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Pot Banking Bill Offers Hemp Relief and Senate GOP Sweetener (2)

Sept. 25, 2019, 9:31 AMUpdated: Sept. 25, 2019, 10:01 PM

The booming hemp industry in Kentucky could be the linchpin to getting cannabis banking legislation through the Republican-controlled Senate.

Hemp production is taking off in Senate Majority Leader Mitch McConnell’s (R-Ky.) home state and elsewhere, particularly among farmers looking to replace tobacco crops. About 1,000 Kentucky farmers are growing hemp, a five-fold increase from 2018, and more than 200 hemp businesses are now registered in the state, up from 70 a year ago, according to Ryan Quarles, Kentucky’s Commissioner of Agriculture.

But that growth is being hampered by hemp’s association with cannabis.

Business loans and payments services have been hard to come by despite full legalization of industrial hemp and non-psychotropic cannabidiol (CBD) products by Congress in May 2018.

Marijuana remains illegal at the federal level though legal in some form in many states.

That status has led to confusion in the financial services sector about how easily they can do business with hemp companies. “The average ordinary banker might not know the difference between hemp and marijuana,” said Jonathan Miller, general counsel to the U.S. Hemp Roundtable, an industry trade group.

“They know they are under intense scrutiny because of marijuana, and think the same scrutiny applies or aren’t aware that hemp has been legalized on the federal level,” Miller said.

House lawmakers recently added safe harbors for financial services companies doing business with the hemp industry to the bipartisan SAFE Banking Act (H.R. 1595).

The House passed the bill Sept. 25 by a 321-103 margin. It would affirm that banks can lawfully work with the industry and wouldn’t be subject to the heightened regulatory scrutiny and compliance necessary to work with the marijuana sector.

Senate Sweeteners

The measure sponsored by Rep. Andy Barr (R-Ky.) is seen as a sweetener to gain political support among Senate Republicans, including McConnell, if the House passes the bill.

House lawmakers also added language to H.R. 1595 that would prevent regulators from strong-arming banks into dropping clients in politically disfavored industries, such as payday lenders or gun manufacturers.

Senate Banking Committee Chairman Mike Crapo (R-Idaho) told Bloomberg Law Sept. 25 the additions were improvements. He said other issues need to be addressed, including anti-money laundering compliance in shifting a largely cash-based market into the mainstream financial system.

Crapo said he hoped the committee would get to a Senate version of the bill “promptly.”

Enactment of H.R. 1595 could be a sea change for U.S. hemp and CBD growers, processors and distributors.

“In Kentucky, hemp gives us the opportunity to be first in something instead of last,” said Quarles. Passage of the bill would help put the state’s hemp production on equal footing with other agricultural products, he said.

“We’re not asking for special treatment, we’re asking to be treated equally,” Quarles said.

The 2018 farm bill was supposed to resolve the legality of banking services for the hemp industry. But major banks and credit card companies have remained skittish, creating hurdles to faster growth.

While some Kentucky hemp farmers and companies have found services with local and regional banks, many others struggle to obtain loans, open bank accounts or use mainstream credit card services, Quarles said.

“What I have observed is a hesitancy of the banking industry to fully embrace an industry that is now legal in America,” he said.

Awareness Campaign

Theoretically, financial institutions and payments processors have the legal coverage they need to do business with the industrial hemp industry.

In reality, many remain wary of possible scrutiny and punishment from federal regulators. Hemp—which is used to make rope, building materials, cloth, and fuel—continues to be associated with its euphoria-inducing cousin, cannabis.

Hemp industry advocates are working hard to make the financial sector aware of the difference.

“I have a phone call with somebody every day trying to convince them that hemp is not marijuana,” said the Hemp Roundtable’s Miller.

The late addition of the hemp provisions to the SAFE Banking Act should clarify for banks that don’t have to meet the same sort of regulatory oversight for serving hemp businesses as they do for marijuana, Miller said.

If passed, the legislation “will relieve them of that fear,” he said.

Holding Back

Banks say further action by Congress will give them confidence to lend.

“Banks want to serve their communities and support their local economies, but they need clear, unequivocal assurance from their regulators that hemp is distinguishable from cannabis,” the American Bankers Association said in July 25 congressional testimony.

Until then, most banks are holding back. “Hemp has been a big discussion for us in Wisconsin,” Nicole Kitowski, executive vice president and chief risk officer of Green Bay, Wisc.-based Associated Bank, said Sept. 24 at an anti-money laundering and financial crime conference in Las Vegas.

There’s a lot of complexity in whether hemp companies and their banks can meet the burden of proof that their plants don’t contain any psychotropic chemicals that might put them in the category of marijuana, she said.

So far, the potential revenues don’t offset the risks of working with hemp, she said.

Harvest Hiccups

Hemp farmers have had trouble financing the expensive equipment necessary to handle harvests, said Mark de Souza, CEO of Revolution Enterprises, an Illinois-based producer of hemp, CBD and marijuana products.

In Illinois alone, cannabis farmers are facing about $200 million in estimated losses due to their inability to process their 2019 crop at scale, said de Souza, a former agriculture adviser and transition team member to Illinois Gov. J.B. Pritzker (D).

“Had this type of legislation been available in conjunction with, or immediately following the 2018 U.S. Farm Bill, it would’ve been a paradigm changer,” said de Souza.

Growth Sector

Even if H.R. 1595 doesn’t clear Congress this year, it seems inevitable that hemp and pot banking legislation will eventually be enacted, said Samuel Dibble, a partner with Baker Botts LLP in San Francisco.

An array of research and investment is poised to flow into the hemp and marijuana industries once issues like access to financial services are resolved, he said.

Those future opportunities have shifted cannabis lobbying activity to Congress from state-level decriminalization efforts, he said.

“There’s a lot of interest in exploring really everything, including existing products that everybody has in mind, and those that are theoretical or haven’t been developed on an industrial scale,” Dibble said.

-- With assistance from Jacob Rund

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com