Last fall, the Wisconsin legislature paved the way for industrial hemp to return to Wisconsin farm fields by passing 2017 Wisconsin Act 100. In doing so, Wisconsin joined more than two dozen other states that have legalized limited cultivation of industrial hemp.
Viewed as an economic development opportunity by some in the agriculture sector, industrial hemp holds a unique regulatory position at the state and federal level. Even though state and federal regulators have yet to release clear guidance to banks on how they should approach doing business with industrial hemp growers and processors, banks face the potential that current and prospective customers may already be growing hemp.
Industrial hemp, as defined in state and federal law, refers to cultivars of the plant Cannabis sativa with a delta-9-tetrahydrocannabinol (THC) concentration of no more than 0.3 percent on a dry weight basis. Unlike its more illicit cousin, marijuana, industrial hemp contains THC levels well below what would be required for the plant to have psychoactive effects. Lauded for its versatility and high number of uses, industrial hemp disappeared from farm fields after World War II when federal law regulated all forms of cannabis and products derived from cannabis as controlled substances. While hemp was once a leading fiber crop, current interest primarily centers on products derived from the hemp grain, such as hemp oil.
Industrial hemp occupies a unique position under state and federal law. The 2014 Farm Bill allowed states to create research pilot programs under which hemp could be cultivated under the authority of state departments of agriculture or universities. Act 100 created such a program in Wisconsin, and licenses have been issued to growers for the 2018 growing season. However, the 2014 Farm Bill did not remove hemp from the list of controlled substances under the federal Controlled Substances Act. Accordingly, the U.S. Drug Enforcement Administration, U.S. Department of Agriculture, and U.S. Food and Drug Administration concluded in a joint “statement of principles” that federal law “continues to restrict hemp-related activities, to the extent that those activities have not been legalized” under the Farm Bill.
This limited legalization puts banks contemplating business with industrial hemp producers in a challenging position. Under the federal Bank Secrecy Act, banks must report suspicious transactions to federal law enforcement officials. While the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has released guidance to financial institutions on marijuana-related businesses, no similar guidance exists for banks working with industrial hemp customers. Ultimately, the Farm Bill’s legalization of limited industrial hemp cultivation makes banking in the industrial hemp space more tenable.
A cautious approach for banks working with industrial hemp customers would include carrying out due diligence on industrial hemp customers. At minimum, this means that banks should verify that the business is operating with the required state licensing and is in compliance with the state’s industrial hemp program. Banks should “refresh” this information regularly to ensure that the customer remains in compliance with relevant law, as any non-compliance with state or federal law could put industrial hemp in the same category as marijuana.
At the state level, it is our understanding that the Wisconsin Department of Financial Institutions will not write up banks that are doing business with industrial hemp producers, though it will urge banks to exercise caution in their relationship with these customers.
Industrial hemp’s position under federal law also gives rise to additional collateral and general business considerations for banks. First, because growers, processors, and handlers must be licensed to sell industrial hemp, a bank may have difficulty liquidating the industrial hemp in the event of default. Further, under the emergency regulation governing Wisconsin’s hemp program, a crop which tests above the 0.3 percent THC threshold must be destroyed. Thus, a bank who takes an industrial hemp crop as collateral also bears the risk that a non-compliant crop could be ordered destroyed. Finally, industrial hemp is not eligible for federal crop insurance coverage, a major risk management tool for farmers.
More certainty could be on the horizon. Since 2015, some members of Congress have been working to remove industrial hemp from the list of controlled substances under federal law. This effort received a recent boost when legislation to do just that was inserted into the version of the 2018 Farm Bill recently passed by the Senate agriculture committee. Alternatively, federal regulators could issue guidance to banks on handling industrial hemp-related issues. Either outcome is likely to reduce any regulatory uncertainty banks are now confronting.