NCUA & FinCEN Issue Additional Guidance on Hemp Banking
As the hemp baking industry continues to grow and stabilize, credit unions need to be kept up-to-date on how to adequately serve legal hemp-related businesses. The National Credit Union Association (NCUA) recently issued a Letter to Credit Unions providing additional guidance supplemental to a 2019 Regulatory Alert. Spurred by the effects of the COVID-19 pandemic on hemp-related businesses, the NCUA issued its letter for advisory purposes, providing no new expectations or requirements for credit unions.
When the Agricultural Act of 2018 (the 2018 Farm Bill removed hemp from Schedule I of the Controlled Substances Act, the U.S. Department of Agriculture (USDA) was directed to establish a national regulatory framework for nationwide hemp production. This was done through an interim final rule establishing the U.S. Domestic Hemp Production Program. This rule will expire on December 31, 2021 if not replaced by a final rule.
The NCUA reminds credit unions that it is important to “stay current with the federal, state and Native American tribal laws and regulations that apply to any hemp-related businesses they serve.” The hemp-industry follows a patch work of state and local regulatory requirements. With the ever-growing landscape of the hemp industry and new COVID-19 considerations, it is crucial for the agency to continually provide guidance. The recent letter provides key clarifications under the 2018 Farm Bill and addresses frequently asked questions.
Some important guidance pulled from the NCUA’s letter includes the following:
- The USDA’s interim final rule does not de facto legalize hemp production in every state. A valid USDA-issued license or approval under a USDA-approved state or tribal plan is required to comply with the 2018 Farm Bill requirements. State or tribal laws were not preempted by the 2018 Farm Bill. The Agricultural Act of 2014 (the 2014 Farm Bill) allows for hemp production pursuant to research and development initiatives. However, this authority is set to expire on November 1, 2020. There have been recent legislative efforts to extend the pilot program under the 2014 Farm Bill.
- Additionally, the letter clarifies misconceptions regarding authority and oversight of the hemp industry. State and tribal governments are responsible for ensuring that hemp producers follow regulations in states and territories with approved plans. Those producers licensed with USDA in areas without production plans are subject to regulation and licensure by the USDA.
- The USDA rule only pertains to requirements for engaging in hemp production, not its manufacturing, processing, distribution, shipping, and retail. It is important for credit unions to understand that the uniform rules set forth by the USDA and other federal agencies only cover production, regardless of whether individual states impose additional requirements on other facets of hemp-related businesses.
- The NCUA brought attention to the significant interest in cannabis-derived products (CBD). However, the U.S. Food and Drug Administration (FDA) has reiterated that CBD products must comply with all other applicable state and federal laws even if the product meets the “hemp” definition under the 2018 Farm Bill. The FDA has confirmed that the legality of the sale of CBD products depends on their intended use and on their labeling and marketing. The Food, Drug, and Cosmetic Act (FDCA) is the leading applicable law relating to CBD.
- Credit unions are permitted to provide loans to a lawfully operating hemp-related business and many credit unions provide important financial services to businesses within their field of membership. Sound commercial practices apply to hemp-related lending, such as appropriate underwriting standards considering the borrower’s management ability, financial condition, and ability to meet all obligations and service the debt. Credit unions are expected to maintain due diligence for all hemp-related accounts. This includes verifying that hemp borrowers possess a valid state or USDA license.
While credit unions should be diligent in determining whether or not to extend a loan to a hemp-related business, they are not expected to serve as the enforcement authority to police the industry for illegal activity. In December 2019 federal banking officials, including the Financial Crimes Enforcement Network’s (FinCEN), removed some red tape by filing a joint statement notifying banks of the removal of the requirement to file suspicious activity reports (SARs) for customers growing hemp in accordance with applicable laws and regulations.
On the heels of NCUA’s most recent updates, FinCEN has also issued important guidance related to credit union’s due diligence requirements under the Bank Secrecy Act and anti-money laundering laws. While customer due diligence (CDD) is always required, further measures may be warranted for hemp-related businesses. At the outset, credit unions must obtain basic identifying information through a customer identification program and risk based CDD processes. Credit unions can confirm a hemp-growers compliance with state, tribal or USDA licensing requirements by obtaining (1) a written confirmation that the grower is validly licensed, or (2) a copy of the license. Any further due diligence steps should be based on the credit union’s assessment of the individual risk posed by each member. This additional information may include crop inspection or testing reports, license renewals, updated attestations from the business, etc.
We anticipate additional guidance from various agencies once the USDA has a final hemp rule in place. NAFCU will continue to monitor news and guidance as it is released and keep you updated on regulatory and legislative changes to hemp banking.