Month: August 2019

How to Get a Credit Union Account for Your Hemp Business

Commercial marijuana activity remains a federal crime, and the Bank Secrecy Act (“BSA”) generally prohibits financial institutions from accepting marijuana-generated dollars. Financial institutions that work with marijuana businesses must conduct due diligence to ensure that marijuana businesses are complying with state law. That includes regularly submitting Suspicious Activity Reports (“SARs”) to the Financial Crimes Enforcement Network (“FinCEN”). Regulated commercial hemp activity is not a federal crime, but hemp’s close proximity to marijuana makes it a generally high-risk endeavor for financial institutions who generally don’t have a high risk tolerance to begin with. That has made it very difficult for many hemp and hemp-derived CBD (“Hemp-CBD”) businesses to access bank accounts. That is changing.

On August 19, the National Credit Union Administration (“NCUA”) released Interim Guidance on Serving Hemp Businesses. The Guidance lays out what credit unions need to incorporate into their Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance programs in order to work with hemp businesses.

First, credit unions need to maintain appropriate due diligence procedures for hemp-related accounts and comply with BSA and AML requirements to file Suspicious Activity Reports (SARs) for any activity that appears to involve potential money laundering or illegal or suspicious activity. It is the NCUA’s understanding that SARs are not required to be filed for the activity of hemp-related businesses operating lawfully, provided the activity is not unusual for that business. Credit unions need to remain alert to any indication an account owner is involved in illicit activity or engaging in activity that is unusual for the business.

Second, if a credit union serves hemp-related businesses lawfully operating under the 2014 Farm Bill pilot provisions, it is essential the credit union knows the state’s laws, regulations, and agreements under which each member that is a hemp-related business operates. For example, a credit union needs to know how to verify the member is part of the pilot program. Credit unions also need to know how to adapt their ongoing due diligence and reporting approaches to any risks specific to participants in the pilot program.

Third, when deciding whether to serve hemp-related businesses that may already be able to operate lawfully–those not dependent on the forthcoming USDA regulations and guidelines for hemp production–the credit union needs to first be familiar with any other federal and state laws and regulations that prohibit, restrict, or otherwise govern these businesses and their activity. For example, a credit union needs to know if the business and the product(s) is lawful under federal and state law, and any relevant restrictions or requirements under which the business must operate. For example, certain hemp-derived products may now or in the future be regulated by state health departments and/or the U.S. Food and Drug Administration.

NCUA’s guidance is written for credit unions but these guidelines are important for hemp businesses because it gives insight into what credit unions are going to need from hemp businesses. Below are some questions any hemp business should be prepared to answer when seeking an account with a credit union.

Where was the hemp grown? For cultivators, this question should be easy as they are the ones growing hemp and can easily provide a credit union a copy of the license or permit provided by a state department of agriculture that authorizes the production of hemp under the 2014 Farm Bill, which currently governs domestic hemp cultivation, or the 2018 Farm Bill which will govern cultivation after the USDA starts approving state hemp plans. Companies that are manufacturing products that contain hemp or selling finished Hemp-CBD products, this may present more of a challenge if they haven’t been closely tracking the source of their hemp. Manufacturers and distributors should have copies on file of every hemp cultivator who grew hemp that is contained in their products and should be prepared to explain to a credit union how they keep track of this information.

Who is buying hemp? According to the Guidance, the NCUA does not believe that credit unions are required to submit SARs when working with hemp businesses, but they are still mandated to submit SARs for suspicious activity. That means the credit union is going to watch a hemp business’ account activity closely. If a hemp business is receiving payments from a suspicious account, that will raise red flags. Also, most states that allow for hemp cultivation do not allow the direct sale of raw hemp to unlicensed individuals. Some states issue processing, manufacturing, or wholesaling licenses. Hemp cultivators should be prepared to explain who is buying their hemp and should provide a credit union copies of the license or permits of their buyers, if applicable. Cultivators should also be prepared to explain how they transport hemp to buyers, especially if raw hemp is moving across state lines as many states have specific regulations on the topic. If a state doesn’t require a license to process or manufacture hemp, hemp cultivators should be prepared to explain that as well.

