By Silvia Garcia Maggio, Deputy General Counsel, Compliance Alliance
Last year, the most frequently asked topic over at Compliance Alliance was, without a doubt, beneficial ownership. With the effective date for that rule well behind us, today the top BSA question we are getting is about how the heck to deal with marijuana banking. Now the issue with marijuana banking is that there are no set definitions and conflict between state and federal laws. Therefore, it’s important to discuss both the definitions that do exist and strategies for the bank to make their own interpretations.
First, the 2018 Farm Bill clarified, from a federal perspective, that hemp cultivation is legal and not just restricted to pilot programs for research purposes which it was before. Importantly, the Act also allows interstate transfer of hemp products. Also, the passage of the law allows for the sale and possession of hemp-based products, as long as those products are consistent with the parameters of that rule. So, what are the parameters? There are still tight restrictions on this type of product. Hemp under this rule is limited to less than 0.3% THC. Second, the bill asks state departments of agriculture to create a regulatory framework that would be collaboration between the state’s governor, law enforcement and the United States Department of Agriculture in order to license and regulate hemp. That plan will have to be approved by the USDA, so we’re not free and clear yet. Farmers in states that choose not to have a USDA-approved program will still have the opportunity to grow hemp and produce hemp-based product, but they will be regulated at the federal government level. As can be expected from those last two parameters, hemp producers will have to be licensed and regulated, which will mean some level of enhanced due diligence for institutions that choose to bank those customers.
How does any of this help us? It helps us because hemp is derived of the same plant as marijuana — the cannabis plant. However, hemp does not have the same effects as marijuana simply because it does not contain as much of the chemical compound known as THC. This creates a category of product that is legal and not classified as marijuana under the Controlled Substance Act. Products that are derived of the same plant but have more THC than allowed would no longer be considered hemp, and instead would be considered marijuana. As marijuana is still an illegal controlled substance at the federal level, under the Controlled Substance Act, this makes a critical difference to banks that are not banking marijuana-related businesses (MRB) but will bank legal hemp businesses.
As the prevalence of marijuana businesses continues to increase, banks have to make risk-based decisions as to whether to bank them, and how to determine whether their customer actually is an MRB. That distinction should include an intimate understanding of state laws and definitions and, also, a conclusive policy statement as to whether the bank does business with MRBs and what the bank’s definition of an MRB is (Is it only a dispensary or grower? Is it a customer who rents retail space to a dispensary?). This process should also include a discussion with the bank’s regulator to understand expectations beyond FinCEN’s stated guidance, as there is no other federal regulator that has made any official guidance and state regulatory guidance is varied.
The number one BSA topic thus far in 2019 is how to develop MRB policies and more importantly, how to even define “Marijuana-Related Businesses.” At the moment, there really isn’t federal guidance, so banks are having to make those interpretations themselves. There are a variety of methods to go about that — from the three-tier approach to the zero tolerance approach, to the “we are choosing not to make an interpretation in our policy” approach. Without a set industry standard, banks are working from scratch via member groups — like C/A huddles — and relying on industry resources like ACAMS to make those interpretations about products that are legal within their own states.
A zero tolerance approach on interpreting what is an MRB has generally included not doing any business with companies who have any relation to marijuana business, directly or indirectly. Direct marijuana business under this approach includes businesses that grow, distribute, sell or produce items that do not fall under the definition of “hemp” under a state-licensed or federal program. Indirect businesses would include businesses that provide services to those businesses — like landlords and business supply companies. While this is the most conservative approach, it is easy to see the downside. This interpretation includes businesses that perhaps did not provide services in the past but do now — like office supply businesses or gardening supply companies. If in the middle of a long-term business relationship — like a closed-end loan — it will be up to the bank to determine how to wrap-up the relationship in order to comply with their own policy. Another approach being taken is the three-tiered risk approach as discussed by ACAMS back in 2016. This approach puts businesses into three different tiers based on risk. The bank then makes a risk-based interpretation of what the definition of “marijuana related business” means by deciding whether to bank customers who are Tier 1, Tier 2 and/or Tier 3.
It is important to note that regardless of which approach — regardless of how they interpret (or choose not to interpret what an MRB is) — they must do so with an understanding of what the legal and compliance risk is to the bank and within the scope of the bank’s acceptable risk. As with any change that is not explicitly addressed by banking regulators, it is a best practice to work with the bank’s regulators, the bank’s attorneys to determine state-specific laws, and the state department of banking prior to beginning new products.
Compliance Alliance does have marijuana banking tools on the website under the “Marijuana Banking Toolkit,” which includes helpful things like an updated manual to help banks sort out how to build a marijuana banking policy.