The Agricultural Improvement Act of 2018 (Farm Bill) was signed into law by President Trump December 20, 2018. This bill removed the hemp plant from the Controlled Substance Act (CSA) at the federal level, and opened the door for states with an established hemp pilot program and regulation initiative to begin the growth and sale of hemp. The 2014 Farm Bill, the current Act’s predecessor, had initially removed the industrial hemp growing restriction so long as the crop was grown under a state’s Department of Agriculture regulation pilot program. Since the beginning of 2019, states like Tennessee that joined the 2014 pilot program initiative are allowing any average consumer or business with proper permitting to grow hemp for sale and process derivative hemp products.
These regulation changes regarding the growth of hemp have consequences for financial institutions and their due diligence procedures for potential or current customers, including establishing whether these increasingly popular hemp farms and cannabidiol (CBD) oil retailers are considered marijuana-related businesses (MRBs).
Before delving into the implications of the 2018 Farm Bill on financial institutions, it’s important to clarify the exact definition of hemp, as opposed to marijuana. Hemp is considered legally grown if the concentration of the hallucinogenic part of the plant—delta-9 tetrahydrocannabinol (THC)— is less than 0.3% on a dry-weight basis. Any plant containing a higher percentage of THC is automatically considered marijuana and illegal at the federal level. The 2018 bill expanded the 2014 rule to include all parts of hemp, including anything processed or made from the plant.
Hemp-related businesses can be grouped into one of three classifications: growers, processors, or retailers. Financial institutions must be able to identify which of these three classifications are met in order to adequately perform due diligence and high-risk customer procedures.
Growers are the foundation of all hemp and hemp-derived products, and most documentation obtained for any hemp distribution should be linked back to a properly licensed and registered hemp grower. For example, in Tennessee, a state with a well-established hemp pilot program, all hemp should be sourced from a legitimate hemp grower that can provide evidence of license and registration with the Tennessee Department of Agriculture (TDA). This license should be renewed annually and can be verified through research on the department’s website or by contacting the department’s office.
Processors create the final product, such as building materials or CBD oil, for retailers. Financial institutions should obtain a written certified statement that the hemp or hemp-derivative product is from a licensed and legitimate hemp grower. While there is no current regulation from the Drug Enforcement Administration (DEA) prohibiting the sale of hemp across state lines, it is the financial institution’s responsibility to research the originating state’s rules for growing hemp.
Additionally, the processor needs to provide another certified statement that the final product contains less than 0.3% THC, and that the product complies with the requirements of the 2018 Farm Bill. Depending on the state’s rules, processors are also required to be registered and licensed with the Department of Agriculture, with annual renewal. Tennessee no longer has the requirement to register processors; therefore, other due diligence considerations should be contemplated by the financial institution.
Finally, retailers need to certify the product’s origins and that the marketing of the product doesn’t violate current rules for hemp, as dictated by the U.S. Food and Drug Administration (FDA). Like processors, retailers must provide a written certified statement that the hemp or hemp-derived products are purchased from a legitimate processor or grower, that the products sold contain less than 0.3% THC, and that they comply with the requirements of the 2018 Farm Bill. Marketing of any products, including topical or ingestible CBD oil products, cannot include any statement on the packaging that indicates the product can cure or treat any medical issue. Since retailers have no registration requirements, a financial institution should establish evaluation procedures and potentially categorize these retail customers as high-risk, based on the nature of the retailer and any established relationships. Due diligence procedures could include an on-site or online visit with written recorded results that can address any uncertainty about the legitimacy of the hemp product.
Per the 2018 Farm Bill, any hemp-related customer in a U.S. state where marijuana is considered illegal, whether a grower or a seller, is not considered an MRB. Therefore, these customers do not need Suspicious Activity Reports (SARs) filed against them, unless the customer violates the 2018 Farm Bill. Because hemp and hemp derivatives are legal at the federal level, the plant should be treated similarly to other crops. For any U.S. state where marijuana is considered legal at the state level, caution is still advised for banking with any customer who grows or sells marijuana, as these are MRBs and will require additional due diligence and consistent SAR reporting. For financial institutions electing to conduct business with these types of customers, it will be critical for them to establish well-defined policies and procedures for monitoring the relationship. Items to consider and address within these policies include hemp-related loans and their loan collateral, crop insurance, updating any Customer Identification Program (CIP) procedures when establishing an account, and the determination of which types of hemp customers require an expanded level of due diligence review, if any.
The financial institution is also responsible for completing any additional due diligence procedures with their hemp customers in order to verify the legitimacy of the product or crop and to ensure compliance with the 2018 Farm Bill. Overall, the hemp industry is still gaining traction as it grows into a well-established and regulated business opportunity. Current rules and regulations are still in creation, and financial institutions choosing to do business with hemp-related customers should take the necessary steps to monitor these changes and to ensure they are in compliance with the 2018 Farm Bill.
For more information about due diligence under the 2018 Farm Bill, or assistance with any matter involving audit and assurance, accounting, or business advisory, contact one of our PYA executives below at (800) 270-9629.
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