Since the passing of the 2018 Farm Bill, sales of cannabidiol (CBD) products have been sky high. The declassification of hemp as a controlled substance seemed to give the green light to CBD producers and retailers, but the exact legal status of CBD actually remains murky. Even so, public demand is soaring, and the market is expected to be worth $20 billion by 2024.
As a result, financial institutions will have new connections to unravel to determine whether customers, new or existing, have links to CBD businesses and, furthermore, do they keep those relationships. For compliance officers, one of the key questions to resolve when evaluating risk and opportunity is the following: “Is this specific CBD client too risky?”
In the second “Cheat Sheets for Compliance Officers,” we look at the ABCs of CBD to help answer questions around CBD riskiness, whether you are looking to bank CBD customers or avoid them all together.
All About CBD - What Is It?
It is vital to differentiate between the different forms of cannabis within your compliance program. The name “cannabis” itself is the overarching term for the plant that includes both “marijuana” and “hemp.” Cannabidiol (“CBD”) is one of hundreds of compounds found in “cannabis.” Since CBD comes from “cannabis,” it can be extracted from either hemp or marijuana. CBD is non-psychoactive and generally does not cause a “high,” but when CBD is extracted, it may contain trace amounts of THC (tetrahydrocannabinol). For more details on the different types of cannabis, see our Cannabis Cheat Sheet.
But What About CBD “Riskiness”
On December 20, 2018, the Agriculture Improvement Act (also known as the 2018 Farm Bill) was passed, changing the definition of “marijuana” to exclude “hemp” and hemp-derived products. While the major federal legal restriction on the cultivation and production of hemp was removed, numerous stringent federal and state laws and regulations were created and are still being finalized.
Furthermore, the 2018 Bill explicitly reiterated the Food & Drug Administration’s authority to regulate the use of cannabis and cannabis-derived compounds, including CBD, in medicine, food and beverages, cosmetics and dietary supplements. The FDA has repeatedly emphasized that it is currently illegal to market CBD by adding it to a food or beverage, labeling it as a dietary supplement or selling as an unauthorized medicine. The FDA has sent out numerous warnings to businesses making unauthorized medical claims, most recently relating to COVID. There is only one FDA-approved form of CBD medicine, Epidolex. Although the FDA recently de-scheduled Epidolex, making it easier to access for children suffering from epilepsy, that move did not “legalize,” deregulate or legitimize non-FDA approved CBD products in any way.
So, even if the hemp is grown legally and CBD is “legal” in a given state, the CBD product may still run afoul of federal laws and regulations. The FDA is considering changing its approach to CDB regulations, but current these laws and regulations still stand.
Can You Be Compliant? How to Assess Compliance Risk
Despite the status of CBD falling into a legal grey area, CBD and CBD products have proliferated throughout the USA and, generally, the FDA has done little to stop it. While numerous politicians are in support of hemp/CBD and numerous states have legalized its production, a case-by-case analysis may be necessary to ensure compliance with both state and federal laws and regulations.
Compliance Officers tasked with analyzing their institution’s risk appetite for CBD in general, or for a potential or existing CBD-related client, should aim to answer the following questions:
1. Is the CBD derived from a legal source?
If CBD is derived from hemp, the hemp itself must be compliant with the 2014/2018 Farm Bill and state laws. If the hemp is not grown in compliance with state and federal hemp laws, the hemp may be illegal and, therefore, so is the CBD. Furthermore, all marijuana-derived CBD remains federally illegal, because marijuana remains illegal (the only exception being Epidolex).
2. Does the CBD contain more than 0.3% THC?
CBD products that contain more than 0.3% THC may be federally illegal even if derived from legal hemp. July 2020 FDA guidance explicitly says:
"We note that intermediates or drug products that contain greater than 0.3 percent delta-9 THC by dry weight, even if the starting materials meet the definition of hemp, may no longer meet the definition of hemp and may be considered a Schedule I controlled substance. In short, the guidance acknowledges that the legal definition of hemp (having less than 0.3% THC) may not be helpful once the cannabinoid compounds are extracted from the hemp plant and processed into intermediates and finished products.”
3. Does its marketing and sales activity comply with all other relevant federal and state laws?
Firstly, is the CBD marketed and sold for use in or as a drug, food, drink or nutritional supplement? If the answer to this is yes, the CBD may be non-compliant with the Federal Food, Drug and Cosmetic Act, and current FDA regulations even if the CBD is otherwise “legal” in a particular state. Similar to marijuana, state-legal CBD products may still run afoul of federal laws and regulations.
Secondly, does the state where the CBD is being sold also have laws prohibiting its production or sale? Even “legalized” marijuana states have different laws, rules and regulations that regulate and/or restrict hemp-derived CBD, so a full understanding of state-specific laws, rules and regulations would be required to assess the legality of the product in a given state. Cannabis law firm Harris Bricken recently wrote a post The Laws and Regulations on Hemp CBD in All 50 States that could be useful for this analysis.
For further support of your CBD decision-making process, download our CBD Consideration Tree, a flowchart walking through key compliance questions, or contact us for more information on how to manage your cannabis-related risk.
The information provided herein presents general information and should not be relied on as legal advice. If you have specific questions regarding a particular fact situation, please consult with competent legal counsel about the facts and laws that apply.