Federal and state bank regulators announced Tuesday that they were scrapping a burdensome requirement that banks said kept them away from the hemp business. Banks will no longer have to treat their hemp customers as suspicious and file reams of paperwork to anti-money-laundering authorities for each interaction.
The change could provide a major boost to a niche product that began its own legalization process last year.
“Banking has been an ongoing problem,” said Erica McBride Stark, the executive director of the National Hemp Association, a trade group for growers. “So this actually should be quite helpful.”
Hemp products are made from the same plants that produce marijuana, but they are cultivated to have far less tetrahydrocannabinol, or THC, the chemical that produces a “high” when ingested. The plants’ stalks can be woven into fabric and their seeds processed into oils used in food, but they cannot be made into drugs.
Even so, federal law long considered hemp to be as forbidden as cocaine and heroin. But with the legalization of marijuana spreading across the country — 33 states have legalized the drug for medical use and 11 states will allow sales for recreational use by January — lawmakers in Washington decided to do away with the designation for its milder sibling.
Last year Congress legalized hemp as a crop and directed the Agriculture Department to start regulating hemp production. It took the agency almost a year to devise rules for the industry, but once they were released, on Oct. 31, bank regulators prepared to take action. Tuesday’s statement, from the Federal Reserve, the Federal Deposit Insurance Company and other state and federal regulators, informs banks that they can now treat hemp producers like other customers, as long as the companies can prove they’re following licensing requirements.
The restrictions on the industry had held back even Ms. Stark’s organization, a nonprofit that does not actually produce hemp. The trade group had problems getting basic services because banks were worried that it could be receiving proceeds from a crime when it collected its members’ dues.
The Agriculture Department rule change on its own did not help. “They understood that hemp was removed from the federal Controlled Substances Act but because of the paperwork that was involved, a lot of them were just like, yeah, it’s just not worth it,” she said.
Rob Nichols, the president of the American Bankers Association, a trade group, said his members had been pushing for the change for some time.
Last month, the association surveyed 1,800 agriculture-focused banks in the country and found that almost half had gotten questions from their farmer-customers about whether they would still do business with them if they started growing hemp.
“We appreciate the steps regulators have taken today to clarify regulatory expectations for banks, and we look forward to working with them as they develop additional guidance,” Mr. Nichols said.
While the change will help businesses making clothes and other hemp products, it does not affect the legal marijuana businesses dealing with the same problems. The federal government still considers marijuana to be illegal, and even local banks have been too worried about getting in trouble to deal with them.
But banks large and small have come together to support a bill in Congress, the SAFE Banking Act, that would legalize marijuana banking by stipulating that the proceeds of a state-sanctioned marijuana business would not be considered illegal under federal anti-money-laundering laws.
The House of Representatives passed a version of the bill, and the banking industry is pushing the Senate to take it up. If it were to become law, it would let banks dive into a lucrative new industry that has been plagued by security concerns and is desperate for even the most basic services, like checking accounts and credit card processing.
Even though banks have been slow to embrace the cannabis industry, investors have been geared up to profit from it. Analysts tracking publicly traded companies have added pot producers to their portfolios, in order to help investors decide where best to maximize their exposure to the industry. Ultrarich venture capitalists have begun to treat pot businesses like tech start-ups.
Banks have been the buzzkills. When Uruguay became the first country in the world to legalize marijuana two years ago, American banks warned their Uruguayan counterparts that they would cut them off if they provided services to pharmacies selling the drug. Banks in Canada, where marijuana has been legal for the past year, are still worried about doing business with pot producers in case it causes them problems south of the border.
Still, it wasn’t clear on Tuesday that the change to hemp regulations would immediately influence bankers’ attitudes. Bankers will still have to study up on the complicated licensing requirements that states and the Agriculture Department have devised for hemp growers.
In the meantime, hemp growers’ hopes might still be dashed. Ms. Stark said she had heard Wells Fargo was considering offering banking services to hemp businesses, but a Wells Fargo spokesman said the bank was taking no such steps.