It easily slipped past national attention as an inevitable government shutdown dominated coverage, but for the first time since the 1940s, farmers can cultivate hemp as a crop.

The Agriculture Improvement Act of 2018, known as the Farm Bill, was approved in Congress with bipartisan support and signed into law by President Trump in late December. It codified a process by which states can seek approval from the federal Department of Agriculture for hemp crops and selling hemp-derived products. The law also removed hemp from the Controlled Substances Act.

The one catch: Any hemp yield must contain less than a miniscule 0.3 percent concentration of tetrahydrocannabinol (THC), the psychoactive compound that gives marijuana its mood-altering effect.

“The lifting of the federal ban on non-psychoactive hemp is a concrete sign that the ‘reefer madness’ which first led to its criminalization is finally coming to an end,” says Aaron Smith, executive director of the National Cannabis Industry Association. “[The Farm Bill] is a step in the right direction for comprehensive cannabis policy reform and will help fuel discussions in Congress about the best ways to end federal prohibition and create a regulated national cannabis market.”

The hemp-related provisions of the Farm Bill are notable as they come amid battles that have pitted states, members of Congress, and Trump administration officials against each other over marijuana legalization. As of the New Year, 22 states have decriminalized marijuana, 33 states have approved medical marijuana, and 10 states and Washington, D.C. have fully legalized marijuana sales and use.

The business world is paying attention. In July, the Canadian company Tilray became the first marijuana business to complete an initial public offering on a major U.S. stock exchange, Nasdaq. In December, Altria, one of the world’s largest producers of tobacco products, announced a $2.4 billion investment in Cronos Group, a Canadian marijuana business.

Despite this momentum, companies that incorporate marijuana and related products and accessories into their business plans still face formidable legal roadblocks and compliance challenges.

Federal clashes

The root of pot-related confusion is the Controlled Substances Act. As the primary source of national drug laws, it classifies marijuana as an illicit substance on par with cocaine and heroin. Since its passage in 1970, the law has generally banned the cultivation, distribution, and possession of marijuana.

In January 2018, former Attorney General Jeff Sessions rescinded a key piece of Justice Department guidance that, back in 2014, sought to temper the government’s legal stance as state legalization efforts gained traction.

“The lifting of the federal ban on non-psychoactive hemp is a concrete sign that the ‘reefer madness’ which first led to its criminalization is finally coming to an end.”

Aaron Smith, Executive Director, National Cannabis Industry Association

The so-called “Cole Memorandum” had deemphasized the need for federal enforcement unless certain enforcement priorities were involved. Among them: preventing the distribution of marijuana to minors and preventing revenue from the sale of marijuana from going to criminal enterprises. Under Sessions’ leadership, however, those policies (although not the connected enforcement priorities) were vacated and replaced with new guidance he said represented “a return to the rule of law” and “well-established principles when pursuing prosecutions related to marijuana activities.”

Congress rolls their own

Even with states legalizing recreational and medical uses, companies in the cannabis space face a number of uncertainties, not the least of which is federal enforcement (both pre- and post-Sessions’ leadership). In response, sympathetic members of Congress have stepped into the fray to address such issues as the availability of financial services for marijuana businesses, federal tax treatment, federal law enforcement, and existing drug classifications. In 2019, it can be expected that many of these past legislative efforts will once again emerge in the new session.

Among those bills are the Small Business Tax Equity Act. It would allow state-legal cannabis businesses to deduct the associated costs of selling their product for the purposes of the federal income tax filings. Internal Revenue Code (Section 280E) states that no deduction is allowed for any amount paid or incurred during the taxable year if a business “consists of trafficking in controlled substances prohibited by Federal law.”

The Responsibly Addressing the Marijuana Policy Gap (RAMP) Act would address a variety of issues, including: eliminating civil and criminal penalties for marijuana-related activities authorized by state or tribal law; eliminating restrictions on print and broadcast advertising; protections for depository institutions that provide financial services to cannabis-related businesses; specifying that marijuana-related businesses are entitled to federal bankruptcy protections; and exempting property from civil forfeiture due to state-authorized marijuana-related conduct.

