Can Financial Institutions Bank CBD Retailers? Did the Farm Bill Legalize CBD?

Terri Luttrell, CAMS-Audit
September 12, 2019
Read Time: min

The Federal Trade Commission’s latest round of warning letters to companies selling products containing cannabidiol (CBD) is a reminder to financial institutions to tread carefully as they look into the possibility of providing banking services to cannabis-related retailers and other cannabis-related businesses (CRBs).

The FTC warned three unidentified companies  that it is illegal to advertise that a product can “prevent, treat, or cure human disease without competent and reliable scientific evidence to support such claims.” The companies were selling oils, tinctures, capsules, “gummies,” and creams containing CBD, and each firm had advertised the products treat or cure diseases or health conditions, such as cancer, chronic pain, diabetes, and epilepsy.

In recent years, hemp and hemp-derived cannabidiol (CBD) products have been introduced into the market, sometimes as stand-alone oil products or in cosmetics, animal food, and infused food and beverages meant for human consumption. CBD is especially popular with some health enthusiasts, who buy anything from wellness products such as beauty creams and shampoos to flavored water.  Many believe that CBD holds therapeutic value for many diagnoses, including pain and anxiety. According to Food & Wine magazine, some bars and restaurants are serving CBD-infused cocktails, sauces, and even hamburgers. There are even CBD-infused dog treats to assist if your pet has anxiety issues.  

With the passing of the Agriculture Improvement Act of 2018 (2018 Farm Bill) many manufacturers, retailers, and financial institutions believe CBD products are now fully legal at the federal level.  That assumption is not quite accurate. The 2018 Farm Bill addresses the declassification of hemp as a Schedule 1 narcotic under the Controlled Substances Act (CSA), but not marijuana. CBD can be derived from marijuana or hemp, which are both subspecies of the cannabis plant. Marijuana-derived CBD has not been declassified and has not been federally legalized.

Image credit: Freek van der Weijden on Unsplash

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While the terms cannabis, marijuana, and hemp are often mistakenly used interchangeably, they are considerably different.  Marijuana, which remains classified by the CSA as a Schedule 1 narcotic along with heroin and LSD, is used for both recreational and medical uses and generally has a 10% or more content of tetrahydrocannabinol (THC), the component that is psychoactive and gets the user high.

Hemp-derived CBD oils and tinctures are legal under the Farm Bill if they do not make claims of unproven health benefits. Keep in mind, however, that hemp must have 0.3% or less THC to not be considered marijuana.  If the chemical composition of a CBD product tests about 0.3% it is considered marijuana and remains a Schedule 1 narcotic.  

CBD regulated by FDA

When the industry opened the door into CBD-infused food and cosmetic products, it immediately became partners with the Food and Drug Administration (FDA) whether it wanted to or not. In immediate response to the passing of the 2018 Farm Bill, then FDA Commissioner Scott Gottlieb, M.D. reminded the public that the agency has been given authority to regulate hemp and CBD under the U.S. Food, Drug, and Cosmetic Act (FD&C Act). He also noted that the FDA does not distinguish between hemp-derived CBD and marijuana-derived CBD.  Gottlieb stated that “it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. Under the FD&C Act, it’s illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements.” He made it clear that the agency will take enforcement action when necessary to protect the public but acknowledged that there are potential opportunities that cannabis and cannabis-derived compounds could offer. 

The FDA further states that there has been no FDA evaluation regarding whether CBD is safe and effective to treat disease, what the proper dosage is, how it could interact with other drugs or foods, or whether CBD has dangerous side effects or other safety concerns. As far as the FDA is concerned, CBD should be evaluated and go through the same standards and approvals as any other drug.  

According to the FDA, only one prescription drug product has been approved to treat rare, severe forms of epilepsy and the FDA has not approved any other CBD products. There is very limited available information about CBD, including information about its effects on the body or dose limitations. Even with that, CBD products are everywhere, including large retail chains such as Walgreens and CVS. The CBD oils and tinctures are legal under the Farm Bill if they do not make claims of any unproven health benefits and follow other state requirements.  Anything consumable and infused with CBD such as food, beverages, dietary supplements as well as cosmetics and lotions fall under the FDA’s authority.  The FDA has stated that the agency is currently working on rules to clarify CBD’s legal status. 

