December 13, 2022
Estimated reading time: 4 minutes
Since the federal government legalized hemp farming in 2018, the industry has grown significantly in the US. With new rights, there was also new guidance on best practices to comply with and challenges for the regulators.
What is Hemp Banking?
Hemp Banking describes financial services in one specific sector: the hemp industry.
It’s important to make the clarification between hemp and marijuana since there is a common misconception that they are the same, even though they are not.
Hemp refers to a strain called Cannabis Sativa L and contains 0.3% or less of tetrahydrocannabinol (THC). A limited amount of THC, the psychoactive substance in cannabis, means that hemp or hemp-derived cannabidiol (CBD) products do not facilitate a reaction that’s typically associated with being ‘high.’
Marijuana-related business activity remains illegal while hemp or cannabis-related businesses are not.
Hemp farming became legal in the eyes of Federal Law after the 2018 Farm Bill was passed. Immediately, hemp was removed from the DEA’s list of controlled substances. This also made it legal for banks and financial institutions to service hemp businesses, including providing open banking services.
However, legalization didn’t automatically propel the state of hemp banking to success. With the opportunity of a new industry comes new risks, and uncertainty leads to higher risks.
This delay in engagement directly hinders the priority of any financial institution. With one of the highest customer loyalty rates across any industry, with the average business sticking with their bank for 14 years.
It means that banks must move quickly to build the infrastructure for taking on hemp business accounts. This way, banks can truly capitalize on the initial influx of newly-available customers in the hemp market.
Unfortunately, the lack of specific guidance around hemp banking or cannabis banking has muddied the waters around compliance. It has taken some time for regulators to collate the right information and regulatory guidance for the banks.
While the Federal Reserve and the Office of the Comptroller of the Currency (OCC) were in discussions, nothing was officially announced until October 2019.
Only the National Credit Union Association (NCUA) released an official announcement immediately, stating that federally-insured credit unions would be allowed to provide their financial services to customers within the industry.
Federal Reserve: bank account applications and approvals
In October 2019, the Federal Reserve released its report on how to provide financial services to businesses engaged in hemp-related activities. The most-pressing consideration was deemed to be anti-money laundering (AML) since the concern with hemp activities is that they are used as a front for illegal marijuana operations. The Federal Reserve ensured that banks apply the AML framework to all hemp organizations.
USDA: approval of new hemp operations
With the Federal legalization of hemp farms, each state would have to submit their own proposal for hemp operations within the jurisdiction. Since state Law differs, plans must be submitted by individual states to ensure that nothing contradicts the current legislation.
Moreover, it’s the USDA’s role to accept cannabis business plans from Tribes and Territories, too. In all cases, plans are submitted and reviewed within 60 days, with the USDA issuing an approval or a Hemp license for successful applications.
All 52 states have been approved, along with over 60 tribes across America.
FinCEN: suspicious activity reports
More recently in June 2020, the Financial Crimes Enforcement Network (FinCEN) was prompted to release further guidance around Suspicious Activity Reports (SARs) in hemp banking.
Due to the nature of the industry, there is a risk of money laundering if hemp farming is used to front other businesses of an illegal nature, such as marijuana.
For that reason, banks began to fill out SARs every time a hemp business applied for an account, or performed a financial activity. FinCen’s new guidance shows that this is not at all necessary. A SAR should only be completed when a customer appears to be using their Hemp business as a front for other activities or is unable to produce its license.
Bank Secrecy Act: risk-management controls
Finally, the Bank Secrecy Act is a longstanding piece of legislation and requires compliance from banks even as they deal with new industries, such as hemp-related businesses.
Banks must maintain a minimum level of security and monitor accounts using the Know Your Customer framework (KYC). Due diligence requirements under the Bank Secrecy Act include the likes of typical identification paperwork and licensing, but also crop inspection reports and correspondence with the State.
This guidance is designed to enable banks to build relationships with hemp farmers and reduce the risks of doing so.
Who must comply?
Banks and credit unions are the entities responsible for complying with hemp banking legislation. Of course, the hemp farmers themselves must provide verifiable documentation through identity paperwork in order to get access to banking services.
Since hemp is a newly-legal industry, regulations provide guidance for industry professionals and banking institutions. Compliance can also help provide a positive platform for new entrepreneurs and stay competitive in this market.
But we don’t expect it to stop here. With the dribs and drabs of regulation currently available, we do expect there to be further clear guidance to help firms when dealing with hemp businesses.
Keep ahead of emerging hemp regulations and guidance by speaking to CUBE.