On August 19, 2019, the National Credit Union Association (NCUA), a federal agency that regulates, charters, and supervises federal credit unions, released updated guidance on federally-backed credit unions working with hemp-based businesses. The guidelines clarify that credit unions are permitted to offer financial services, including loans, to businesses dealing in the realm of hemp or hemp-based products such as manufacturers, distributors, shippers and retailers, among others. This announcement comes shortly after reports of hemp-based businesses losing access to financial services and credit card processing in recent months.
Last April, Evalon, a payment processing subsidiary of the U.S. Bank, announced that it would stop working with businesses who deal with CBD, a hemp-derived chemical compound. Soon after Evalon’s announcement, other financial institutions followed suit, leaving many established business owners scrambling to find alternative providers and would-be entrepreneurs unable to join the space without access to banking or credit card processing.
Despite the fact that hemp is no longer classified as a controlled substance at the federal level with the passing of 2018 Farm Bill, banks and other financial institutions remain wary about doing business with those within the sector. This issue stems from confusion and misinformation about hemp-based products versus those derived from its psychoactive cousin, cannabis. Though the distinction may be clear for those within the industry, banks and other financial institutions can often be unsure or lack information, leading to confusion about whether a product is, in fact, hemp-based and legal. In most cases, when a bank, lender, or payment processor shuts down an account it’s because they want to avoid a potential liability risk. With a small business, it’s a relatively low cost for a financial institution to let them go, compared to the risk of a much higher cost if the product is found to be illegal.
Fortunately, while some traditional lenders backed away, others seized the opportunities to leverage new business. In its guidance, the NCUA clarifies that federally-backed credit unions are permitted to service those within the legal hemp industry. Credit unions seeking to service those within the hemp industry must have a Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance program and be willing to meet the requirements including:
- Compliance– Each credit union must comply with all local, federal, and native American tribe laws that apply to any hemp-based businesses they work with. The credit union must be knowledgeable of any relevant restrictions or requirements under which the business must operate.
- Determination– When seeking to work with a hemp-related business, the credit union must determine both the business and its product(s) are lawful under federal and state law.
- Due diligence– Under the BSA and AML, credit unions are required to file Suspicious Activity Reports (SARs) for any money laundering, illegal, or suspicious activity.
Does this mean that every credit union will embrace hemp businesses with open arms? Of course not. The guidance makes it clear that each credit union maintains its discretion over which services and accounts it offers. Some credit unions may choose to forgo putting in the time and resources to understand and successfully navigate the risks and complexities of lending within the industry.
For this reason, it is important that hemp-based business owners who are seeking to secure lending or financial services through a credit union do their due diligence and ensure that products have clear labels and descriptions identifying them as hemp-based. Retailers should ask their CBD suppliers for background, in writing, on testing and certifications and should have this information on hand should their financial institutions inquire. Being upfront, having the proper documentation and anticipating questions before they arise increases transparency with the credit union and within the industry, saving businesses time and money. Hemp-based business owners may benefit from seeking the guidance of a legal professional who is experienced working in the space and can help ensure the proper documentation and procedures are in place to secure financing.
The NCA guidance for credit unions is a step forward for the hemp industry and, hopefully, the banking industry will soon follow suit. Will this prompt movement on access within the cannabis industry as well? Only time will tell but, with this progression, the outlook continues to remain positive.