What products are you selling, where are you selling them, and how are they marketed? Lets cut to the chase: much of the interest in hemp is due to Hemp-CBD and the legality of Hemp-CBD varies widely from state-to-state and that the Food and Drug Administration’s (“FDA”) position is that Hemp-CBD cannot be added to food, dietary supplements, or unapproved drugs. NCUA indicated that credit unions must be aware of restrictions and regulations under other state and federal law. This question is going to be a major focus for distributors of Hemp-CBD products, but hemp manufacturers or cultivators should be prepared to answer this as well if they are selling directly to consumers or know that they are in the production chain of Hemp-CBD products. Credit unions are going to look out for Hemp-CBD in foods and dietary supplements, as the FDA has clearly stated that Hemp-CBD may not be legally added to these products. The credit union will also want to see marketing materials to watch out for medical claims as such claims will cause the FDA to categorize a product as an unapproved drug. The FDA’s position on Hemp-CBD in cosmetics and smokable hemp is not as hostile but some states have enacted laws or regulations prohibiting smokable hemp. States also differ widely on how they treat Hemp-CBD, generally including: what types of products are prohibited, standards for THC testing, requirements for labeling and packaging, manufacturing standards, and whether products must be registered in a given state, just to name a few examples. Hemp businesses should be prepared to explain how they are complying with regulations in each state where they do business.

How are you monitoring regulatory changes? With the ever-changing laws and regulations, hemp businesses should expect to discuss the efforts they make to stay up-to-date on law and policy regarding hemp. A credit union is going to want to know that its hemp clients are well informed and carefully tracking the industry with procedures in place to comply with new regulations.

The above questions are not a comprehensive checklist, but if you are prepared to answer each in detail, you’ll be in a good position when it comes time to meet with your local credit union. If not, contact our Hemp-CBD attorneys to help get your business on track.

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Utah MLM Essential Oils: doTERRA’s Copaiba Oil Challenges Young Living’s CBD Oil

Recently I wrote about the two dominant global MLM essential oil companies based in Utah: Young Living and doTERRA. Last month Young Living announced it is entering the CBD oil market, but doTERRA publicly stated on its website that it will not (yet) follow suit, even though everyone and their dog are clamoring for CBD oil and CBD oil-derived products. doTERRA only hints that it may produce CBD oil if it can be produced according to doTERRA’s rigorous standards for its products, but “Right now, it is not possible to deliver a CBD oil that meets [doTERRA’s] CPTG® standards.”

Instead, doTERRA has gone to great lengths to educate its distributors (wellness consultants) both about the medical and legal issues surrounding CBD oil. On its website in a post modestly titled Everything You Need to Know About CBD, doTERRA provides a part-medical part-legal treatise, complete with embedded video, a PowerPoint presentation, and 24 footnotes to medical journals and federal laws. Its thoroughness means that it is a beast to digest if you did not double major in pre-med and pre-law, but doTERRA makes some compelling points about the current unsettled state of CBD.

On the legal side, doTERRA takes a conservative approach:

  • doTERRA advises its distributors to “remain cautious” against products that may not follow the Federal Food, Drug, and Cosmetics Act (the “FD&C Act”) that may put health and safety at risk. This point is well taken, as we mentioned in a prior blog post entitled Four Important Considerations for Any Hemp CBD Company.
  • Relatively little medical and scientific research has been completed regarding CBD and its “perceived health benefits” (see FDA Says It Is Speeding Up The CBD Regulation Process). This point is also well taken with respect to U.S. regulators. Neither the FDA nor the USDA have issued implementing regulations yet regarding hemp-derived CBD.

Young Living is aware of these potential legal issues with the current state of CBD, and it has taken proactive steps to mitigate potential negative effects. In its acquisition of Colorado-based Nature’s Ultra that produces 0.0% CBD oil (no THC content), Young Living has opted to keep Nature’s Ultra as a separate operating company rather than integrating its operations within Young Living. Nature’s Ultra’s CBD oils can be purchased with Young Living’s essential oils blended into its products rather than the other way around.

