The signing into law of the Agriculture Improvement Act of 2018—commonly referred to as the 2018 Farm Bill—federally legalized hemp and hemp derived products while providing the framework for the United States Department of Agriculture (USDA) to implement a joint federal and state regime for the regulation of commercial production of hemp. On Oct. 29, 2019, the USDA announced that they were formalizing the regulatory regime by publishing the interim final rule in the Federal Register. 1,2
With the publication of the interim final rule, it is important to keep abreast of potential guidance issued by your relevant regulators. Before the announcement of the interim final rule, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), nor the Federal Credit Administration (FCA) had issued any specific guidance on hemp businesses. The National Credit Union Administration released interim guidance on Aug. 19, 2019, which states that the guidance will be revised and updated once the USDA finalizes their regulations and guidelines.3 Those agencies that have not yet released guidance related to hemp businesses may follow suit now that the regulatory regime is being formalized.
Enhanced due diligence considerations for hemp businesses:
The USDA’s framework for the commercial production of hemp provides two pathways for the licensing of hemp producers. The first pathway involves programs that are developed by State Departments of Agricultures, agencies representing nonstate territories, and Indian tribal governments that will be subject to approval by the USDA. The second pathway consists of licensing by a USDA hemp program and will be available to those producers who are in localities that do not have or intend to have a plan for a hemp program. Institutions that provide services to hemp producers should obtain evidence of their customer’s compliance with licensing. Institutions that maintain customers that are licensed under the USDA program must be cognizant that if the relevant jurisdiction for their customer’s locality decides to implement a hemp program, the license issued by the USDA will be invalid upon the jurisdiction issuing licenses under their own program.
- A major crux of the licensing requirements for hemp producers consists of THC, the active ingredient in marijuana, testing to ensure that the levels are under 0.03%. The 0.03% threshold also applies to hemp-derived products; however, there is currently no federal licensing requirement on hemp-derived products that provides an easy method of due diligence on this requirement. Institutions that provide services to entities involved in hemp-derived products should consider requiring those entities to provide independent testing of the THC in their products. In addition to the evidence of THC testing, institutions should consider obtaining information on the suppliers of the hemp utilized to produce the products in order to verify that the hemp is being derived from a lawful and licensed entity.
- One further risk factor that institutions should take into account is the potential for the comingling of funds with marijuana-related businesses that may have a relationship with an entity involved in the hemp industry. Institutions should consider performing enhanced due diligence on the entity and other parties to the entity such as beneficial owners for potential ties to marijuana-related businesses. If the institution’s customer has ties with marijuana-related businesses, controls should be put in place to mitigate the potential risk for marijuana-related business activity to be conducted through accounts maintained by the hemp business.