On Monday, federal regulators offered guidance on banking services for hemp businesses.
In a move that could signal a new era for the resurgence of hemp in the United States, the National Credit Union Association announced on August 19 that it was issuing guidance to its member institutions on providing banking services to businesses in the hemp industry. The NCUA, an independent agency of the federal government created by Congress, regulates credit unions and administers the National Credit Union Share Insurance Fund, which insures the deposits of account holders in all federal credit unions and most state-chartered credit unions.
NCUA Chairman Rodney E. Hood said in a press release from the agency that credit unions have a role in the growth of hemp, which was legalized nationwide with the passage of the 2018 Farm Bill in December.
“Lawful hemp businesses provide exciting new opportunities for rural communities,” Hood said. “I believe today’s interim guidance keeps with the mission of the nation’s cooperative credit system to serve people who have been overlooked and underserved.”
Lack of Financial Services Hampers Industry
Prior to the 2018 Farm Bill, hemp’s status as a Schedule I controlled substance and federal anti-money laundering (AML) laws combined to make providing banking services to hemp businesses a risky and burdensome undertaking.
Many banks and credit unions avoided the industry altogether, closing the accounts of businesses that were discovered to be working with hemp and CBD and leaving them without a way to process credit card sales and other financial transactions. Derek Du Chesne, the chief growth officer at hemp and CBD producer EcoGen Laboratories, told HEMP via email that the situation has hampered the growth of the nascent industry.
“Since the passage of the 2014 Farm Bill, the hemp industry has boomed initially with a handful of states’ pilot programs,” said Du Chesne. “As any business is scaling, it’s crucial to be able to utilize basic financial services that are readily available to every other industry. With the lack of federal support and clear definitions of what banks can/cannot do within the hemp industry, it’s left hundreds if not thousands of businesses resorting to unrealistic [lending] terms.”
The guidance from the NCUA notes that credit unions wishing to provide services to hemp companies must maintain due diligence that includes incorporating new practices into their compliance programs for the Banking Secrecy Act (BSA) and anti-money laundering regulations. Recommendations from the agency include:
- Credit unions need to maintain appropriate due diligence procedures for hemp-related accounts and comply with BSA and AML requirements to file Suspicious Activity Reports (SARs) for any activity that appears to involve potential money laundering or illegal or suspicious activity. It is the NCUA’s understanding that SARs are not required to be filed for the activity of hemp-related businesses operating lawfully, provided the activity is not unusual for that business. Credit unions need to remain alert to any indication an account owner is involved in illicit activity or engaging in activity that is unusual for the business.
- If a credit union serves hemp-related businesses lawfully operating under the 2014 Farm Bill pilot provisions, it is essential the credit union knows the state’s laws, regulations, and agreements under which each member that is a hemp-related business operates. For example, a credit union needs to know how to verify the member is part of the pilot program. Credit unions also need to know how to adapt their ongoing due diligence and reporting approaches to any risks specific to participants in the pilot program.
- When deciding whether to serve hemp-related businesses that may already be able to operate lawfully–those not dependent on the forthcoming USDA regulations and guidelines for hemp production–the credit union needs to first be familiar with any other federal and state laws and regulations that prohibit, restrict, or otherwise govern these businesses and their activity. For example, a credit union needs to know if the business and the product(s) is lawful under federal and state law, and any relevant restrictions or requirements under which the business must operate.
“Many credit unions have a long and successful history of providing services to the agriculture sector,” Hood added. “My expectation is that credit unions will thoughtfully consider whether they are able to safely and properly serve lawfully operating hemp-related businesses within their fields of membership.”
New Opportunity for Rural Communities
Farmers in Kentucky, once a primary source of American hemp before de facto prohibition in 1937, are eager to return the state to its former glory. Many family farms that have been dependent on tobacco need a new crop as the popularity of cigarette smoking wanes in the Western world and production shifts to Asia. A return of Kentucky’s hemp fields could help farmers be more profitable and fuel investment in the infrastructure needed to process the agricultural commodity.
Debbie Painter, the president of the Kentucky Credit Union League, said the state’s credit unions are eager to support the economic opportunity.
“Our member credit unions proudly support Kentucky’s agriculture sector, and the NCUA’s regulatory guidance can allow us to take part in the extraordinary growth of hemp in the Commonwealth,” Painter said in a press release.
The guidance provided by the NCUA could also serve as a template for providing banking services to companies operating in state-legal marijuana markets. Thomas Gavin, the CEO of CannaTrac, a company that offers banking solutions to the cannabis industry, believes progress for hemp producers could translate into support for bills pending in Congress to protect financial institutions that do business with legal marijuana companies.
“By allowing credit unions to open up their doors to hemp and CBD businesses,” said Gavin, “the federal government is expediting the industry’s path to the overall goal, acceptance for the entire legal cannabis industry.”