Posts

The below article is the Special Focus section of the November 2019 Compliance Journal. The full issue may be viewed by clicking here.

The United States Department of Agriculture (USDA) published an interim final rule on October 31, 2019 specifying regulations to produce hemp. The rule is effective October 31, 2019 through November 1, 2021.

Introduction

The rule establishes a Federal program for producers in States that do not have their own USDA-approved plan. The program includes provisions for maintaining information on the land where hemp is produced, testing of THC levels, disposing of plants not meeting certain requirements, and licensing requirements. USDA has also outlined provisions under which States may submit their own plans for approval.

It is WBA’s understanding that the Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP) will submit a Hemp Program Plan to USDA. However, DATCP will continue under the 2014 Farm Bill provisions, and existing Wisconsin regulation at time of this article’s publication, in 2020. As of November 1, 2019, DATCP has begun its hemp licensing for the 2020 hemp season. At this time, DATCP is is preparing to write rules to align Wisconsin law with the 2018 Farm Bill, and expects to begin the new program under the 2018 Farm Bill, and USDA’s rule, in 2021. 

This article discusses the procedural aspects for submission of a State plan to USDA under its interim final rule. It also discusses the Federal program requirements placed upon hemp producers. While these procedures and the program requirements do not directly apply to banks, they will affect how hemp businesses operate in Wisconsin, and thus, bank customers seeking to engage in hemp-related activity. This article presents selected aspects of the interim final rule for banks to better understand what to expect in the coming years and the requirements that may apply to their customers.

Procedural Aspects

From a procedural standpoint, WBA reminds readers that as of publication of this article, much remains to be decided. November 26, 2019 Governor Tony Evers signed 2019 Senate Bill 188 establishing a new hemp program. It requires DATCP to write and submit a plan to USDA for approval. After USDA receives the plan, it will either approve or disapprove the plan no later than 60 calendar days after receipt.

If DATCP proposes a plan and it is rejected by USDA, the interim final rule provides for amended plan procedures. Under those procedures, hemp production continues under the existing plan. For example, production in Wisconsin would continue under current rules while DATCP and USDA work out amendments to the proposed plan. However, if an amended plan is not submitted within one year from the effective date of the rejected new law or regulation, the existing plan is revoked. 

Note that as of publication of this article, the current DATCP program under ATCP 22 and 2017 Wisconsin Act 100 is still in effect. As discussed above, DATCP is currently issuing licenses for the 2020 season. If DATCP writes new rules under the new law, WBA will report on what banks need to know about the process.

USDA Plan Requirements

Because hemp production at the time of this article’s publication continues under existing Wisconsin law, and the future rule governing production is unknown, a full discussion of USDA’s rule and the Wisconsin bill would be premature. As such, this article will not discuss the Wisconsin bill which has yet to be signed by the governor. It will discuss USDA’s rule below, but from a conceptual standpoint rather than a full discussion. Note that the requirements as presented below have been edited to help banks understand their broader implications. As such, most technical requirements have been removed. For a full reading of the rule, please refer to the link at the end of this article.

A State plan must meet information collection requirements, to be reported to The Secretary of Agriculture of the United States regarding:

  1. Contact information for licensed producers;
    • A legal description of the land on which the producer will produce hemp including its geospatial location; and 
    • The status and number of the producer’s license or authorization. 
       
  2. A State plan must include a procedure for accurate and effective sampling of all hemp produced, requiring the following: 
    • Samples must be collected within 15 days prior to the anticipated harvest.
    • The method used for sampling must be within a level of 95% accuracy, that no more than 1% of the plants in the lot would exceed the acceptable hemp THC level.
    • During a scheduled sample collection, the producer or an authorized representative of the producer shall be present at the growing site. 
    • Representatives of the sampling agency shall be provided with complete and unrestricted access during business hours to all hemp and other cannabis plants, whether growing or harvested, and all land, buildings, and other structures used for the cultivation, handling, and storage of all hemp and other cannabis plants, and all locations listed in the producer license.
    • A producer shall not harvest the cannabis crop prior to samples being taken.
       
  3. The State plan must include procedures for testing that can accurately identify delta-9 tetrahydrocannabinol content concentration levels to specified levels and meet a specific methodology.
    • Any test resulting in higher than acceptable THC levels is considered conclusive evidence that the lot represented by the sample is not in compliance. Lots tested and not certified may not be further handled, processed or enter the stream of commerce and the producer shall ensure the lot is disposed of.
    • Samples of hemp plant material from one lot shall not be commingled with hemp plant material from other lots. 
    • Analytical testing for purposes of detecting the concentration levels of THC shall meet standards that are not presented in this summary.
       
  4. The State shall promptly notify USDA by certified mail or electronically of any occurrence of cannabis plants or plant material that do not meet the definition of hemp in this part and attach the records demonstrating the appropriate disposal of all of those plants and materials in the lot from which the representative samples were taken. 
     
  5. A State plan must include a procedure to comply with certain enforcement procedures.
     
  6. A State plan must include a procedure for conducting annual inspections of, at a minimum, a random sample of producers to verify that hemp is not produced in violation of this part. 
     
