Hemp Businesses Suffer from Banking Troubles
“We believe the passage of the 2018 Farm Bill will resolve those issues,” Senate Majority Leader McConnell had his staffers tell me. He was wrong. Since the passage of the 2018 Farm Bill hemp banking has only gotten worse.
December 20th, 2018 seemed to be a promising day for a wide range of people – from the American Farmer, to rising entrepreneurs, to Venture Capitalists, and even the everyday person.
With the signing of the 2018 Farm Bill, hemp was no longer a Federally Controlled Schedule I Narcotic. It was America’s new cash crop:
- A crop that brought promise to reinvigorating agricultural lands bringing young Americans back to the farm.
- A material that opened pathways to innovations in food, science, technology and health.
- And a consumer culture waiting for a world of change from a plant that offers potential solutions to America’s most pressing problems: industrial agricultural creating high inflammatory foods and tremendous environmental problems, an opioid epidemic plaguing every state in the nation, and over consumption of plastics and synthetic fibers mounding in our landfills, waterways and trash bins.
But much of this promise fluttered away as the Federal Reserve and their Big Bank influence stalled in providing guidance for hemp’s banking issues.
Banking Prior to the 2018 Farm Bill
Banking has not been perfect in the hemp space from the get-go, but there were workarounds because the market size and the legal grey area. Initially companies found success skirting banks by not having hemp in their name or specifying they were selling a variety of natural products as opposed to announcing their business in hemp.
Back in 2016 in Kentucky, the Commissioner of Finance wrote a letter providing guidance on banking hemp, mostly pointing to hemp’s legality under the 2014 Farm Bill. This eased some local banks’ minds, and they became open to holding hemp money, but not necessarily loaning or allowing a company to make money through merchant processing tools.
Merchant processing has been the ultimate disaster in the industry. Because in today’s modern ways, how can you grow a business if you can’t take credit cards or debit cards? E-commerce solutions like Shopify would allow a company to use their services, but their payment gateway, Stripe, was and still is closed to hemp companies.
As the hemp-derived CBD space grew, multiple third-party gateways, almost entirely overseas, began to expand giving opportunities for merchant transactions, but the services were expensive and risky with many companies becoming victims of fraud. (And to think an excuse of limiting hemp banking was to prevent fraud…)
The companies that provided these services offered unbearably high costs. For instance, one company offered rates starting between 7% and 10% of the sale, plus 10% holding with 30-day rollover, not to mention initial set up fees around $500 and $25 monthly fees. Consider this in comparison to an average of 2.5% to 2.9% for normal processing fees, with limited, if no, hidden fees.
Months before the 2018 Farm Bill passed, the merchant processor Elavon joined forces with US Bank to open banking for the ever so hot hemp-derived CBD market. At a market rate of 3% transaction fees, everyone in the hemp-derived CBD space signed up, making Elavon the largest merchant processor for hemp in the world. Unfortunately, this excitement was short lived.
Hemp Banking After The 2018 Farm Bill
The 2018 Farm Bill created high hopes for the industry. The industry put faith in those 13 words… “We believe the passage of the 2018 Farm Bill will resolve those issues,” and Senator McConnell could not have been more wrong.
Not more than 1 hour after the Farm Bill was officially signed, finally removing hemp from the Controlled Substances Act, the Food and Drug Administration issued a notice that hemp foods derived from the seed were now legally defined as “Generally Recognized As Safe” (GRAS), but that CBD was unlawful. This notice seemed to put banking on high alert.
By March of 2019, no more than 6-months after they opened processing, Elavon wrote their clients that they would be closing the door to CBD companies by May 15th. PayPal initiated an audit and immediately stripped companies selling legally manufactured hemp derived plant extracts. When asked why they shut down my accounts (including my personal account and non-profit accounts), PayPal said I’d need to subpoena them.
On April 2, 2019, Senate Majority leader Mitch McConnell and Senator Ron Wyden lead a bi-partisan initiative to request the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Office of Comptroller of the Currency (OCC) and Farm Credit Administration letters requesting the four groups provide guidance on the banking of hemp.
