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The U.S. government’s decriminalization of industrial hemp has further muddied the waters for banks considering whether to serve state-authorized cannabis firms, sources told ACAMS moneylaundering.com.

U.S. officials lifted their prohibition on hemp, a non-psychoactive strain of cannabis sativa, following enactment of the Agriculture Improvement Act, commonly known as the 2018 Farm Bill, in December, but the marijuana strain of the plant remains listed as a Schedule 1 narcotic under the Controlled Substances Act, along with heroin and LSD.

The diverging federal treatment of hemp and marijuana, and the conditional terms under which the former strain was de-listed, together comprise a legal and regulatory gray zone that banks are struggling to navigate, according to compliance officers, attorneys, and lawmakers who have spoken publicly on the issue in recent weeks.

Guidance issued five years ago by the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, on marijuana—which 33 U.S. states now license in some form—met strong opposition in Congress and did not clarify whether banks can serve the industry.

No such guidance exists for handling the proceeds of hemp, which appears to have boundless potential for use in textiles, construction and other industries but was comprehensively banned by the U.S. in 1970 because of its similarity to marijuana.

“Up until this Farm Bill, hemp was largely illegal at the federal level, and so was marijuana. Now there are carveouts,” a compliance executive at a regional lender on the West Coast told moneylaundering.com. “So we have to create a compliance program that addresses hemp as well as the marijuana that gets you high.”

U.S. officials began allowing production of hemp on a limited basis following adoption of the 2014 Farm Bill, which made statutory distinctions between the two strains of cannabis.

The most recent version of the legislation, the 2018 Farm Bill, went further by redefining hemp as containing no more than a 0.3 percent concentration of THC—the chemical that makes marijuana users high—and de-scheduling it, along with all its derivatives and extracts, including cannabidiol, or CBD, which is believed to have therapeutic value.

Before local hemp production can commence, however, U.S. states, territories and Native American tribes must first secure federal approval of their framework for licensing and regulating the strain, or have the Agriculture Department, also known as the USDA, establish one for them.

According to its website, the USDA has begun developing rules to implement the 2018 Farm Bill and expects to have the regulatory edifice for hemp production in place for the 2020 growing season.

The decriminalization of hemp-derived CBD has separately triggered oversight from the Food and Drug Administration, which has claimed authority to investigate the safety of CBD-based foods and beverages, personal goods and medical products for human consumption, and eventually permit their sale.

The FDA has approved only one such product to date: a prescription medication for treating epilepsy.

“Walking around the street today you see CBD sold everywhere, you’d think that this is 100 percent legal,” Michael Greenman, chief counsel for anti-money laundering and sanctions law at U.S. Bank, said at the ACAMS AML Risk Management Conference in New York in June. “The answer is, it’s legal-ish.”

The hemp industry’s liberalization separately creates an opportunity for certain marijuana-related businesses that have struggled to obtain banking services to present themselves as CBD firms and open accounts, Greenman said, citing federal investigators.

Banks in the U.S. often decline to process transactions for MRBs for fear of the legal and regulatory exposure they would face if the federal government were to enforce its marijuana ban.

Banking regulators remain silent

Overlapping jurisdictions and the pending determinations of several federal agencies tasked with monitoring hemp are clouding banks’ ability to identify which cannabis firms they can serve legally, according to the West Coast-based compliance executive.

“You have to slice and dice your way through the Farm Bill, through the pronouncements on the USDA and FDA websites,” said the compliance executive, who asked to remain unnamed. “The easiest thing would be not to deal with it at all … but if you do, are you going to miss the train completely?”

As for banks, their primary federal regulators and FinCEN have neither published guidance on processing transactions for hemp in the eight months since the 2018 Farm Bill’s enactment, nor clearly distinguished the substance from marijuana by tweaking their regulations.

In the interim, risk-averse financial institutions will likely continue denying services to firms involved in federally legal hemp production and federally illegal marijuana alike.

The lack of guidance “is the sole item” preventing Citywide Banks from accepting hemp firms as clients, Joanne Sherwood, president and chief executive of the Colorado-based community lender, told the Senate Banking Committee last month. The bank does not serve state-licensed marijuana-related businesses, or MRBs, she said.

Sherwood outlined her bank’s policies in response to a question from Sen. Tina Smith (D-MN), who cited complaints from hemp farmers unable to access loans or payment processing services in her home state.

Lawmakers expect federal banking supervisors to weigh in on the financial implications of the 2018 legislation at some point, Sen. Jon Tester (D-MT) said at the hearing. “They tell us that regulation, clarity, is due to come out since we passed the last Farm Bill and took it [hemp] off the schedule,” he said.

Even in the absence of guidance for banks on handling hemp proceeds, the crop’s removal from the Controlled Substances Act differentiates it from marijuana in a fundamental way.

“Processing money related to that business [hemp] is not a violation of federal money-laundering laws, and so I view that as … more of a compliance risk than a prosecution risk,” Greenman, the attorney for U.S. Bank, said at the conference in New York.

Contact Valentina Pasquali at vpasquali@acams.org