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

WBA expects that many Wisconsin banks will soon be approached by customers engaged in the industrial hemp industry, if they have not already. Wisconsin possesses favorable weather and soil conditions for the crop, and many farmers appear to be exploring the industry. As of January 2, 2019, the Wisconsin Department of Agriculture, Trade, and Consumer Protection (DATCP) has received a total of 413 Hemp Grower, and 244 Hemp Processor applications for a license and/or 2019 annual registration to participate in Wisconsin’s pilot program. Growers, processors, and retailers have already begun searching for banks offering deposit services and soon, loans. WBA has already received several calls through the WBA Legal Call Program questioning the legality of banking industrial hemp customers.

There are no rules or regulations prohibiting banks from doing business with customers legally engaged in the hemp industry. Growing, processing, and selling hemp products is legal, but it is regulated. Banks should implement policies and procedures to work with their customers accordingly. There is no regulatory guidance on the topic, but, arguably, none is necessary. Banks should follow BSA, safety and soundness, and business considerations already in place. Policies and procedures will need to be written or updated, as appropriate for this new business, but there are no new rules governing banks.

To that extent, it is important for banks to understand the hemp industry so they can understand their customers. WBA recommends considering the following matters: 

  • Is your customer registered with DATCP? 
  • Can they provide documentation that their licensing is up to date? 
  • Do they submit samples for regular testing? 
  • Who do they buy/sell to? 
  • If they are a grower, do they use licensed seed? 
  • If they’re a retailer who may not be required to register with DATCP, who do they buy from (and is that seller licensed)?
  • Others.

These considerations become even more important when it comes to lending, where banks must consider additional underwriting and collateralization components. Furthermore, as the hemp industry develops, the rules regulating it will change, and the business will continue to develop. Bank policies and procedures must be designed to evolve in tandem with this new industry.

Hemp has long been a cash industry, and deposit services such as checks, debit cards, and online banking are tools the industry has been without in the past. WBA has observed that farmers and growers appear eager to work with Wisconsin banks who are the experts in their community at handling money. Hemp businesses that follow Wisconsin’s pilot program are legal. While this situation is new, it is analogous to others. For example, business customers that open a bar, liquor store, or own and operate ATM and gaming machines are regulated and must meet certain requirements. From a BSA, safety and soundness, and general know-your-customer standpoint, banks have policies and procedures in place to consider those requirements. Industrial hemp, while new and carrying its own unique requirements, should be no different and should be addressed by policy and procedure.

WBA encourages Wisconsin banks to learn more about hemp, what it is, how it is used, and understand its legal requirements. WBA will continue to provide resources and updates as the industrial hemp industry continues to grow. For further discussion of the hemp industry in Wisconsin and the pilot program’s requirements, join us at the WBA Compliance Forum with sessions running from February 19-21 where we will be joined by a speaker from DATCP. For more information, visit our website at https://www.wisbank.com/.

 

By, Ally Bates

Late last year, President Donald Trump signed into law the long-awaited 2018 Farm Bill, with broad ramifications for agriculture and related industries nationwide. In its more than one thousand pages the bill covers a lot of ground, including crop insurance and farm subsidies, conservation topics and much more. There are also several provisions that affect federal regulation of the cultivation and production of industrial hemp that deserve attention from banks and some of their Ag customers.  

Hemp production in the United States goes back centuries. George Washington grew hemp at Mount Vernon, and the USS Constitution used more than 120,000 pounds of hemp fiber rope in its rigging. Though the Marijuana Tax Act of 1937 raised the cost of production, hemp was used extensively through World War II in uniforms, canvas, and rope. Because of efforts in efficiency and mechanization by International Harvester and the state Department of Agriculture, by the 1950s, Wisconsin was one of the leading producers of industrial hemp, just in time for the introduction of less expensive synthetic fibers that made hemp products uncompetitive. Hemp production dropped rapidly. In 1970, the Controlled Substances Act finished the industry by declaring all cannabis varieties Schedule I controlled substances, including hemp. Growers were required to obtain a rarely granted permit from the Drug Enforcement Administration (DEA) and production trailed off to essentially zero.  

