One of the coolest things we've done here at Harris Bricken was work with the National Credit Union Association on its June 2020 guidance for servicing hemp-related businesses. Back when we first started working with small, Northwest credit unions in 2014 and 2015 (on the THC banking side) we never imagined being hired one day by the federal government itself on cannabis-related matters. Then, the 2018 Farm Bill came and we saw a sudden increase in credit unions looking at the hemp banking space. Service was slow to start, but everyone had questions!
This post covers a few important considerations we typically discuss with credit unions looking to service the hemp industry. This is not an exhaustive list of questions and recommendations, like the one we work though with clients; instead, it identifies five, high-level considerations for any credit union currently looking at the space.
What kinds of businesses are you willing to bank?
The hemp industry exists on a spectrum, from businesses that sell seeds to farmers all the way through retail sellers of hemp and hemp-CBD products. The supply chain is being built as we speak, and new products (and even new markets) continue to surface. Generally speaking, it may be "safer" for a credit union to work with some types of hemp industry businesses than others. For example, a hemp farm that is producing crops via state licensure under a USDA approved plan (or under the 2014 Farm Bill) may be safer to work with than a business focused on sale of CBD comestible products, given the Food and Drugs Administration (FDA) position on that issue. Similarly, seed companies may feel safe, while extractors of Delta-8 THC may feel risky. Each business category comes with different considerations.
Is the hemp going anywhere? And where?
Some states, like Oregon, have local export laws related to hemp that even many industry players do not seem to understand. Or they may have specific rules even for selling locally: i.e., into the Oregon Liquor Control Commission pipeline versus the world at large. Other states, especially in the middle of the country, can be hazardous for shipments of even legitimate hemp biomass. International import and export are another matter entirely. Depending on how the hemp company interacts with transport, if at all, is an important consideration for any bank or credit union.
Are you up for expansive due diligence?
I have always said that it would be easier to launder money in the hemp ecosystem than with state-licensed marijuana. Like banks, credit unions obviously must comply with Bank Secrecy Act/Anti-Money Laundering Requirements. Those regulations impact diligence and ongoing monitoring/KYC protocols, but in the hemp world there are an additional raft of questions and monitoring obligations that a credit union should undertake on an initial and ongoing basis. These requests may include everything from copies of business financing documents, to state-level permits and licenses, to product disposal protocols. We work with credit unions to build out due diligence checklists on a state-by-state basis, and we always advise them that their costs per account are going to be higher in this industry.
Are you aware of key industry litigation?
Federal policy on hemp is still unkempt, and aspects of the 2018 Farm Bill and its implementation are currently being litigated by industry and government. For example, the Drug Enforcement Administration (DEA) recently promulgated an Interim Final Rule which provides that in-process hemp is a schedule I controlled substance (like marijuana or LSD or fentanyl) at "any point" in which the hemp's THC concentration exceeds 0.3% on a dry weight basis (see our coverage on that here, here, here, here and here). It's a bad rule, and it means that many hemp industry processors—including those with current credit union accounts—are probably in possession of unlawful controlled substances from time to time, at least in DEA's view. Some credit unions, their directors and members will be uncomfortable with this dynamic. In any event, credit unions in this space should monitor lawsuits like this one closely.
Are you ready to have fun?
The hemp industry is changing and changing fast. The supply chain is a work in progress. Guidance for credit unions continues to roll out (see here for last months' NAFCU guidance, for example) and new state and federal proposals are myriad (see here for our coverage of Rand Paul's new 1% THC bill). Because things are moving so quickly, our credit union clients' member service agreements tend have non-standard termination provisions and even indemnities, and we tend to check in frequently on key issues affecting our clients in this space.
The hemp space may seem intimidating for credit unions. Despite everything I've written above, it doesn't have to be so. We have clients doing well in this space. The key is gaining familiarity with the industry and its features, then taking a reasonable approach. Ultimately, there is tremendous upside in banking what already has become a $5 billion U.S. industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
