National Credit Union Administration Encourages Banking Hemp Businesses — With Some CaveatsIn December 2018, Congress gave the hemp industry a significant boost by passing the 2018 Farm Bill, which legalized the cultivation and sale of hemp (i.e., cannabis with a THC content of less than .3%).  The 2018 Farm Bill tasked the United States Department of Agriculture (USDA) with formulating the regulations to govern this burgeoning industry, the first draft of which has yet to be published. However, while the federal government has legalized the hemp industry, financial services companies have proceeded with caution, in some instances making it difficult for hemp-related businesses to procure banking and other financial services.

Last week, credit unions received a gentle reminder from their primary regulator, the National Credit Union Administration (NCUA). The NCUA’s interim guidance seeks to encourage credit unions to get the ball rolling on banking hemp while remaining mindful of the complexities and risks involved. The four-page regulatory alert can be boiled down to a few simple points: be aware of the myriad state and federal regulations involved, know your customer, and stay abreast of ongoing regulatory developments in this evolving industry.

1. Verify licensure under the 2014 Farm Bill.

The bulk of the NCUA’s guidance focuses on maintaining due diligence procedures and complying with the Bank Secrecy Act and anti-money laundering requirements to file Suspicious Activity Reports (SARs) for any activity that could be indicative of money laundering, or illegal or suspicious activity. Credit unions are not required to file a SAR for activity associated with a legally operating hemp business, however, which means the first step is to confirm that the hemp business is indeed operating legally. Until the regulations for the 2018 Farm Bill are released by the USDA, hemp businesses must be registered, licensed, and operating under the research and development pilot programs outlined in the 2014 Farm Bill.

2. Know your customer.

The burdensome “know-your-customer” guidelines will likely sound familiar for those with prior AML/BSA compliance experience. The NCUA guidelines indicate that a SAR should be filed when the activity of a hemp business is deemed “unusual for that business” or when a credit union has reason to believe “an account owner is involved in illicit activity.” As with other industries involving a greater risk of money laundering, this requirement imposes a more significant burden on credit unions to closely monitor their hemp-related business customers because, in order to recognize what is unusual, a credit union must first know what is commonplace.

To that end, credit unions should familiarize themselves with the business of each hemp-related business customer to identify irregular financial and growth patterns and more easily identify suspicious financial activity.  Although the NCUA does not provide any suggestions for specific policies or procedures, a comprehensive approach would involve, among other safeguards, maintaining a list of vendors with whom their customers plan to conduct business, thereby allowing credit unions to flag transactions with unfamiliar vendors. Other red flags might include rapid money movement, significant or sporadic interstate cash flow, increases in revenue that are disproportionate to industry competitors or the market itself, and financial statements or tax returns that are inconsistent with the actual account activity.

3. Monitor Regulatory Developments

 The NCUA guidance emphasizes the importance of compliance with both federal regulations and the patchwork of individual state and tribal regulations. For now, hemp-related businesses are still required to operate as part of the 2014 Farm Bill pilot program, as well as current and forthcoming regulations from state health departments and the U.S. Food and Drug Administration. Although the NCUA’s regulatory update is sparse on the particulars, credit unions can take certain steps to minimize the risk of compliance violations, such as implementing policies and procedures designed to regularly monitor for developments at both the state and federal levels and documenting all compliance efforts, especially with regards to AML/BSA compliance.

In a nutshell, the NCUA seeks to encourage lending to hemp businesses while simultaneously stressing the importance of compliance with the state and federal regulations implicated by banking the cannabis industry, which remain in a state of constant flux. The NCUA will issue additional guidance once the USDA’s regulations are finalized, but until then, this regulatory update is meant to spur credit unions to provide much-needed financial services to those currently operating lawfully in this capital-restricted industry. To that end, credit unions and other financial institutions seeking to navigate the complex regulatory environment should seek counsel to confirm compliance with applicable state and federal law.

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Photo of James W. Wright Jr. James W. Wright Jr.

Jay Wright is a partner in the firm’s Banking and Financial Services and Litigation practice groups. Jay has earned his Accredited Mortgage Professional (AMP) designation through the Mortgage Bankers Association (MBA), and is one of a small number of lawyers who have achieved…

Jay Wright is a partner in the firm’s Banking and Financial Services and Litigation practice groups. Jay has earned his Accredited Mortgage Professional (AMP) designation through the Mortgage Bankers Association (MBA), and is one of a small number of lawyers who have achieved this status.

Jay’s practice focuses on financial services litigation and regulation, and he is actively involved in lawsuits and disputes across the country representing companies involved in a wide array of state and federal law claims. His representation includes general defense of various claims against financial institutions, mortgage companies, and other commercial entities. Many of these claims involve allegations of wrongful foreclosure proceedings or violations of the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and Federal Housing Administration (FHA) regulations, as well as various deceptive trade practices claims under state law.

Photo of Benjamin William Perry Benjamin William Perry

Ben Perry’s practice spans the spectrum of legal services. On the litigation side, Ben represents clients at the trial and appellate level against a wide variety of claims in state and federal courts. His practice primarily concentrates on complex civil litigation, products liability…

Ben Perry’s practice spans the spectrum of legal services. On the litigation side, Ben represents clients at the trial and appellate level against a wide variety of claims in state and federal courts. His practice primarily concentrates on complex civil litigation, products liability defense, and representing financial institutions and mortgage companies in civil litigation. As part of the Banking and Financial Services Practice Group, he defends mortgage servicers, investors, and related entities against numerous state and federal law claims arising out of lending and loan servicing practices, including alleged violations of the Telephone Consumer Protection Act (TCPA) and various claims relating to the sale of bank-owned real estate. Ben also has substantial experience defending banks and investors in hundreds of cases related to homeowner’s association (HOA) superpriority liens, and he has represented a company’s founder and CEO facing claims brought by the SEC for alleged embezzlement of company funds.

Photo of Alex McFall Alex McFall

Alex McFall primarily represents banks, servicers and other financial institutions in civil litigation, with an emphasis in residential and commercial lending. Alex has defended financial institutions against claims for breach of contract, fraud, alleged violations of the Truth in Lending Act (TILA), Fair…

Alex McFall primarily represents banks, servicers and other financial institutions in civil litigation, with an emphasis in residential and commercial lending. Alex has defended financial institutions against claims for breach of contract, fraud, alleged violations of the Truth in Lending Act (TILA), Fair Debt Collection Practices Act (FDCPA), Real Estate Settlement Procedures Act (RESPA), Fair Credit Reporting Act (FCRA), Telephone Consumer Protection Act (TCPA), and Fair Housing Act (FHA). She has substantial experience defending financial institutions in HOA super-priority lien litigation and has contributed frequently to the firm’s Financial Services Perspectives blog regarding super-priority lien litigation.