On the medical side, doTERRA provides extensive information regarding cannabinoids:

  • The human body has cannabinoid receptors that are broken down into two categories:
    • CB1 receptors – affect the brain and central nervous system (pleasure and reward) (more widely distributed throughout the body).
    • CB2 receptors – immune system (inflammatory system) (less widely distributed than CB1 receptors).
  • THC works directly on both CB1 and CB2 receptors.
  • CBD works indirectly on both CB1 and CB2 receptors by slowing down the work of an enzyme called fatty acid amide hydrolase (“FAAH”), which breaks down anandamide (your body’s naturally-produced cannabinoid as a response to strenuous exercise (runner’s high), stress (fight or flight), and other related stimuli (stepping on a pile of your kid’s Legos in the dark)), which is why anandamide is called an endocannabinoid).
    • A slower breakdown in anandamide means it is present in the body longer and continues to interact with the body’s CB1 and CB2 receptors.

Finally, in good competitive market fashion, doTERRA educates its distributors that it already has a superior product to CBD oil called Copaiba oil:

  • Copaiba oil contains beta-caryophyllene (“BCP”), which is a cannabinoid and a sesquiterpene (delivers oxygen molecules to cells) found in hundreds of different plant species.
  • Copaiba oil comes from distilling the oleoresin of varieties of copaiba trees, which are found in Brazil. The resin is harvested similar to the method used to extract maple sap from maple trees.
  • BCP interacts directly with the body’s CB2 receptors (“no risk of psychoactive effects”), “soothing tissues and helping to manage healthy inflammatory responses.”
  • doTERRA’s copaiba essential oil contains 55% BCP content, which is the “highest BCP content of any known oil.”
  • Its efficacy means only “a drop or two” is needed for its BCP to start affecting the human body, so its price point is significantly lower than CBD oil per application (They can’t call it a “dose” because “These statements have not been evaluated by the Food and Drug Administration” and “This product is not intended to diagnose, treat, cure, or prevent any disease.”)
  • Copaiba oil has been produced under doTERRA’s rigorous proprietary CPTG® standards.

But at the end of the day, copaiba oil is not CBD oil. BCP is not CBD, even though it contains two of the same three letters and may be confusingly similar enough for doTERRA’s wellness advocates to have an opening in the conversation to educate the market about BCP’s benefits. doTERRA is hoeing a hard row right now, but there is a segment of the doTERRA and Young Living essential oil market that is hesitant to use products that have not been approved by the FDA or that have any trace of THC content, as I explained my prior blog post. If copaiba oil is as effective as and can be purchased at a fraction of the price of CBD oil, it may get some takers, but because it does not interact with the CB1 receptors, it may be a hard sell. And copaiba oil is not as cool or edgy as CBD oil. Will doTERRA eventually produce CBD oil? Almost certainly. Will doTERRA’s consultants be able to educate the market about copaiba and BCP and keep pace with Young Living’s sales of its CBD oil through Nature’s Ultra? Probably not. The developments over the next several months will be interesting as these two competitors continue to fight for market dominance.

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An Update on California’s Proposed Hemp and CBD Laws

California’s legislature introduced a potentially game-changing hemp-derived cannabidiol (“Hemp CBD”) bill in January 2019: Assembly Bill 228 (“AB-228”). For those of you who aren’t familiar with AB-228, see my posts here, here, here, and here. AB-228 would change California’s anti-Hemp CBD policies, and the highlights of some of the more significant changes from the recent version are:

  • Licensed cannabis companies wouldn’t be precluded from being in the hemp business;
  • Hemp products that are foods, beverages, or cosmetics would have some minimal labeling requirements;
  • Food manufacturers that make hemp products would be required to obtain certain registrations and would need to demonstrate that their hemp comes from a jurisdiction that has an “established and approved industrial hemp program” that meets all federal requirements for the sale and cultivation of hemp;
  • The CDPH wouldn’t be able to conclude that foods, beverages, or cosmetics are adulterated just because they contain CBD; and
  • Raw hemp products would need to undergo certain lab testing and get certificates of analysis prior to sale.

AB-228 has made it all the way through the California Assembly and part of the way through the California Senate, with almost complete support along the way. AB-228’s most recent hearing in the Senate Appropriations Committee was on August 12, 2019, during which time the bill was placed in the “Suspense File”. The Suspense File is described as follows:

The Suspense File process has been a part of the Committee Rules since the mid-1980s as a way to consider the fiscal impacts to the state of legislation as a whole. The committee analysis indicates whether a bill’s fiscal impacts meet the criteria for referral to the Suspense File.