  7. A State plan must include a procedure for submitting a monthly report to USDA. All such information must be submitted to the USDA in a format that is compatible with USDA’s information sharing system. 
     
  8. The State must certify that it has the resources and personnel to carry out the practices and procedures necessary to comply.
     
  9. The State plan must include a procedure to share information with USDA.
    • The State plan shall require producers to report their hemp crop acreage to the Farm Service Agency. 
    • The State government shall assign each producer with a license or authorization identifier in a format prescribed by USDA. 
    • The State government shall require producers to report the total acreage of hemp planted, harvested, and, if applicable, disposed. The State government shall collect this information and report it to USDA. 

Final Takeaways

As expected, the rule requires testing, reporting, and monitoring to accurately identify whether hemp samples contain a delta-9 tetrahydrocannabinol (THC) content concentration level that does not exceed the acceptable level. To that extent, hemp is defined as the plant species Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a THC concentration of not more than 0.3 percent on a dry weight basis.

Another aspect to note is the rule’s use of the word “producer.” A producer is someone who is licensed or authorized to produce hemp, meaning to grow hemp plants for market, or for cultivation for market, in the United States. The rule does not distinguish between grower, producer, retailer, or any other type of hemp-related business. As such, it will remain important to see what DATCP proposes for categories of regulation in its rule.

Conclusion

While hemp businesses in Wisconsin still operate under DATCP’s current rule at time of this article’s publication, it is important to understand the track Wisconsin is currently on, and what possibilities the future holds, in order to prepare accordingly. WBA will continue to monitor and report on future hemp regulation as it continues to develop.

Click here to view USDA’s interim final rule.

By, Ally Bates

The below article is the Special Focus section of the October 2019 Compliance Journal. The full issue may be viewed by clicking here.

On January 1, 2020, recreational marijuana becomes lawful in Illinois, making it the eleventh state in the country to legalize marijuana for recreational use. When Illinois Public Act 101-0027 was enacted this past June, Illinois also became the second state bordering Wisconsin to legalize marijuana for recreational use, second to Michigan where licenses will begin being issued next month. Marijuana legalization in neighboring states raises the following question: Can a Wisconsin bank lawfully bank marijuana-related businesses (MRB)1 that operate in states where recreational marijuana is legal? 

State v. Federal Legality

To answer that question, it requires an understanding of the current legal landscape. At a state level, individuals and businesses acting consistent with state law requirements (e.g. licensure, age restrictions) will be deemed lawful actors within the state. However, current federal law muddies the waters regarding whether those individuals and business are acting entirely lawfully. This is because marijuana is still unlawful on the federal level – the Controlled Substances Act (CSA) characterizes marijuana as a Schedule I Controlled Substance and makes it illegal under federal law to manufacture, distribute, dispense, or possess marijuana. Technically speaking, then, individuals acting consistent with state marijuana laws are violating federal law. But, you ask, why don’t we often hear of lawful state actors being penalized by federal law enforcement officials?

Enter the Cole Memo. On August 29, 2013, then-Attorney General James Cole issued a Memorandum (the “Cole Memo”) in response to several states legalizing marijuana. The memo, in so many words, defers enforcement of marijuana-related activity to the states that have enacted laws legalizing marijuana in some form. The Cole Memo sets forth a number of federal enforcement priorities pertaining to marijuana including, for example, preventing the distribution of marijuana to minors, preventing violence and use of firearms in the cultivation and distribution of marijuana, and preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels. Outside of the enforcement priorities delineated in the Cole Memo, the federal government will rely, as it has traditionally relied, on “states and local law enforcement agencies to address marijuana activity through enforcement of their own narcotics laws.”

After the issuance of the Cole Memo, individuals and businesses could act pursuant to state marijuana laws without fear of prosecutorial action from the feds, assuming their actions did not implicate an enforcement priority indicated in the Cole Memo. That “relief” was short-lived, however, as on January 4, 2018, then-Attorney General Jeff Sessions rescinded the Cole Memo. The Cole Memo remains rescinded today. In practice, however, the spirit of the Cole Memo appears to live on, as the rescission issued by Attorney General Sessions continued to provide “prosecutorial discretion.” 

Thus, in summary, though recreational marijuana may be lawful at the state level, it remains unlawful and subject to enforcement action at the federal level. In practice, however, it is clear that federal law enforcement officials do not necessarily prioritize taking enforcement action against individuals and businesses acting consistent with state marijuana laws.

BSA Responsibilities

Of course, the legality question is a relevant one for banks because of Bank Secrecy Act (BSA) obligations. As banks, it’s imperative that you meet your (BSA) obligations, consistent with your Customer Due Diligence (CDD) program. In short, the bank must ensure that the transactions conducted through the bank are not derived from illegal activity. As described above, however, transactions flowing through an MRB are, very clearly, derived from illegal activity.
 
