A little snip from our Q2 INSIGHT:
There continues to be a view within the banking industry that hemp and CBD businesses present lower risk than direct marijuana businesses. In terms of legality, hemp as defined and proven under the 2018 Farm Bill, is a legal agricultural commodity.
Hemp-derived CBD is not considered a controlled substance but remains a sore point with the FDA. To date, the FDA has not approved a marketing application for cannabis for the treatment of any disease or condition. The FDA has, however, approved one cannabis-derived and three cannabis-related drug products. These products are only available with a prescription from a licensed healthcare provider. Under the Food, Drug and Cosmetic (FD&C) Act, any product intended to have a therapeutic or medical use, and any product other than a food that is intended to affect the structure or function of the body of humans or animals, is a drug. The legality of selling CBD products depends, among other things, on the intended use of the product and how it is labeled and marketed. Even if a CBD product meets the definition of hemp, it must still comply with all other applicable laws including the FD&C Act. In other words, CBD cannot be sold as a dietary supplement, infused into food or pet food, or beverages. Under the FD&C Act, cosmetic products and ingredients are not subject to premarket approval by the FDA except for most color additives. Yet, we continue to see an increase in online and brick-and-mortar CBD retailers. From a banking perspective, what do you need to be concerned about? The first and most critical element is understanding legality of CBD within your state. There are half a dozen states that have implemented CBD licensing requirements of varying degrees of coverage. The FDA has issued letters of warning to several companies whose labeling or marketing practices qualify as “triggering terms” in that they purport to diagnose, treat, cure, or prevent disease or other ailments. Due diligence must prove legality at the state level, conformance with THC thresholds and avoidance of triggering terms.
Despite due diligence requirements to establish the burden of proof of legality for hemp and CBD, we have seen account opening and monitoring fees for such entities all but disappear. How do you then manage your risk of banking such entities without the corresponding risk pricing? How do you ensure that your anti-money laundering and surveillance monitoring systems are effectively helping you to identify and manage risk? Hemp and CBD entities are largely treated as standard customers within such systems, identified through account opening workflows and whose behaviors are subject to the parameters set within the system. However, how do you ensure that the business activities of hemp and CBD customers are commensurate with the entity type, with products grown, processed, distributed, or sold? How do you ensure that there are no THC funds being commingled with seemingly legal deposits? These are key questions you to address when determining whether to offer depository services or loans to such entities, and in evaluating software providers that can help you effectively manage this risk.
Fortunately, the regulatory agencies have been slowly but surely setting standards for evaluation and risk management. The Federal bank regulatory agencies clarified requirements for providing financial services to hemp-related businesses in December 2019. In April 2020, the Conference of State Bank Supervisors published a Cannabis Job Aid that is inclusive of hemp, marijuana, state-by-state cannabis policy, and Indian Tribe hemp status. The job aids are useful tools in understanding how the examiners define and view each entity, provides guidance to examiners for the evaluation process and provides specific policy citations for reference. You can access the job aid at www.csbs.org/job-aids
and use its contents as a self-evaluation checklist in advance of your next examination.
As recent as June, the NCUA issued additional guidance addressing the servicing of hemp-related businesses. Interestingly enough, the guidance indicates that NCUA examiners will be collecting data through the examination process in 2020 regarding the types of services credit unions are providing to hemp-related businesses. The guidance specifically notes that, “this data collection is intended only to help the agency better understand how it can assist credit unions serving hemp-related businesses.”
These pieces of guidance are moving the industry forward in understanding the risks and opportunities of offering financial services to cannabis operators. Each piece of guidance, existing and yet to come, will help shape the standards for safe and stable banking solutions for the cannabis industry and industries that will follow its path.