Bills that meet the Committee’s Suspense threshold will be placed on the Suspense File after testimony is taken at a regular-order hearing. A vote-only Suspense Hearing will be held prior to the deadlines for fiscal committees to hear and report bills to the Senate Floor. Bills will either move on to the Senate Floor for further consideration or be in held in committee and under submission.

At the Suspense File hearing bills are taken up alphabetically by author. There is no public testimony.

Being in the Suspense File doesn’t mean that AB-228 won’t pass—it just means that it’s on hold for the time being. In fact, this isn’t the first time that AB-228 has wound up in a suspense file. AB-228 sat in the California Assembly’s Suspense File just a few months ago. We don’t yet know when AB-228 will be heard next, but hopefully sometime this year.
Of equal importance is SB-153, California’s proposed bill to update its hemp cultivation laws, which I wrote about previously here. For a summary of SB-153’s important provisions:
  • Adding a new definition of “industrial hemp”;
  • Narrowing the scope of who qualifies as an established agricultural research institution to be more consistent with federal law;
  • Requiring CA to submit a 2018 Farm Bill-compliant hemp production plan to the U.S. Department of Agriculture;
  • Requiring registrations for commercial and non-commercial growers who don’t qualify as established agricultural research institutions; and
  • Creating enforcement provisions, penalties for false statements on applications, and a bar on persons from being a part of the industrial hemp program if they had a conviction relating to controlled substances in the prior 10-year period.

SB-153 was recently modified further in the California Assembly, and one of the interesting new modifications is the following:

Industrial hemp shall not be cultivated on a premises licensed by the department to cultivate or process cannabis. Industrial hemp, regardless of its THC content, that is cultivated on a premises licensed by the department for cannabis cultivation shall be considered cannabis as defined in subdivision (f) of Section 26001 of the Business and Professions Code and subject to licensing and regulatory requirements for cannabis pursuant to Division 10 (commencing with Section 26000) of the Business and Professions Code.

So the message here is that California Department of Food & Agriculture licensees won’t be able to cultivate industrial hemp on their licensed premises, and that if they cultivate plants with less than .3% THC, the state will consider them “cannabis” and subject them to all state-level cannabis regulations.

SB-153 was passed off to the Assembly Appropriations Committee, but it doesn’t appear that a hearing has been set yet.

Stay tuned to the Canna Law Blog for developments on AB-228 and SB-153.

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Hemp-CBD Across State Lines: Georgia

The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp-CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, and Florida. This week, we look at the Peach State.

Earlier this year, Georgia jumped on the hemp bandwagon by enacting HB 213, which legalized the commercial production of hemp and hemp products in the state. Under the new law, which is codified in O.C.G.A. § 2-23-1 et seq., only growers and processors licensed by the Georgia Department of Agriculture (“GDA”) will be permitted to grow and process hemp in the state. Note that licenses will not be issued by the GDA until final rules and regulations are in place. The GDA’s process of drafting rules and regulations began in July with the agency released proposed rules that are now open for public comments.

The proposed rules provide that licensees shall comply with specific testing, storage, recordkeeping and transportation requirements. For example, in Georgia, no licensed grower or processor may transport hemp without a hemp transportation permit issued by the GDA. Hemp may only be transported to permittees or to storage facilities owned by the licensees and listed on the licensee’s approved license application.

The proposed rules also address the manufacture of hemp products. Hemp product means “all products with the federally defined THC level for hemp derived from, or made by, processing hemp plants or plant parts that are prepared in a form available for commercial sale, but not including food products infused with THC unless approved by the United States Food and Drug Administration.” (Emphasis added).

Although the manufacture and sale of Hemp-CBD food is expressly prohibited – and reiterated in a May 10 press release issued by the GDA – the manufacture and sale of other Hemp-CBD products, such as smokables and cosmetics, is not clearly authorized nor restricted. However, the GDA’s proposed rules provide that “[n]othing in these Rules shall be construed as authorizing any person to violate any Federal law or regulation” and requires that licensed processors comply with the federal Food, Drug and Cosmetic Act and other rules and regulations related to product manufacturing, consumer safety and public health.

