Financial services for a growing hemp industry
the Agricultural Improvement Act 2018 (“Farm Bill”) came into effect over two years ago, decriminalizing hemp and its derivatives and opening the door for American farmers, manufacturers and retailers to create and explore new commercial markets for the crop and its products.
Since then, the cannabinoid market has exploded, including cannabidiol or “CBD” products. Other sectors of the industry are also seeing a new wave of growth and development in their ranks, including new market opportunities and commercial traction for food, fiber and industrial uses in culture.
Like any other industry, hemp businesses need traditional banking and financial services to continue to be successful. But getting reliable deposit account services, business loans, and merchant services has proven to be a challenge for the industry. Many banks and credit unions have pulled out of the market due to the difficulties, expense, and perceived risk when dealing with hemp participants. But some financial institutions are actively seeking to fill this banking void in the market, including West Bank and trust.
Bank hemp is legal
Banks and credit unions are allowed to legally bank hemp companies. Publication of the Federal Reserve, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, Office of the Comptroller of the Currency, and Conference of State Banking Supervisors advice in December 2019, and again in June 2020, to clarify the issue for banks. The National Credit Union Administration has also issued advice in June 2020, affirming the ability of credit unions to serve the industry. The bottom line is that hemp and hemp products are legal, and banks are allowed to do business with companies that operate within the law.
Banks and credit unions must monitor and comply with a host of regulatory obligations under state and federal laws, including obligations arising from regulatory requirements of bank secrecy and anti-money laundering law. ‘silver (BSA / AML). And, for these hemp-related business customers, banks and credit unions must conduct and monitor additional levels of due diligence and ongoing compliance programs. These include, but are not limited to:
Obtain basic identifying information about hemp businesses through the application of risk-based ‘know your customer’ and customer due diligence programs;
Obtain and verify information on the beneficial owners of clients;
Establish risk-based procedures for ongoing customer due diligence; and
Obtain the licenses, authorizations and consents issued by the client’s government, if applicable, for the client’s business or operations.
Ultimately, it is the responsibility of the bank or credit union to research and obtain sufficient information to assess the level of risk posed by each customer, their business and their products, to develop an appropriate risk profile on a client by client. client, and to perform ongoing monitoring to identify and report suspicious transactions. Although Suspicious Activity Reports (SARs) are not required to be filed on customers solely because they are engaged in the growth or cultivation of hemp, or the production or sale of hemp products , they may still be needed when suspicious activity is observed for a customer. .
Laws and regulations evolve
Laws and regulations relating to hemp and hemp-based products are continually changing at the national and federal levels. The USDA has published its Final rule for domestic hemp production on January 15, 2021. Many state governments have opted for USDA approval state level hemp production plans within their borders. Some states continue to implement their pilot hemp production programs under licenses granted by the 2014 farm bill. A patchwork of state-level laws, rules and regulations has arisen across the country for the mining, processing, manufacturing, storage, packaging, distribution and retail sectors. detail of the hemp industry. Laws are not consistent from state to state.
Finding good partners is essential
The patchwork of state laws on hemp and hemp-based products, and the ever-changing legal and regulatory frameworks within the industry, require banks and credit unions to have strong partners when entering the market. the market. It is essential to work with a competent legal advisor both on banking (or credit union) legal and regulatory matters and on hemp-specific legal and regulatory matters. External vendors can greatly assist an institution with its client onboarding and initial due diligence efforts, but identifying the right partners and platforms for those efforts is essential. Not all hemp is created equal. And leveraging the knowledge and experience of your advisors and suppliers can dramatically reduce an institution’s regulatory risk, legal risk, reputational risk, as well as the overall costs and headaches of administration. compliance plans for hemp customers.
The green lining
With careful record keeping and good risk management, banks and credit unions can increase their deposits, loans, and merchant services (if available) by taking hemp-related businesses as new customers. It takes time and intentional effort to build a comprehensive due diligence and compliance platform. But, as the laws and regulations surrounding hemp (and cannabis, in general) continue to change and expand, the number of high-quality hemp customers with banking needs will continue to grow.
© 2021 Ward and Smith, PA. All rights reserved.Review of national legislation, volume XI, number 118