the definition of marijuana. For example, a CBD product that has been prohibited as “mari[j]uana” will no longer violate the CSA, if it meets the Farm Bill’s definition of hemp.
Where the Farm Bill legalizes hemp, it also sketches out a regulatory framework in new Subtitle G to the Agricultural Marketing Act of 1946 (7 U.S.C. § 1621 et seq.). Subtitle G sets forth a regulatory scheme by which states and Indian tribes may seek primary regulatory authority over hemp production in their territories by submitting monitoring and regulation plans to, and receiving approval from, the Secretary of Agriculture. And if they fail to do so, hemp production may proceed only under a federal regulatory scheme to be developed by the Secretary.
What Does this Mean for Banks and Payment Processors?
While the 2018 Farm Bill opens the door to lawful hemp production in the United States, there are a number of open questions that banks, processors, and other financial services providers should consider before they start serving the industry. Media and industry advocates have focused primarily on the fact that hemp has been legalized, but there has been relatively little commentary addressing the fact that hemp will be subject to robust regulatory oversight at both the federal and state levels. For banks and processors interested in this industry, understanding the nuances of this regulatory framework will be critical to providing banking and processing services in a safe and sound manner.
1. Is Hemp Production Legal Today?
As has been reported extensively in the media, the Farm Bill exempts hemp from the legal prohibitions that apply to marijuana. But what, exactly, does this mean? Is it lawful today for industry to manufacture and sell hemp products to consumers? While perhaps a bit academic, the answer is somewhat open to debate. Although growing hemp no longer violates the CSA, the Farm Bill also states that it is unlawful to produce hemp in any state or tribal territory that does not have a state or tribal plan in place or without a federal license. As of today, there are no federal, state, or tribal licenses or regulations in place. So what does this mean for the current legal status of hemp? The Farm Bill, unfortunately, does not address this apparent gap in the legislation.
2. What Will the Future Regulatory Framework Look Like?
The Farm Bill excludes hemp from the CSA definition of marijuana but also requires that the federal government, states, and Indian tribes work together to establish a robust regulatory process for licensing and overseeing the industry. At a minimum, the framework will need to address key issues such as the licensing of hemp producers, product testing, enforcement compliance procedures, and annual inspections. The Farm Bill, however, only sketches out the basic requirements for this framework – the adoption of federal, state, and tribal regulations will take time to develop and implement.
The current lack of a regulatory regime means that banks and processors that provide services to the industry will be doing so without a clear picture of federal and state expectations. This suggests that any financial institution dealing with hemp products should do so carefully and consistent with best practices for providing services to high-risk industries.
One option would be to treat hemp producers similar to marijuana-related businesses in states where marijuana has been legalized. While marijuana remains illegal at the federal level, the federal government (through the Financial Crimes Enforcement Network) and states have provided guidance and suggested best practices for financial institutions banking or providing services to marijuana-related companies.
Moreover, there remains a question as to how states will treat hemp. While the Farm Bill provides states and tribes the ability to regulate the product, or to rely on a federal framework, nothing in the Farm Bill prohibits a state or tribe from outlawing the production, sale, or use of hemp. Also open to speculation is what the final regulatory framework will look like, and how the federal, state, and tribal plans may differ. As such, any financial institution looking to work with a hemp or CBD company will need to be mindful of potential state or tribal limitations.
3. What About Imports of Hemp?
As noted, the new Subtitle G states that it is unlawful to produce hemp in any state or tribal territory that does not have a state or tribal plan in place or without a federal license. This seems to imply that imports of hemp may be lawful today, even if you take the position that production is not – at least until the Secretary of Agriculture promulgates regulations and begins issuing licenses, or until the states and tribes submit their own regulatory plans. This leaves a gray area that banks and processors will need to navigate if they decide to provide services to hemp businesses.
