Cannabis-related banking continues to operate in a legal and regulatory gray area. Conflicting state and federal laws muddy the path to compliance, and misinformation about the industry makes it difficult to separate myths from fact.
Under the Marihuana Tax Act of 1937 all forms of “cannabis” were illegal. It was further strengthened by the Controlled Substances Act of 1970. However, more recently, numerous states have legalized "marijuana" and the 2018 Farm Bill more broadly legalized "hemp" and hemp-derived products, such as cannabidiol (aka "CBD").
With a large and growing number of federal, state and local "cannabis" laws, rules and regulations, the terminology can become overwhelcoming.
For example, take the definition of "cannabis" in the recent The Heroes Act:
The term ‘cannabis’ has the meaning given the term ‘marihuana’ in section 102 of the Controlled Substances Act (21 U.S.C. 802)...the Agriculture Improvement Act of 2018 (Public Law 115–334) legalized hemp by removing it from the definition of ‘‘marihuana’’
under the Controlled Substances Act.
Note that the definition of "marihuana" in the Controlled Substances Act means:
all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.
(B) The term "marihuana" does not include—
(i) hemp, as defined in section 1639o of title 7
(ii) the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.
Amid these evolving regulations, one thing is certain: financial institutions must be confident in their ability to understand, identify, and assess "cannabis"-related risk, whether they intend to serve cannabis-related businesses (CRBs) or avoid them altogether. To do so requires a written policy that clearly defines and differentiates between the various forms of cannabis: marijuana, hemp, and CBD.
We review each of these here to help compliance officers understand the differences between each term and how those differences might inform their institutions' policies and procedures.
Cannabis: The Overarching Term
“Cannabis” is a plant that contains hundreds of chemical compounds, including tetrahydrocannabinol (THC) and cannabidiol (CBD). As such, "cannabis" is the general term that encompasses marijuana, hemp, and CBD.
Marijuana: Psychoactive Cannabis
Marijuana is the psychoactive cannabis variety with THC content greater than 0.3% on a dry weight basis. As defined by the DEA, marijuana (aka marihuana) includes: “all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin.”
Marijuana remains a Schedule I drug under the Controlled Substances Act. As explained in the DEA Resource Guide, “it is the U.S. Food and Drug Administration that has the federal authority to approve drugs for medicinal use in the U.S. To date, the FDA has not approved a marketing application for any marijuana product for any clinical indication.” Without such approval, marijuana will remain a Schedule I controlled substance under federal law.
As more states have “legalized” medical and/or adult recreational usage, the magnitude of the conflict between federal and state laws has increased. When banks accept proceeds derived from the cultivation, production, or sale of marijuana and/or process marijuana-related transactions, they increase risk to anti-money laundering regulations. Yet marijuana businesses and states want access to the federal banking system and its protections. To reconcile Bank Secrecy Act (BSA) compliance expectations with the federal-state law conflict, FinCEN issued guidance for financial institutions working with marijuana-related businesses.
Updates to federal laws may be nearing a tipping point, though, to changing public and political attitudes and the revenue marijuana-related taxes provide to states. Until then, the FinCEN guidance remains the standard for compliance in banking marijuana-related businesses.
Hemp: Non-Psychoactive Cannabis
Hemp is a non-psychoactive cannabis variety with thousands of industrial uses. The Agriculture Improvement Act (2018 Farm Bill), which was signed into law on December 20, 2018, changed the definition of marijuana to exclude “hemp,” the plant material that contains 0.3 percent or less THC on a dry weight basis.
The Farm Bill did remove many restrictions on hemp-derived products, but there remains significant state and federal influence over the cultivation and production of hemp with stringent laws and regulations. For example, farmers that want to grow hemp must obtain a license through their state or through the USDA. Each state must create its own hemp program, then submit to the USDA for review and approval. Full implementation is likely to take years.
Until then, farmers need to comply with the 2014 Farm Bill, which allows for pilot research hemp programs. Forty-two states currently have pilot hemp programs, which account for all current USA hemp production. Finally, certain hemp-derived CBD products, including human foods and dietary supplements, may violate FDA rules and regulations absent.
