SAN FRANCISCO–If credit unions think there is a lot of haze around banking the marijuana business, the expanding hemp industry isn’t any clearer, according to one expert.
Especially since legal hemp can actually become “hot” and turn into illegal marijuana.
While hemp is critical to the explosion in CBD-related products, it brings with it a host of complex legal and regulatory questions, explained Deirdra O’Gorman, a former senior financial services executive who now leads DX Consulting and Empryreal Logistics, which consults with the hemp industry.
While hemp and marijuana are both varieties of cannabis (differentiated by the level of hallucinogenic THC in the plants), hemp can actually become marijuana under certain conditions.
Hemp can be used in numerous products, including health foods, lotions, body care and even plastics, said O’Gorman, predicting, “It’s going to be prolific in our economy in the coming years.”
The Reason for the Hesitation
CBD oil can typically be extracted from industrial hemp or from marijuana. CBD is one of more than 120 cannabinoids compounds that react with the human body.
“Certain factors can cause a spike in THC, such as the growing environment or an overly long flowering period,” explained O’Gorman. “This is why a lot of financial institutions have been hesitant to move into this space, because they don’t know if their banking hemp or marijuana until it goes through testing.”
Currently a number of hemp pilot programs are underway in the U.S., but the law does not currently allow large-scale manufacturing. O’Gorman noted the 2018 Farm Bill sought to fast-track hemp regulations, but federal agencies said there were numerous issues that needed to be addressed first, and they declined to fast-track anything. Agency rules and regulations have yet to be developed.
What’s Happening Now
The Department of Agriculture, the FDA, the EPA, the Treasury, the U.S. Trade Association, Justice Department and Treasury are all working together to write regulations. Among the issues to be addressed are farm inspections, insurance, interstate regulations, and more.
One senator recently pressed federal banking agencies for their policies on hemp, and as CUToday.info just reported here, the agencies basically punted the question back to other departments within the federal government.
Today there are 633 FIs, including 140 credit unions, that have been filing SARs related to serving hemp or marijuana-related businesses.
Compliance Issues
Compliance issues around Hemp Banking that must be considered, according to O’Gorman:
- Have board members been duly advised of the risks involved, such as how the plants can become “hot?”
- FIs should review their Directors & Officers policies to ensure coverage for providing services to hemp businesses.
- Business ownership. Many of the businesses are owned by or affiliated with MRBs. Is the financial institution prepared to compete the necessary enhanced due-diligence to ensure compliance with FinCEN guidance.
- Lending. Are there permissible, direct financial interests, challenges for UCC and bankruptcy, collateral issues. Can FIs legally take over entity due to default?
- Validation. Can you track the hemp seed’s chain of custody to ensure it is hemp and not marijuana?
- Interstate commerce. With the current confusion, many states have defaulted to the 2014 Farm bill. Therefore, FIs must understand each state’s rules should the business participate in interstate commerce and/or interstate transport of the product.
- Vendors. Will current vendors work with the FI to provide hemp banking?
- Industry. Understand the nuances; issues of privacy/trade secrets; evaporating product (tracking industry); knowing good vs. bad industry vendors/systems.
One Final Piece of Advice
“I think hemp is going to be bigger than the cannabis banking space,” said O’Gorman. “There are more products that can be made from hemp. In 2018, the hemp market was $4.41 billion. At some point there will be a robust loan market, forecast O’Gorman, who cautioned that if a credit union is not experienced in agriculture lending it should not begin with hemp.”