What Compliance Needs to Know About Hemp

By Robert Rowe

It seems hard to believe that in the late 17th and early 18th centuries, hemp was a valued product in the American colonies. In fact, some colonies required farmers to raise hemp and it would often be used for bartering when other forms of currency were scarce. Around the time of the Civil War, though, as other commodities became more commercially useful, hemp fell into disfavor. For example, one of the most common uses of hemp was to make canvas and ropes for ships, but as steam power took over through the end of the 19th century, the need for hemp declined. And then, during the early part of the 20th century, marijuana became illegal.

When marijuana (spelled marihuana in federal law) became criminalized, hemp was caught in the legal ban since the plants are all part of the same family. Until late 2018, industrial hemp was covered by the restrictions that applied to marijuana and other narcotics under the federal Controlled Substances Act, even though industrial hemp lacks the same chemical compounds that provide the “high” produced from ingesting marijuana.

A version of this article originally appeared in the November/December 2019 issue of ABA Bank Compliance magazine. It has been revised and updated to reflect more recent developments.
However, these restrictions changed when President Trump signed the Agriculture Improvement Act of 2018 (the 2018 Farm Bill), on Dec. 20, 2018. The 2018 Farm Bill includes Subtitle G, which specially applies to hemp production. Basically, the statute carves out a special exception from the Controlled Substances Act for certain strains of hemp. As a result, hemp can be legally grown in the United States, as long as certain conditions set forth in the statute are met. And for bankers, those conditions are the critical factor.

For bankers, it’s important to understand these specific conditions and qualifications to ensure agriculture lending stays on the right side of the law. In order for a plant to qualify as hemp it must have less than 0.3 percent concentration of tetrahydrocannabinol, or THC, the chemical element that has the psychoactive effects found in most strains of cannabis and what makes cannabis otherwise illegal under federal law, and the crop must be produced according to a regulatory framework established by the U.S. Department of Agriculture. Importantly, the CSA exception under the 2018 Farm Bill also applies to hemp derivatives and, in particular, to one derivative that has generated a great deal of interest: CBD, or cannabidiol, which is subject to oversight by the Food and Drug Administration.

Statutory requirements and USDA

Under the 2018 Farm Bill, a state or Indian tribe that wants to serve as the primary regulator for hemp production in their state or territory must submit a regulatory plan to USDA for approval. The statute requires the plan to include certain specific elements, specifically:

  • Procedures to track information about tracts of land where hemp will be grown
  • Procedures for testing hemp to ensure it stays within the 0.3 percent concentration level
  • Procedures for disposal of hemp grown in violation of the restrictions as well as disposal of any by-products from growing hemp
  • Procedures for enforcing the regulations
  • Procedures for annual inspections
  • Certification that the state or Indian tribe has sufficient resources to carry out its regulatory plan

To date, at least 47 states have enacted legislation to establish industrial hemp cultivation and production programs. Many of those state statutes predate passage of the 2018 Farm Bill, and states have been actively reviewing and updating their laws to bring them in line with the federal statute and expected USDA regulations. It is important to note that federal law, and USDA regulations, will set a floor for hemp regulation at the state level—meaning that states will be free to set more stringent standards for their local markets if they deem appropriate. Banks will need to be cognizant of the potential for differing legal standards for hemp cultivation and production in their own state and from state to state.

Perhaps the most significant challenge faced by growers—and the bankers that provide services to them—is ensuring that the concentration level of the crop is within the established 0.3 percent THC parameter. During the growing season, the effects of sunlight, rain, and other growing conditions can cause the THC level in the plant to fluctuate, sometimes exceeding the statutory concentration level despite the best efforts of the farmer. That’s why USDA’s regulations regarding testing processes and procedures will be critically important in understanding to what extent the crop can reliably be grown within the threshold, a point that ABA stressed in its Jan. 29 comment letter to USDA, urging flexibility in its testing approach to accommodate good-faith hemp growers whose crops inadvertently exceed the threshold. ABA also pointed out that bankers will need access to the USDA database of licensed growers to ensure banks can verify who is authorized to grow hemp under the rule.

Apart from the plant, the statute imposes several other conditions. For example, anyone convicted of a felony or anyone who makes a false statement on their application, is ineligible for a state license.

The USDA rule

When a state or Indian tribe creates a regulatory scheme for licensing and regulating hemp production within their territory, the scheme must conform to regulations developed by USDA. On Oct. 31, 2019, USDA published an interim final rule that governs the production of hemp. Recognizing the significant demand for guidance, USDA issued the regulation as an interim final rule instead of a proposal, although it may make adjustments to the rule. The program covers the requirements for both state and tribal plans as well as USDA licensing for those states and tribes that have not implemented their own plans, including records on hemp production, testing the levels of THC, disposal of non-compliant product and overall compliance. For the most part, the interim final rule follows the provisions outlined in the statute.

