The text of this article was originally published in the Argent Communications Group’s Cannabis Law and Regulation Reporter. It is reprinted here with permission.

Hemp is Legal, Why is Banking Still Hard?


In December 2019, the federal Agriculture Improvement Act of 2018, also known as the 2018 Farm Bill, was passed into law by Congress. It was widely touted as legalizing hemp, but hemp businesses are still having trouble finding bank accounts. Did banks not read the Farm Bill, or is there something else going on? 

Is Hemp Legal? 

The first question a bank needs to understand is if hemp is actually legal. The 2018 Farm Bill changed the definition of marijuana in the Federal Controlled Substances Act to exclude Cannabis sativa L. with delta-9 tetrahydrocannabinols (THC) levels of less than 0.3 percent. On a federal level, hemp is now legal. Does this mean that hemp is also legal in all states? Most states adopted their own version of the Controlled Substances Act (CSA), but they did it in different ways. For example, when Ohio enacted their version of the CSA, they copied the federal definition of “marihuana” and wrote that into their law. Despite the change in federal law, Ohio law wasn’t changed, so hemp is still classified as marijuana and is illegal. Oregon on the other hand, when they enacted their Controlled Substances Act, rather than copy the federal definitions, they referenced the specific federal statute. As a result, when the federal definition was changed, Oregon automatically adopted the new definition. 

Despite the passage of the Farm Bill, each state’s laws are written differently and must be evaluated on an individual basis. 

Are Hemp Businesses Legal? 

Just because hemp is legal in a state, that doesn’t mean that hemp businesses are legal to operate. The 2018 Farm Bill requires states to submit a plan on how the state will regulate the production of hemp. The plan must include collecting land information, testing procedures, disposal procedures, and enforcement procedures. Once received by the U.S. Department of Agriculture (USDA), they have 60 days to approve or reject the plan. If a state doesn’t submit a plan, a business can still operate, but they will be subject to oversite by the USDA directly. 

The USDA was given authority to draft regulations consistent with the Farm Bill and also regulations to evaluate state plans. These regulations have yet to be drafted, according to the USDA Secretary, Sonny Perdue, he is hoping the regulations will be ready for the 2020 growing season. Until those regulations are available, there will be no legal hemp businesses under 2018 Farm Bill. 

Fortunately, that is not the end of the story. The 2014 Farm Bill allowed state departments of agriculture or state universities to establish pilot programs for research of industrial hemp. Many states, including Oregon and Kentucky, established robust hemp pilot programs and are producing significant quantities of industrial hemp. The 2018 Farm Bill recognizes the validity of these programs. However, the 2014 Farm Bill industrial hemp pilot program is repealed effective December 20, 2019. This could leave many businesses in legal limbo until the USDA issues its hemp regulations. 

Compliance for Banks 

Banks are required to know their customers and have processes in place to ensure that those customers are not engaged in illegal activities. Because hemp is so closely related to marijuana, a scheduled 1 controlled substance, hemp businesses have a higher potential of engaging in illegal activities. Based on this risk alone, some banks will choose not to be part of this industry. For banks that are considering serving the hemp industry, they must develop industry expertise in order to identify potential risks and develop a compliance program to address those risks. This is a new industry so a bank is unlikely to be able to hire an expert, they will need to spend the time to develop their own expertise.

A typical compliance program would include background checks of the business owners and key employees to ensure there is no history or affiliation with criminal activity. The bank will also want to verify that a business has a valid hemp license and operates within that license. This is a difficult task because this information is only available from the USDA, and they don’t typically have a process to share that type of information. The bank will also need to verify test results to ensure the customer is growing or processing hemp and not cannabis. Finally, if a test result is over 0.3 percent THC the bank must ensure that the product is properly disposed of. Banks have never before been required to conduct this type of monitoring, it is a challenge for them to put the checks and balances in place to ensure they can adequately monitor these results and disposal. Despite the cost of program development and compliance, there is significant pressure for the cost of these accounts to be low. Most cannabis businesses understand that accounts are expensive because cannabis remains federally illegal. However, hemp customers feel that since hemp is legal their account should cost the same as any other legal business.

Hemp Banking Might Not Look Any Different than Cannabis Banking

Because of all of these factors, observers suggest that hemp banking will be similar to cannabis banking. There will be a small number of community banks and credit unions in each state that will specialize in hemp banking. This will allow these institutions to have a significant number of accounts to gain an economy of scale for an efficient program. These accounts will be more expensive than a typical business account, but the institutions will keep the cost as low as possible to discourage new financial institutions from entering the market. Large national or regional financial institutions are not likely to participate in the industry. Each state will have its own unique features to its laws, a multi-state institution will need to have a compliance program to address these features, so the larger the program the more complex it becomes. From the perspective of a large financial institution, this is a small industry and will not generate the fee income necessary to justify the risk and expense.

Conclusion and Implications

Ultimately, hemp banking will remain difficult until mid to late 2020. Banks will want the certainty of the USDA regulations, and then the time to develop a compliance program.

This article does not address medical hemp programs or CBD/hemp oil derived from cannabis. These products may be available in some states but are done so through a cannabis licensing program and banks will treat them as cannabis.
(Alan Hanson, Mia Getlin)