As this summary reveals, the proposed rules address the fundamental issues that surround the production of hemp but are vague on the manufacture and sale of Hemp-CBD products, with the exception of food. As the public comment period evolves, it will be interesting to see whether the GDA clarifies this issue and whether other state agencies, such as the Georgia Department of Health, provide additional guidelines on the production of these products.

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Four Important Considerations for Any Hemp CBD Company

State governments and the federal Food and Drug Administration (“FDA”) take wildly different approaches when it comes to Hemp-derived cannabidiol (“Hemp CBD”), and for the most part, the ball is still in the government’s court to actually regulate hemp and Hemp CBD. The Food and Drug Administration (“FDA”) and U.S. Department of Agriculture (“USDA”) haven’t issued regulations yet, states like California are still considering laws that would allow (or ban) many Hemp CBD products, and the interstate transport protections under the 2018 Farm Bill arguably still haven’t been fully implemented because the USDA hasn’t even reviewed a single state hemp production plan.

All of this makes for a lot of uncertainty for Hemp CBD companies, both in terms of how they operate internally and how they contract with third parties. It can be tough enough for Hemp CBD companies to comply with the little available guidance that’s out there, but things get increasingly difficult when Hemp CBD companies have to trust that their suppliers, manufacturers, distributors, or other partners are actually following the rules or even trying to follow the rules.

It almost goes without saying that when doing business, comprehensive written contracts that detail each party’s rights and obligations are essential. Our Hemp CBD lawyers still see comprehensive transactions memorialized on one- or two-page, bare-bones contracts or even on a “handshake” basis. This is almost always a bad idea, and is especially dangerous in an industry with so many legal and regulatory pitfalls and constant changes in the law. Hemp and Hemp CBD products should be treated like any other commodity, and legitimate contracts should be a serious consideration. No matter what kinds of Hemp CBD contracts a company might enter into, there are some important things that companies should at least consider when inking a transaction.

#1 Making Sure the Hemp is Legal

Hemp and Hemp CBD purchasers should want reassurances that the hemp or Hemp CBD products they are purchasing was grown in accordance with both state and federal law, using approved seed cultivars, passes stringent state testing requirements, etc. It’s not enough to just trust a seller or to assume that because hemp is being sold, it’s legal. Failure to vet suppliers could lead to serious legal ramifications. This doesn’t just apply to purchasers of biomass—buyers of manufactured products can ask the same (and even more) questions. If the hemp isn’t grown in accordance with the law, then that could legally “taint” all products made from that hemp and pose risks to everyone in the supply chain.

#2 Making Sure the Hemp is “Hemp”

One of the biggest concerns for Hemp CBD companies should be ensuring that the product that they are purchasing is not “cannabis” or “marijuana” as defined under state or federal law. The difference between “hemp” on one hand, and “cannabis” or “marijuana” on the other, usually is the .3% THC threshold (although states are taking varied approaches to how this is measured). If what’s cultivated has .3% or less it’s hemp and could be legal under federal and state law. But if it has any more than .3% THC, it may be considered cannabis and then be illegal under federal law, or be unregulated (and by extension, illegal) under local law. Even though more and more states are requiring lab testing, it’s always a good idea to include lab testing as a requirement in a contract.

#3 The Chain of Custody

Even if the parties ensure that lab testing is performed or that hemp is legal where it came from, it can be a moot point if the results aren’t properly used. If a government decides to investigate a Hemp CBD company, it may demand proof that what they’re making actually contains legally produced hemp. If companies can’t prove the “chain of custody” of the hemp, an investigator could conclude that the hemp at issue was not grown in accordance with state law. It’s much easier to get all the chain of custody information in a contract, rather than hoping your suppliers will give an investigator information that will help you.

#4 Watching the Advertisements

In the next few years, we’re likely to see more and more litigation over claims made in connection with Hemp CBD products (one such case alleging misleading statements on a company’s website was just filed in August 2019). We’ve already seen the FDA send warning letters to companies who make medical claims on in connection with their Hemp CBD products, and it’s likely that in the coming days the Federal Trade Commission (“FTC”) could take action against online advertisers (I recently wrote about the FTC dangers relative to using social media influencers to advertise cannabis, which are very similar for Hemp CBD companies). Hemp CBD companies can in many cases face penalties if third parties market their products unlawfully. Hemp CBD companies should take a hard look at what’s in their third-party contracts relative to marketing.

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