Earlier this month, federal agencies issued a statement to clarify the regulatory requirements for banks looking to provide services to hemp-related businesses. As businesses take the initial steps to form banking relationships, they should be prepared to help banks understand both compliance considerations and the overall hemp industry, according to Scott Birrenkott, assistant director for the Wisconsin Bankers Association.
“This [statement] from the federal banking agencies is really important because it’s the first time that the agencies have even acknowledged the existence of hemp and the legality of hemp as a commodity,” Birrenkott tells Hemp Grower. “Not only that, but it’s also the first time that they’ve offered any guidance on how banks can meet their compliance requirements, their regulatory burden.”
The banking industry faces myriad regulations, he says, and chief among them is the Bank Secrecy Act (BSA), which requires banks to know their customer to a certain degree.
“They have to ask certain questions of their customers,” Birrenkott says. “They need to verify that information through documentary methods, meaning they have to collect certain documentation, certain evidence, to prove what they have collected, and all of this has to be part of policies and procedures that banks have written and put in place and follow regularly every time a new customer or new business comes into their door.”
Prior to the agencies’ recent announcement, they had issued no guidance about hemp, and while some banks were willing to provide services and resources to the nascent industry, there were many unanswered questions about how they could meet their compliance burden, Birrenkott adds.
Now, under the statement issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, FinCEN, the Office of Comptroller of the Currency and the Conference of State Bank Supervisors, banks are no longer required to file suspicious activity reports for customers solely because they are engaged in a hemp-related business. The statement also provides banks with background information on the legal status of hemp, the U.S. Department of Agriculture’s interim final rule on hemp production, and the BSA requirements for providing services to hemp-related businesses.
“The fact that these agencies are now acknowledging that hemp is legal, that banks can do business with those hemp-related industries that are engaged in the hemp industry legally and offering that little bit of guidance on how they can meet those requirements is a big step forward in helping banks understand how they can move forward with these customers,” Birrenkott says.
But what comes next?
Here, Birrenkott offers advice for hemp businesses seeking banking services to ensure success when building a relationship with a bank.
1. Be patient.
First and foremost, Birrenkott says, businesses should understand that even though this guidance has been issued, many unanswered questions remain for banks, and they still need time to work through the compliance considerations involved with serving hemp-related businesses. Banks need to draft new policies and procedures for the industry and implement them not only on the compliance side, but also on the business side, he says.
“Banks needs to now work through and understand what hemp is as a commodity [and] the types of activities that their customers are going to be engaged in—for example, growing, processing or retail of … hemp or hemp-derived products,” Birrenkott says. “Banks want to know that and understand that from the business side, not just knowing their customer for compliance considerations, but also because they want to know their customers when starting a business relationship with them.”
Not unlike the hemp industry, banks face stringent regulations and must complete documentation and maintain a certain level of recordkeeping for their customers. All of this takes time.
“When a business goes in, understand and appreciate that banks have to work through that,” Birrenkott says. “They might have questions for you. They might have questions you weren’t expecting. You might have thought it would be easy to go in and get those services, but because this is new from a compliance standpoint, banks have to work through that and make sure they’re doing that due diligence, but also from the business standpoint, they just might want to understand your industry.”
2. Be prepared.
In order to better understand the hemp industry and a particular business within that industry, banks will need to collect a lot of information, and business owners must be prepared to provide it.
For example, Birrenkott says that depending on a business’s place in the supply chain, operators should be prepared to share what type of seed they use, the size of their field, what they are processing the hemp for and who they are selling it to.
“Go prepared to answer questions,” Birrenkott says. “It’s best if you have documentation at the ready. For example, … in Wisconsin, we have something called a [Fit for Commerce] certificate before a crop is ready for harvest. … Depending on what you’re doing, a bank may want that, so it’s best to go prepared.”
Business owners should not be discouraged if they have to leave to gather the required documentation and come back another day to finish their onboarding with the bank, he adds.
“[Banks] want to help and serve their local communities in providing those much-needed financial services, but also be prepared that if you go into a bank that’s never seen this before, they might still not understand it,” Birrenkott says. “Be prepared to introduce a banker to that. Maybe even talk to somebody else at the institution. If you’re talking to frontlines staff, they might not be in as good a position to make this decision if it’s the first time the bank has seen it before as a manager or someone else that might be a better person to talk to.”
And since this may be the first time a particular bank is dealing with a hemp business, business owners should be prepared to make a good first impression, he adds.
3. Choose your bank carefully.
Before entering into a banking relationship, hemp business owners should first understand what services they require from a bank, and then choose an institution that is best able to provide those services, Birrenkott says.
“I think a good example would be to distinguish between deposit services and loan services,” he says. “If I just want a place to put my money, a checkbook, online banking [and] a debit card, those would all be services that are offered from the deposit side of the bank. On the other hand, if I’m looking for a loan—I need financing to get some new equipment or some fields … —that’s going to be on the loan side. So, study that and see other areas of the industry that the bank is involved in. One institution might be offering deposit services, but they don’t do a lot of agriculture loans, they don’t do a lot of business loans or they don’t do loans in general. Another institution might have a bigger ag lending side.”
Business owners should also keep in mind that just because one bank declines them as a client, other banks may have the resources or the general willingness to serve the hemp industry, so operators should keep looking until they find a bank that will work with them.
“Hemp is brand new for a lot of banks,” Birrenkott says. “It’s brand new for a lot of processors, it’s brand new for a lot of farmers, and these things just unfortunately take time.”
Many banks, at least in Wisconsin, have been exploring the possibility of serving the hemp industry more and more, he adds, and their questions are starting to shift from basic inquiries about what hemp is to more sophisticated questions about how to market to hemp businesses, what sort of disclosures they should have in place for customers in the industry and what kinds of policies and procedures they should create around hemp.
“Again, banks are heavily regulated,” Birrenkott says. “Part of this difficulty with hemp is understanding how to meet those existing regulatory requirements given a new industry. This [federal guidance] certainly helps that. Banks now have something to go on when they write their policies and procedures, [but] they still have to write those policies and procedures, so there’s still time, and they still have to understand this industry as a commodity. We’re seeing them work through it, but it’s still something they’re asking about and looking to understand."