Once a state or tribal plan has been approved and is in place, USDA may audit performance to ensure compliance. If a state or Indian tribe is found to be non-compliant, USDA may take appropriate action to ensure the state comes back into compliance. Separately, a hemp producer may be found in violation if it does any of the following:

  • Fails to provide a legal description of the land where hemp will be grown
  • Fails to obtain the appropriate license
  • Produces hemp with a THC concentration that exceeds the limit

If a violation is discovered, the state or Indian tribe may prescribe appropriate corrective action or may refer the matter to law enforcement or, if there are three repeat violations in a five-year period, ban the grower from growing for five years.

If a state approves hemp production within its borders but does not submit a plan to regulate that production to USDA, then a hemp grower will be subject to the regulations developed and administered by USDA. What also is important to recognize is that states still have the authority to ban hemp production, making it important to know the law in your state.

Interstate movement

The 2018 Farm Bill provides that no state or Indian tribe may prohibit the movement of hemp or hemp products across state lines. This is going to present different challenges. Industrial hemp strongly resembles other strains of cannabis and there are no reliable tests available yet that distinguish hemp with acceptable concentration levels of THC from other varieties of the plant. The current lab tests only determine whether the plant contains THC. And so, until reliable tests are developed, this will be a vexing issue, particularly when product is being moved across states which have not authorized medicinal or adult use of marijuana.

Food and Drug Administration

One of the provisions of the 2018 Farm Bill that has generated a fair amount of interest—and confusion—is the treatment of hemp derivatives. Since the 2018 Farm Bill also exempted derivatives from coverage by the Controlled Substances Act—provided that the hemp from which the derivative was made is below the 0.3 percent THC concentration level—a whole new class of product is flooding the market, particularly CBD oils.

Even though the 2018 Farm Bill exempted industrial hemp from the Controlled Substances Act, it did not change the authority of the FDA. As stated by an FDA official during a congressional hearing in July 2019, “FDA’s existing authorities over foods, dietary supplements, human and veterinary drugs, and cosmetics apply to hemp products to the extent such hemp products fall within those categories. These safeguards help ensure that Americans have access to safe and accurately labeled hemp products, and, in the case of drugs, that patients can depend on the effectiveness of these products.” Since CBD is a component in a drug that was approved by the FDA in 2018 to treat a rare form of epilepsy, the agency considers CBD a medical ingredient and therefore prohibits its use in food and other ingestible products.

In early 2019, then-FDA Commissioner Scott Gottlieb indicated that the FDA would act soon to resolve any questions, noting that “[t]he increasing public interest in these products makes it even more important with the passage of this law for the FDA to clarify its regulatory authority over these products.” Although Commissioner Gottlieb left the FDA at the end of March 2019, the FDA has moved ahead with efforts to clarify its policy on hemp derived products. It hosted a public hearing on the topic at the end of May 2019 and the agency is currently reviewing comments to help inform its deliberations regarding the safety and effectiveness of CBD.

The FDA also is evaluating how best to preserve and incentivize research into cannabis and CBD drug development, while considering possible regulatory frameworks to enable non-drug uses, including in foods and dietary supplements. It will likely take the FDA some time to gather and evaluate the necessary data on health and safety before issuing final regulations, but it does not appear that the FDA will release specific guidance on CBD anytime soon.

Nevertheless, ingestible products containing (or claiming to contain) CBD have become widespread—from gummies at the gas station to CBD lattes at the corner coffee shop. Although these products violate FDA regulations, the fact of the matter is that the agency has limited resources to police and enforce its regulations. As a result, the FDA has chosen to focus its energy on bad actors marketing CBD products with unsubstantiated claims that the product can be used in the diagnosis, cure, mitigation, treatment, or prevention of diseases such as cancer, Alzheimer’s disease, psychiatric disorders or diabetes. Before any such claims can be made in marketing or promotional materials, the product must be tested and approved by the FDA. Recently, the agency issued a series of warning letters to companies making untested medical claims.

Apart from ingestible products, there are any number of topical applications, including creams, lotions, and cosmetics, that include CBD. Because these products are not ingested, it appears they fall within the exception for derivatives included in the 2018 Farm Bill. There is, however, one notable exception that is clear: hulled hemp seeds, hemp seed protein, and hemp seed oil are exempt from the FDA restrictions. For any other hemp derivative, including CBD oil, FDA approval must be secured before the product can be legally marketed.

What’s next?

When it issued the interim final rule, USDA pointed out that the great interest in hemp production is driven by the potential high returns from sales of hemp. Hemp, it turns out, is a viable replacement for tobacco, making it attractive to tobacco farmers looking for a replacement crop as the use of tobacco declines. Hemp also can be used in flooring, insulation and other products used in the construction business, making it an appealing and less expensive alternative for existing products that are petroleum-derivative. And the demand for CBD made from hemp is clearly increasing. However, the regulatory framework is still settling and requires vigilance on the part of compliance officers to know the risks and how to mitigate them.

The key for bankers: wait and watch.

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