Recognizing the precarious position of financial institutions and the practical realties of having an unbanked yet burgeoning MRB population, the Financial Crimes and Enforcement Network (FinCEN) issued guidance entitled “BSA Expectations Regarding Marijuana-Related Businesses” on February 14, 2014 (“FinCEN Guidance”). The FinCEN Guidance, which is still alive and well today, leaves direction to banks to determine whether to provide financial services to MRBs, but indicates that customer due diligence is a “critical aspect” of this determination. To this end, the FinCEN Guidance delineates financial institutions’ due diligence responsibilities when banking MRBs. Specifically, it outlines requirements including, for example, verifying state licensure and registration and reviewing associated documentation, requesting information about the MRB and related parties from state licensing and enforcement authorities, developing an understanding of the normal and expected activity of the business, and conducting ongoing monitoring. 

In addition, the FinCEN Guidance outlines the obligation of financial institutions to file Suspicious Activity Reports (SARs) on activity involving MRBs, which, according to the Guidance “is unaffected by any state law that legalizes marijuana-related activity.” If a bank is providing financial services to an MRB, the bank must file one of the following types of SARs, consistent with FinCEN’s suspicious activity reporting requirements and related thresholds:

  • “Marijuana Limited” 
  • “Marijuana Priority”
  • “Marijuana Termination”

Determining which type of SAR to file is described within the FinCEN Guidance. In summary, the determination is based on whether or not Cole Memo priorities are implicated (despite its rescission) and if the account activity leads the bank to terminate the relationship with the customer. 

Finally, the FinCEN Guidance notes that a bank’s Currency Transaction Reporting (CTR) responsibilities are unaffected by the fact that a customer is deemed an MRB.

Banks planning to provide financial services to MRBs should familiarize themselves with the obligations outlined in the FinCEN Guidance.

Regulator Considerations

In addition to the criminal liability risks and practical considerations that a bank must consider in weighing the decision to bank MRBs, the regulator risk must also be weighed. Based on our current understanding the various regulators’ position on banking MRBs, the direction is to “follow FinCEN Guidance.” Thus, assuming the bank is following the FinCEN Guidance and has followed applicable policies and procedures, one would assume enforcement action would be avoided. 

To the extent your bank is considering providing financial services to MRBs, I suggest getting in touch with your regulator for guidance. 

So, What Do I Do?

The head-in-the-sand approach to banking MRBs is not a good one, as the issue will eventually present itself if it hasn’t already. Thus, I suggest banks take the following actions:

  • Consider whether your answer to “will you bank an MRB?” is a “yes (under certain circumstances)” or “no”. Develop policies and procedures accordingly and as necessary. 
  • Regardless of your policy, it’s important to know if your customer is an MRB; thus, you should ask. If the customer is an MRB and your policy says you won’t bank them, don’t bank them. If your policy is that “yes” (you will consider banking the MRB), you need additional information before you should bank or continue banking the self-identified MRB.
  • That additional information is information and documentation that allows the bank to determine whether or not the customer is in compliance with state law. Such collection will typically take the form of a Questionnaire and Certification and will require supporting documentation from the customer. Information will vary from state to state and any such information collection documentation should be developed in consultation with counsel who is familiar with the marijuana laws of the state.
    • If, based on the bank’s reasonable due diligence, the customer appears to be in compliance with state law at account-opening or when the bank confirms compliance of an existing customer, I suggest the following:
      • Designate the customer as “High Risk”. Consistent with such designation, continue to monitor your MRB customer for compliance with state law on an ongoing basis; and
      • Follow FinCEN Guidance. This includes monitoring the account for the presence of red flags identified in the FinCEN Guidance and filing SARs as appropriate. 
  • In contrast, if, based on the bank’s reasonable due diligence, the customer appears to NOT be in compliance with state law, the activity is unlawful and inconsistent with FinCEN Guidance. Accordingly, I do not suggest banking the customer.

The Future

The good news is that we only anticipate greater clarity as time marches on. Such clarity could come with enactment of the Secure and Fair Enforcement Banking Act of 2019 (“SAFE Banking Act”), which has already cleared the Senate and is now in the hands of the House. In summary, the Act would provide protections for financial institutions that provide financial services to legitimate cannabis-related businesses and services providers. The Act would allow banks to serve cannabis-related businesses without fear of adverse action from the regulators or criminal liability. The Act would not eliminate the need for banks to make policy decisions and draft implementing policies and procedures pertaining to MRBs, but it would certainly reduce ambiguity and provide protections that bankers need to feel comfortable serving this clientele.  Stay tuned on the SAFE Banking Act and/or other possible legislative fixes to the precarious relationship between the banker and the MRB.

1A marijuana-related business (MRB) is not a defined term, though it has been used in various guidance issued by federal agencies. Questions remain regarding whether a business needs to “touch the plant” to be considered an MRB (e.g. grower, processor, or retailer) or if MRB would include parties accepting monies from MRBs (e.g. landlords, vendors, or suppliers). This definitional question is one for the bank to grapple with, possibly in consultation with regulators, until additional clarification is provided.

WBA wishes to thank Atty. Lauren C. Capitini, Boardman & Clark, llp for providing this article.

By, Ally Bates