Despite a resurgence of interest in hemp production in the 1990s, there were no significant changes until the 2014 Farm Bill which allowed states to create agricultural pilot programs to grow hemp. The State of Wisconsin did just this in 2017 with a licensing and registration process for an industrial hemp research pilot program through the Department of Agriculture, Trade and Consumer Protection (DATCP). Hundreds of producers registered into the program for 2018 and 2019 and banks could finally consider banking these customers again. The 2014 Farm Bill also created a legal definition of industrial hemp, requiring it to contain 0.3% or less of tetrahydrocannabinol (THC), the psychoactive compound in marijuana.  

The 2018 Farm Bill addresses various issues relating to industrial hemp and lowers the hurdles to legal cultivation under federal law. However, the bill legalizes industrial hemp only subject to significant conditions.  

First, the requirement to maintain 0.3% THC content or less was carried forward. “Hemp” is legally defined as any part of the Cannabis sativa plant containing THC below this threshold. Any product exceeding this threshold is “marijuana” and is still a controlled substance. This replaces previous guidance under the Agricultural Marketing Act of 1946 which specified certain parts of the plant as hemp.

Testing THC concentrations will be an important qualifier for legalized hemp production. However, discussion on how this will be done, who will oversee testing (the US Department of Agriculture, state departments or both), and how these results will be verified and recorded is just beginning. Banks that move forward with industrial hemp customers should look for a careful and deliberative process in measuring THC to ensure they are not inadvertently facilitating the production of a Schedule I drug. 

Second, nothing in the Farm Bill invalidates the DATCP pilot program. Under the bill, states are allowed to become the primary regulators of hemp cultivation. As part of their due diligence, Wisconsin banks should look for participation and annual registration. This is still the right way in this state to become a producer in what will be a heavily regulated industry. The DATCP does not intend to publish a list of participants in the program, though they will confirm for particular customers by email. DATCP is also coordinating THC testing of industrial hemp crops in Wisconsin. More information is available on their website under Programs and Services.

Third, while the Farm Bill provides clarity around non-food hemp products, it doesn’t change the Food and Drug Administration’s (FDA’s) regulation of cannabidiol (CBD) oil. The FDA maintains that, except for some limited pharmaceutical grade production, the use of CBD as an ingredient in food or dietary supplements remains prohibited. Also, while hemp cultivation in a manner consistent with the Farm Bill will produce low-THC CBD, any that exceeds 0.3% THC remains a Schedule I controlled substance. This means that while customers that sell CBD oil have a standard to meet to avoid DEA violations, they might still face challenges from the FDA. Banks should consider these issues when performing due diligence on any customer that sells CBD, though replacement of zero tolerance for THC with 0.3% tolerance can provide some protection against the most serious, drug-related complications.

Finally, the patchwork of state laws around medicinal and recreational use of marijuana has not changed, and high-THC products are still Schedule I controlled substances according to the DEA. Despite the carve-out for hemp provided by the Farm Bill, marijuana remains illegal under state and federal law in Wisconsin. Banking marijuana-related businesses still means following Financial Crimes Enforcement Network (FinCEN) guidance and taking on some compliance risk.

With the passage of the Farm Bill, banks have opportunities to take on industrial hemp customers with more confidence than in the past. As an added benefit, the bill permits hemp researchers (under the DATCP pilot program in Wisconsin) to apply for federal grants and they are eligible for federal crop insurance. Banks may see customers looking to take advantage of hemp production as a new, potentially higher margin crop. However, the road to successfully serving those customers and meeting regulatory requirements is not without complications. In addition to the considerations above, banks that take on these customers should update their BSA policies and procedures to include any enhanced due diligence performed on industrial hemp customers. With careful planning and risk-based monitoring, industrial hemp producers could prove to be some of your best customers.

This article has been written by Shane Bauer, First Vice President – Compliance, BSA and Security Officer with Bankers' Bank in Madison.

By, Lori Kalscheuer