Last week, the National Credit Union Administration (NCUA) issued new guidance (“Guidance”) for federally-chartered credit unions serving the hemp industry. All of us at Harris Bricken were excited to see the Guidance released: NCUA retained us last fall to advise the government on this project, and we have always represented credit union clients as to cannabis business services.
The Guidance is structured in an easily digestible Q&A format: it comes with clarifications, assurances and no real surprises. Fundamentally, the Guidance is “advisory and provides no new expectations or requirements for credit unions.” At issue is the impact that hemp businesses banking may have on credit union obligations under the Bank Secrecy Act and implementing regulations, sometimes known as anti-money laundering legal authority (“AML”).
Before we get into a few key issues, though, some context may be helpful.
First, it’s important to understand what NCUA is and does. NCUA is an independent federal agency that provides deposit insurance to all federal credit union depositors (and most state credit union depositors). It also charters and regulates federal credit unions. If you are a credit union member, your deposit is almost certainly insured through something called the National Credit Union Share Insurance Fund. Many people have heard of the Federal Deposit Insurance Corporation (FDIC), which provides deposit insurance to bank customers. NCUA is a sister agency.
Second, it’s important to note that NCUA is not a trade or advocacy organization. The Credit Union National Organization (CUNA) fills that role for both state- and federal chartered credit unions. CUNA has been vocal historically on cannabis banking reform, but CUNA has no power to charter or regulate the credit unions themselves. Thus, federally-chartered credit unions would look to NCUA, not CUNA, for guidance on hemp banking. (And state-chartered credit unions would look to their respective state divisions of financial services.)
Regarding the Guidance itself, there are 17 questions and answers—and credit unions should review each of them carefully–but I will break it down into a few key concepts.
Know the Law
This is crucial to hemp banking, especially as the law continues to evolve. Although credit unions are not required to file Suspicious Activity Reports (SARs) for general hemp client transactions, they are expected and required to keep up with developments at the U.S. Department of Agriculture (USDA), the Food and Drug Administration (FDA) and relevant state and tribal programs.
The Guidance does not divide hemp businesses into categories (e.g. farmer, processor, topical or edible goods producer) for purposes of declaring which hemp businesses are acting lawfully; instead, credit unions are encouraged to “consult qualified legal counsel and the appropriate federal and state authorities” for this analysis. Whether certain hemp businesses are “acting lawfully” will be one of the more challenging areas for credit unions to assess, and setting policy in this area will be key for every board.
Know the Hemp Business
The Guidance also mentions a need for “due diligence procedures for hemp-related accounts.” Most financial services lawyers would say that this starts with “know your customer” (KYC), a mandatory process of identifying, verifying and periodically confirming a customer’s identity over time. KYC processes are designed to enact AML requirements and prevent illegal schemes. In the context of hemp banking, KYC will be especially critical as many operators will attempt to launder gray- and black-market marijuana dollars through the hemp banking ecosystem.
KYC aside, the Guidance talks about basic diligence touchstones (e.g. state licensing information, maintaining information on the land where the hemp is produced) and notes that the nature and extent of business diligence will vary depending on the type of credit union service provided. For example, the establishment of a basic depository account will involve different enquiry that underwriting an equipment loan.
Broad Services Authorized
One general thrust of the Guidance is that hemp-related businesses may be treated like other agriculture businesses, with special consideration to the highly regulated nature of the industry. This means that credit unions can offer hemp businesses a full suite of products and services, in the context of the credit unions’ monitoring and diligence requirements.
Does this mean that hemp businesses will pay more for credit union services than other agricultural businesses? Yes it does. We foresee things settling out for the hemp industry somewhere between what marijuana businesses pay for credit union services, and what other farmers pay.
The Guidance is not the first offering by NCUA, and it won’t be the last. Other federal agencies have also weighed in with hemp banking guidance, and will continue to do so as the laws and industry evolve (cf. joint statement offered by the FDIC, the Office of the Comptroller of the Currency and others).
Overall, hemp banking is a significant market opportunity for credit unions. But hemp is not corn or wheat or sugar beets, and credit unions that want to work in this space need to come prepared.