4. Is CBD Oil Legal?
The Farm Bill legalizes the production and sale of CBD oil derived from hemp. What the law does not address, however, is whether hemp is capable of producing commercially viable amounts of CBD. Under the CSA, the legality of products derived from marijuana (such as CBD oil) formerly turned on the part of the plant used to produce the product. Products made from the mature stalk and seeds were excluded from the CSA definition of marijuana (and were therefore lawful), while products made from the flowering tops, resin, and leaves are included (and were unlawful). The DEA has consistently taken the position that CBD can only be produced in commercial quantities from the unlawful parts of the plant. Yet with the new exclusion of hemp from the CSA, the old dichotomy no longer applies. Products made from any part of the plant are excluded from the definition of marijuana so long as the product is low-THC (i.e., 0.3% THC or less). Thus, it remains to be seen whether industry will be able to produce CBD from hemp in commercial quantities. We leave that question to the scientists.
Finally, there remain questions about how existing laws will be reconciled with the changes to the definition of hemp. New Subtitle G grants to the Secretary of Agriculture the sole authority to promulgate federal regulations on hemp production, but also states that nothing in Subtitle G affects or modifies the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 301 et seq.), section 351 of the Public Health Service Act (42 U.S.C. § 262), or the authority of the Commissioner of Food and Drugs and the Secretary of Health and Human Services under their respective statutes. This means, for example, that the FDA’s current position that dietary supplements and foods containing CBD are unlawful will continue to be of concern to the CBD industry. Although some believe that the FDA’s position is vulnerable to a legal challenge, the specter of enforcement will remain until either the agency changes its position or someone successfully challenges the FDA in court.
Best Practices for Those Looking to Process Hemp-Related Payments
Despite these present uncertainties, we suspect that many hemp businesses will forge ahead, and that banks and payment processors will explore providing services to the industry. We therefore provide the following recommendations for offering payment processing services to hemp producers.
1. Confirm the Legality of Your Customer’s Business
Any bank or processor looking to board a hemp customer should start by confirming that the customer’s operations comply with applicable laws and regulations. This may seem like a no-brainer, but there remain some open questions about when and how hemp may be produced and sold. Our view is that regulators and law enforcement will expect banks and processors to do their homework before they start banking the industry. Moreover, as discussed, there are other laws and regulations that apply to products such as CBD oil. The Farm Bill does not supersede these laws, and a bank or processor should still be careful to avoid customers that engage in unlawful, deceptive, or fraudulent practices.
2. Best Practices for Managing Higher-Risk Customers
Even if a financial institution is comfortable that a potential customer’s hemp-related business is lawful, the financial institution may still decide to treat the customer as high-risk and subject to commensurate due diligence. In particular, federal and state regulators expect banks and processors to understand their customers’ business and to monitor their customers’ transactions for signs of unlawful activity.
With respect to due diligence for hemp customers, in addition to any standard due diligence for high-risk merchants, we recommend the following additional checks:
- Does the producer have a license issued by a state, Indian tribe, or the federal government?
- Has the producer ever been denied a license?
- Has the producer ever been subject to any corrective action plan? If so, what were the violation(s) and remediation steps, and what is the current status?
- Has the producer ever been subject to any period of ineligibility? If so, what were the circumstances and what is the current status?
- Has the producer ever been convicted of a felony relating to a controlled substance under state or federal law?
Just as hemp producers should be treated as high-risk merchants at onboarding, they should be subject to heightened monitoring requirements throughout their tenure with the payment processor and/or acquirer. In addition to any standard monitoring conducted on high-risk merchants, we recommend the following additional checks:
- Secure contractual requirement that merchant will notify processor and/or acquiring bank immediately upon receipt of notification of any violation from state, tribal, or federal licensing authorities or regulators.
- Require merchant to provide updated licensing information annually (or according to the state, tribe or federal licensing timeline).
- Subscribe to any available law enforcement lists or databases regarding hemp production, including information on licensing status and documented violations.
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Despite the present uncertainties, we expect some banks and payment processors will explore ways to provide banking, payment processing, and other services to the hemp and CBD oil industries. For those interested in this opportunity, it is important that they do so in a safe, sound, and responsible manner.