In December, Sen. Cory Gardner (R-Colo.) introduced an amendment to the First Step Act, a slate fo criminal justice reforms, that, had it not been blocked by party leadership, would have ensured that states have the right to determine the best approach to marijuana within their borders. It would have also automatically expunged federal marijuana use and possession crimes. The amendment to the 2018 crime bill mirrored language of the bipartisan STATES Act that Gardner introduced with Sen. Elizabeth Warren (D-Mass.) in June.

Last month, Gardner spoke on the Senate floor about the perils of disharmonized state and federal law.

“This disconnect doesn’t just effect the industry’s patrons, or even just its growers and retailers for that matter. It also makes criminals of those outside the industry,” he said “Plumbers, electricians, bankers, landlords, and real estate service providers, employment and advertising agencies, insurance companies, HR services, and all of the everyday businesses that interact with the marijuana industry are affected by the federal law, too. That’s because when they take money from a marijuana business federal law considers them money launderers, putting them at risk for both criminal liability and civil asset forfeiture.”

Elections have consequences

As important as the legislation brewing in Congress may be who is, and who is not, still working the hallways of Capitol Hill.

With Democrats successfully re-seizing the House of Representatives during the November mid-term elections, Rep. Jim McGovern (D-Mass.) will serve as chairman of the House Rules Committee. He has been vocal in his support for accommodating state marijuana laws. “Citizens are passing ballot initiatives, legislatures are passing laws, and we need to respect that,” he recently said.

Also important for the legalization cause is the departure of Texas Republican Pete Sessions, the former chairman of McGovern’s committee. A casualty of the recent election, he was an outspoken adversary of pot legalization.

“Sessions was the single greatest impediment in the U.S. House to the passage of common-sense, voter-supported marijuana law reform measures,” says National Organization for the Reform of Marijuana Laws Political Director Justin Strekal. “His departure opens the door for the possibility of House lawmakers in 2019 enacting a number of significant policy changes.”

The compliance buzzkill

As the legal and legislative landscape continues to shift, a host of regulatory and compliance challenges continue to vex companies that buy and sell marijuana. Among the many issues affected: tax law, food safety procedures, false and deceptive medical claims, labelling concerns, advertising restrictions, and banking challenges.

The easing of hemp restrictions in the Farm Bill prompted Scott Gottlieb, commissioner of the Food and Drug Administration, to address his agency’s regulation of products containing cannabis and cannabis-derived compounds.

“Just as important for the FDA and our commitment to protect and promote the public health is what the law didn’t change. Congress explicitly preserved the agency’s current authority to regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act and the Public Health Service Act,” he said.

Gottlieb expressed concerns about the number of drug claims made concerning products not approved by the FDA that claim to contain cannabidiol (CBD) or other cannabis-derived compounds. “Selling unapproved products with unsubstantiated therapeutic claims is not only a violation of the law, but also can put patients at risk,” he said.

While products containing cannabis and cannabis-derived compounds remain subject to the FDA’s requirements, “there are pathways available for those who seek to lawfully introduce these products into interstate commerce,” Gottlieb said. In June, the FDA approved a drug, Epidiolex, that contains cannabis-derived CBD for the treatment of seizures associated with severe forms of epilepsy.

Got papers?

Seemingly mundane infractions can also trip up a business, according to the firm Adherence Compliance, developer of a risk assessment and compliance management app for marijuana businesses. After conducting more than 600 cannabis compliance inspections with its automated compliance platform, Adherence detailed top medical marijuana dispensary infractions:

  • Not adding all marijuana products into a state-mandated inventory tracking system;
  • Not having all required federal and state financial business documentation available on demand; and
  • Marijuana sold to patients does not include all required public health and safety warnings.