In December 2019, four federal agencies, in conjunction with the state bank regulators, issued a statement clarifying the legal status of hemp growth and production and the relevant requirements under the Bank Secrecy Act (BSA) for banks providing services to hemp-related businesses. The statement emphasizes that banks are no longer required to file suspicious activity reports (SAR) for customers solely because they are engaged in the growth or cultivation of hemp (if in accordance with applicable laws and regulations). For hemp-related customers, banks are expected to follow standard SAR procedures if warranted by suspicious activity (eg, a hemp business using accounts to move marijuana-related proceeds). However, a number of concerns continue to persist that have partially kept many financial institutions at bay for serving hemp businesses, including concerns about “hot hemp” (hemp that tests over the 0.3 percent THC threshold), on-going uncertainty around the implementation of state hemp programs, and evolving USDA regulations.
CBD: A Non-Psychoactive Compound Found in Cannabis
CBD is a compound that can be extracted from either marijuana or hemp. CBD is currently the primary driver of the US hemp industry, accounting for approximately 80% of all hemp cultivation in some estimates. Under the 2018 Farm Bill, there will be more broadly available and legal CBD products. This does not mean all CBD products are legal moving forward.
The 2018 Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds, including CBD, in medicine, food/beverage, dietary supplements and cosmetics and has only approved one form of CBD, Epidiolex. Recently, the FDA de-scheduled Epidiolex, which means “less red tape and easier access for some very sick kids and adults. … It’ll be easier to get by prescription. Suppliers don’t have to use as much security, more insurers might pay for it, more doctors might prescribe it, prescriptions last longer and can be refilled, and more pharmacies might stock it. But those changes will take months or years, because each state may have to amend its own controlled substances list.”
Outside of Epidiolex, one study suggests that over 90% of CBD startups fall in a legal gray area, due to FDA rules and regulations. The FDA has issued numerous warnings and actions regarding CBD, including very recently to multiple companies claiming that CBD helps to prevent and cure COVID-19. CBD banking is more complicated than simply asking “Is it from hemp?” Although the 2018 farm bill generally legalized hemp and hemp-desired products, additional considerations should be considered when evaluating the risk of a given CBD product or company across various uses and jurisdictions.
As more thoroughly laid out in our “CBD Consideration Tree” (available for download), CBD legitimacy generally includes: (1) ensuring the CBD is derived from a legal source (ie, legally grown hemp; not marijuana); (2) contains <0.3% THC; and (3) marketing and sale does not otherwise run afoul of any other relevant federal or state laws. At this time, banks should diligently approach CBD. Many financial institutions continue to avoid CBD altogether, including even marijuana-friendly FIs, which feel that the legal and regulatory uncertainty around CBD is actually higher than that of marijuana.
Three Basics to Any Effective Cannabis Program
- Understand the different types of “cannabis,” their market potential as it relates to your institution, and the legal and regulatory implications. Show your regulators, executives and board that you have done your homework.
- Policies should be written, clearly define cannabis terminology, and state what your institution is and is not willing to do. Very broad and vague “no marijuana” or “no cannabis” policies are not going to cut it and are increasingly unrealistic. Unwritten and/or unclear policies are an immediate red flag to auditors/examiners that your institution may not understand cannabis or adequately address the risk.
- Procedures need to be well constructed and effectively implemented to consistently identify and manage cannabis-related risk. Even with a good understanding and well-written policies, a FI can fall short by not identifying and mitigating cannabis-related risks and opportunities. For example, the vast majority of banks still have “no marijuana” policies, but FinCEN’s Marijuana Banking Updates show that banks and credit unions are still providing services to MRBs.
The cannabis market is growing quickly, even with the current COVID-19 slowdown, and retail sales of legal marijuana alone are expected to exceed those of the NFL in 2020. However, the industry is new with quickly evolving definitions, rules, regulations, and laws. As such, cannabis poses both a compelling opportunity for enterprising and well-managed FIs, and significant risk for unprepared, naive, and complacent FIs. Compliance officers can address both the risks and the opportunities by developing logical and effective cannabis compliance programs to be one step ahead of their competition and poised to quickly seize market opportunities when ready (if not now!).
Looking for information about more about the realities of banking and CRBs? Check out our blogs Common Myths About Banking & the Cannabis Industry or our CBD Decision Tree.