The FDA has recently cracked down on this untested compound when medical claims are made in marketing the products. According to CNBC, outgoing FDA Commissioner Gottlieb told lawmakers that he was uneasy about Walgreens and CVS selling CBD products in their drugstores because the products claims are out of line.  CVS recently pulled CBD products produced by Curaleaf from their stores after the cannabis producer received a warning from the FDA that they were selling misbranded “unapproved new drugs.”  The product claims that it can treat anything from cancer to Alzheimer’s disease. Gottleib resigned from the FDA in March 2019 and acting commissioner Ned Sharpless continues this work to ensure CBD is safe before used for human or animal consumption.  The FDA has also warned that its tests of some products allegedly containing CBD found many of them did not contain the levels of CBD claimed. “Consumers should beware purchasing and using such products,” the FDA says on its website.

What do CBD products mean for financial institutions?

All of this information is important for financial institutions to consider. At the same time, products infused with CBD are expected to reach $5 billion this year, up 706% from 2018, according to data research firm Brightfield Group. Many financial institutions do not want to be left out of this seemingly endless stream of revenue. In order to get in the game before it becomes flooded, financial institutions interested in banking CBD retailers, CBD-product manufacturers or other CBD-related businesses must perform a risk assessment on each CRB that they may wish to provide services for.  The board of directors and regulators should be brought in early in the risk-based decision making process.  When all partners are on board, success is much more likely.  If the decision is made to bank CBD, either hemp- or marijuana-derived, ongoing enhanced due diligence will be necessary due to the heightened risk and the cash intensity of the industry. 

At a minimum, the following steps are recommended:

  • Create detailed policies and procedures for providing these services; include what types of businesses/individuals you will bank (i.e., growers, attorneys/CPAs, employees, equipment suppliers, etc.). Have enhanced due diligence (EDD) requirements spelled out for each category based on risk
  • Obtain required ownership information, including all beneficial owners
  • Conduct negative news searches on all owners and authorized signers
  • Review and obtain all licensing information
  • Obtain current lab results proving the chemical composition of 0.3% if you are banking a business selling hemp-derived CBD products
  • Obtain financial statements and tax returns – ensure that they both support ongoing revenue streams
  • Obtain expected activity information and compare to actual account activity
  • Perform periodic on-site visits
  • Fee income for the institution could be significant. Due to the increased need for monitoring and enhanced due diligence, costs should be covered by a lump sum charge to the customer in addition to account analysis fees. 

Banking services for CBD businesses 

Providing traditional banking service for CBD customers undoubtedly comes with enhanced risk and enhanced due diligence requirements. Technology, such as AML products (anti-money laundering) that incorporate scenarios and watchlists to detect state-licensed CRBs, can make it easier to address some of the requirements and risks. In other cases, banks and credit unions may want to pursue help establishing policies and procedures either for or against banking CRBs to reflect the institution’s strategy, or assistance in identifying gaps in policies and procedures and in recommending changes to consider in advance of an audit or exam.

With the passing of the 2018 Farm Bill and possible safe harbor legislation with the pending Secure and Fair Enforcement (SAFE) Banking Act, the future looks promising for this growing industry. Once the FDA provides further guidance on the manufacturing and sale of CBD and with your regulator as partner, financial institutions should be able to benefit financially while maintaining a safe and sound risk-based compliance program.


About the Author

Terri Luttrell, CAMS-Audit

Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size. She has successfully worked with institutions in developing BSA/OFAC programs, optimizing various automated solutions, and streamlining processes while ensuring all regulatory requirements are met. As the Compliance and Engagement Director at Abrigo, Terri provides insights that contribute and support long-term banking strategies based on analysis of market and industry trends, competitor developments, and financial and regulatory technology changes. She is an audit-certified anti-money laundering specialist and a board member of the Central Texas chapter of the Association of Certified Anti-Money Laundering Specialists (ACAMS). Terri earned her bachelor’s degree in business administration, specializing in business and finance, from the University of North Texas.

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