“Inventory is one of the most challenging aspects of running a marijuana business,” the firm wrote in a blog post on its Website. “Marijuana product and/or cash diversion is the primary concern of regulators and a pillar of Cole Memo compliance. Is inventory reconciled daily between physical counts, POS inventory, state-mandated tracking inventory, and the accounting system for related tax payments? This is the number one infraction across all marijuana license types.”

Banking on success

The biggest challenge for pot-based businesses is the lack of available banking services. Because marijuana remains illegal at the federal level, most financial institutions refuse to accept their deposits on offer loans.

A report from the Congressional Research Service, “The Marijuana Policy Gap and the Path Forward,” detailed the issue: “So long as marijuana remains classified as a Schedule I controlled substance under federal law, financial institutions and their directors, officers, employees, and owners could be subject to severe criminal and administrative sanctions for providing financial services to marijuana businesses, even if those businesses are operating in compliance with state law.”

To the extent that a bank acquires proceeds with the knowledge that they are derived from the sale of marijuana, the proceeds could potentially be confiscated by federal authorities, even when the underlying actions are permissible under state law, the report added. For example, if a bank originates a loan to a business openly operating as a state-authorized medical marijuana dispensary, “the principal and interest payments earned by the bank on that loan could be subject to forfeiture.”

For those rare banks that buck the trend—the Treasury Department estimates that there are about 400 of them—or that come into related assets, the Treasury Department’s Financial Crimes Enforcement Network imposes a variety of compliance obligations. Those demands, first itemized in 2014 guidance, require filing Suspicious Activity Reports. As of September 2018, FinCEN has received a total of 67,024 SARs related to marijuana businesses.

In assessing the risk of providing services to a marijuana-related business, FinCEN says that a financial institution should conduct customer due diligence that includes: verifying state registration and licensing; developing an understanding of the normal and expected activity for the business, including the types of products sold and the type of customers served; monitoring of publicly available data sources for adverse information; and ongoing monitoring for suspicious activity.

An opportunity for compliance

Financial institutions require a simpler, more efficient way to both serve these companies and manage the inherent risks, says Kevin Hart, founder and CEO of Green Check Verified. His company offers a cloud-based technology platform for managing, in real time, the pot industry’s ever-changing regulatory landscape. 

Hart boasts that his firm has solved “the biggest pain point” in the legal cannabis space with its focus on compliance best practices.

His goal when creating the company was to overcome the inherent challenges of building compliant banking relationships. Necessary objectives for the resulting software included enhanced due diligence workflows; real-time access to sales, inventory, and organizational details; intelligent transaction monitoring; red flag detection; and automated FinCEN reporting tools.

A compliance technology system, Hart added, must also “satisfy the alphabet soup” of banking regulations, including the Bank Secrecy Act, anti-money laundering, know your customer, and know your customer’s customer obligations. GCV’s software documents the controls in place to mitigate risks.

Even for dispensaries and retailers who are legal in the eyes of their home state, banks often have no visibility into how a business is structured, how it operates and, most importantly from a banking perspective, the sources and origins of its commerce relationships and cash. “When somebody shows up with, you know, suitcases full of cash or duffel bags full of cash even with assurances of compliant business, banks need to know where all this money comes from,” Hart says. “What do they tell examiners?”

Hart says that current cannabis banking challenges proved a good fit for enterprise software technology and supply chain logistics. In fact, he was originally approached to build a point-of-sale system for the cannabis industry before brainstorming the need to layer in compliance-related services.

“When you look at this problem of how to connect highly regulated industries that don’t know how to work well together, that screams technology,” he says. “When I was interviewing marijuana businesses, I saw piles and piles of cash all the time. I learned about the banking challenges and started checking the boxes for a horizontal software as a service platform … We knew we had to build something that was going to withstand the rigors of compliance verification.”

“We will only 100 percent work within the banking industry, not around it, and not by taking shortcuts and trying to use cryptocurrency or stored value cards,” he added. “We don’t talk about compliance as a feature; it’s more of a mantra for us.”