By April 24th 2019, the Kentucky Department of Financial Institutions sent a letter to State-chartered Depositary Institutions that provided guidance and some protections stating:
“With the hemp-related changed in the 2018 Farm Bill, financial institutions can clearly offer financial products and services to individuals or businesses participating in the legal production, consumption, or sale of hemp or hemp-derived products. Furthermore, a customer’s participation in the hemp industry should not serve as the sole basis for categorizing the customer as “high risk” for BSA/AML [Bank Secrecy Act/Anti-Money Laundering] purposes.”
However, these letters only seemed to incite more restrictions, especially by the bigger banks. On May 23, 2019, my bank J.P. Morgan Chase “decided to end [the] relationship” with my hemp company then branded as Nature’s Hemp Oil because “the word hemp was in the name.”
I was enraged at the turn of events. I started calling on various financial companies to get this changed. I felt like a dog chasing my tail. Finally on June 29, 2020 the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury, announced “FinCEN Guidance Regarding Due Diligence Requirements under the Bank Secrecy Act for Hemp-Related Business Customers.”
The letter outlined guidance related to “financial institutions BSA/AML risk considerations for only hemp-related businesses.” The guidance used examples of hemp-related businesses as “businesses or individuals that grow hemp and processors and manufacturers who purchase hemp from growers.” It went on to describe the legalities of hemp and made an important mention that preserved the legal “authority to regulate products containing cannabis or cannabis-derived compounds, including hemp under the Federal Food, Drug and Cosmetic Act and section 351 of the Public Health Service Act…” (this regulation has yet to be issued).
Problems Still Exist, Perhaps Worsen
Fast forward one year and the problems still exist. While opportunities and solutions are arising more frequently than before, surprising restrictions are still hindering advancements of legal hemp businesses small and large.
In the past two weeks alone the following three financial issues have occurred in the legal hemp industry:
- A small start-up is prohibited from retailing hemp-derived products because the product photos say supplement on the bottles, despite the thousands of products being sold worldwide, including across Amazon channels.
- An individual tries to set up a business account on Venmo to pay an influencer who markets hemp products and is banned from their software.
- The commodity trading and market analysis company, PanXchange gets kicked out of their bank because they… analyze hemp data. PanXchange worked with their bank without issue for over 10 years conducting international business when suddenly their banks anti-money laundering division sent notice of ending their relationship.
Is There a Safety Net that Can Save Us?
The discriminatory nature of these financial institutions needs to stop immediately, yet it’s nearly impossible to force this action when the largest banking institutions in the world are pulling against you and sadly, this market force is not new to hemp.
JP Morgan, the founder of the JP Morgan & Co (the predecessor of the three largest banking institutions in the world including JP Morgan Chase, Morgan Stanley and Deutsche Bank) was famous for his consolidation tactics – most notably related to railroads, steel and the natural fiber industry. JP Morgan believed consolidation would help industries grow more effectively and efficiently, which was part of the reason hemp was pushed out of global markets in the 1930s.
Today, Congress has the power to alter this course of action. Here are the current options that
would should fix these issues:
- SAFE Banking Act of 2021 – passed the House in 2020 and 2021 and has been referred to the Senate’s Committee on Banking, Housing and Urban Affairs. The bill primarily supports “Secure and Fair Enforcement” of Banking across the cannabis sector but includes language for hemp in its guidance. Overall, the Act is strong. With a Democratic-led Senate that is pro-cannabis, the opportunity for this bill to move is positive, but its chances of passing and ultimately being signed by President Biden are concerning.
- Including hemp banking language as a “rider bill” on a must pass bill like the Omnibus Spending Bill (I don’t know why this hasn’t happened yet) or the Farm Bill of 2023 (yikes, that’s too far away)
- A stand-alone bill for hemp exclusive of cannabis (…When was the last time Congress passed a stand alone bill?)
Right now, the protection mechanisms for hemp companies are limited and largely left in the hands of a dysfunctional Congress that is also juggling foreign cyber-attacks, COVID-19, banning a former President from re-election and debating whether the 99% of Climate Scientists are right.
If we don’t take action soon, JP Morgan’s consolidation legacy will continue to live on as financial institutions refuse to open their doors to the legal and rapidly evolving hemp industry, while favoring big corporations over small companies.
One would hope opening banking for a growing local economy in a time of economic stress would also be a priority, but politics is politics… So, what else can we do to resolve this that doesn’t rely on Congress? Is there enough evidence to file a class-action lawsuit? Could that move the needle for this entrepreneurial economy?