HEMP: What Your Banker Needs to Know

EDITOR'S NOTE: This article does not constitute legal advice. Each financial institution is going to make decision about a customer or potential customer based on its own criteria. The items below are considerations for lenders and not a loan application. Following this checklist does not guarantee access to credit.

Scott Birrenkott: Assistant Director Legal, Wisconsin Bankers Association

I've heard a few claims that the Declaration of Independence was written on hemp paper. I couldn't confirm this and my natural skepticism leads me to believe it's an urban legend, but I'll admit it's possible. Colonial America used hemp in several applications, many of which we're starting to see used again today.

In addition to textiles, hemp products include oils, building materials, and food. Some quick research claims hundreds of possibilities, which I'm inclined to believe based upon the wide variety of existing products. To take advantage of this versatility during a tough part of the cycle, many Wisconsin farmers are diving into the industry; with our state's favorable weather and soil conditions, it appears the industry will only continue to expand. Two recently passed pieces of legislation—2017 Wisconsin Act 100, the Wisconsin Department of Agriculture, Trade, and Consumer Protection's (DATCP) Industrial Hemp rule, and the 2018 Farm Bill—have lowered legal barriers to the industrial hemp industry, further spurring its growth.

As of March 1, 2019, DATCP has received a 1,405 total Hemp Grower and 692 total Hemp Processor applications for a license and/or 2019 annual registration. This represents a significant growth over last year (247 Grower/100 Processor permits in 2018). I anticipate that, for those applications that are approved, Wisconsin banks will see growers, processors, and even retailers looking for deposit accounts and eventually, loans. Many already have. I have received numerous calls through the WBA Legal Call program asking, "Can we bank these customers?"

The answer is yes, but as with anything, you must consider the compliance risk. While growing, processing, and selling hemp products is legal, it also is regulated, and banks should always strive to know their customers. To that extent, consider what information your bank wants from its potential hemp customers. Currently, there are no rules or regulations (beyond your typical BSA considerations) that dictate what you must ask, so it will be a matter of policy. I'd recommend considering some of the following questions: 

• Is your customer registered with DATCP? 
• Can they provide documentation that their licensing is up to date? 
• Do they submit samples for regular testing? 
• Who do they buy/sell to? 
• If they are a grower, do they use licensed seed? 
• If they're a retailer who may not be required to register with DATCP, who do they buy from (and is that seller licensed)?

These questions become even more important on the loan side, where you must consider additional underwriting and collateral components.

Another important consideration: we are still awaiting the Federal Banking Agency's response to hemp's legality, so it might be worth reaching out to your regulator to understand what, if any, exam expectations they have.

Another common question I've been hearing—this time from producers—is, "Why won't my local bank give me a checking account?" I am quick to explain the regulatory burden that banks face, the additional resources required to learn about this brand new industry, and that patience is a virtue. I do appreciate the hemp industry's desire for deposit accounts. Hemp has long been a cash industry, and these customers are eager to work with Wisconsin banks who, in their community, are the experts at handling money. Deposit services such as checks, debit cards, and online banking are tools they've been without in the past.

Keep in mind that hemp businesses that follow the requirements are legal. These business activities do border potentially illegal activity, but banks are no strangers to such situations. For example, if I want to open a bar, liquor store, or own and operate ATM and gaming machines, I must meet certain requirements. Industrial hemp is no different in that, while legal, it imposes requirements upon those seeking to do business. The primary difference is that it is new and carries its own unique requirements.

I would encourage Wisconsin banks to learn more about hemp, what it is, how it is used, and understand its legal requirements. WBA will continue to provide resources and updates as the industrial hemp industry continues to grow.

ADDITIONAL INFORMATION TO CONSIDER (NOT AFFILIATED WITH WBA) 

• Are you licensed with the Wisconsin Department of Agriculture Trade and Consumer Protection?
• Is your Annual Hemp Grower Registration Current?
• Can you provide documentation of your license and current registration
• Do you submit samples for regular testing? Per section 10113 of US Farm Bill 2018, hemp cannot contain more than 0.3% THC. Any product exceeding this threshold is "marijuana" and is classified as a Schedule 1 controlled substance.
• Please provide a copy of the sample results and the State of WI testing certificate.
• Do you license seed?
• Where did the seed originate?
• Does your business sell or have plans to sell hemp-related products such as CBD Oil? (provide a list)
• Who do you buy your product from? Imported CBD products are illegal.
• Are they a licensed provider? (If no, a bank account cannot be opened)
  
  Except for some limited pharmaceutical grade production, the use of CBD as an ingredient in food or dietary supplements remain prohibited.
• Does your business manufacture or have plans to manufacture hemp-related products?
• Is the Hemp used in the manufacturing, derived from hemp produced in a manner consistent with the 2018 Farm Bill, associated federal regulations, association state regulations, and by a licensed grower?  All other cannabinoids, produced in any other setting, remains a Schedule 1 substance under federal regulations and are thus illegal.
• What is the source of the hemp used in the manufacturing of your product?

Scott Birrenkott can be reached at sbirrenkott@wisbank.com or follow him on Twitter, @sbirrenkott.