After months of negotiations, on December 12, Congress overwhelmingly passed the Agricultural Improvement Act of 2018, which is also known as the “Farm Bill.” For banks and payment processors, the Farm Bill’s passage is an important development because the bill includes language removing hemp from the list of prohibited substances under the federal Controlled Substances Act.

Hemp is a variety of the cannabis plant, but it does not produce a psychological “high.” Instead, it’s used in manufacturing, including production of textiles, rope, and carpets, and for medicinal purposes. Most states permit hemp’s use for both manufacturing and medicinal purposes.

But, for years, hemp has been classified as a controlled substance under the federal Controlled Substances Act, (21 U.S.C. ch. 13 § 801 et seq.), which created a federal law barrier to banks and payment processors working with hemp producers or merchants.

With the passage of the Farm Bill, however, that may be about to change. Section 10113 of the Farm Bill removes hemp from the list of controlled substances under the federal Controlled Substances Act and amends the Agricultural and Marketing Act of 1946 to allow states to manage hemp production as long as hemp produced contains no more than a 0.3% concentration of tetrahydrocannabinol, or THC.

In accordance with the Farm Bill, a state that wants to manage hemp production within its borders must submit a plan for regulation and monitoring to the U.S. Secretary of Agriculture for approval. However, a hemp producer in a state that does not submit a plan to the Secretary of Agriculture may still produce hemp as long as its production complies with the amended section 297C of the Agricultural and Marketing Act.

The Farm Bill further mandates that hemp producers complying with section 297C, as opposed to a state plan, must maintain information about the land on which the hemp is produced, test the hemp’s THC levels, establish procedures for disposing of any non-compliant hemp or hemp product, and submit to annual inspections. Hemp producers operating under either an approved regulation-and-monitoring plan or section 297C are subject to licensing requirements as well as potential federal auditing. Moreover, under the Farm Bill, states maintain authority to limit hemp’s production and marketing within their borders. Thus, hemp producers, depending on where they operate, may still be restricted by state law. States cannot, however, limit the transportation of hemp.

The Farm Bill creates an opportunity for banks and payment processors. Banks and payment processors can now work with hemp producers and merchants without the looming threat of a federal law enforcement action.

The Farm Bill’s passage does not mean, however, that banks and payment processors can forego their regulatory compliance efforts. A bank or payment processor must still ensure that any hemp producer or merchant is complying with the Farm Bill’s licensing requirement and TCH-level restriction. In addition, a bank or payment processor that works with a hemp producer or merchant must still ensure that the producer or merchant is complying with any federally approved regulation-and-monitoring state plan or section 297C. Indeed, those compliance efforts are critical, as violations can leave a hemp producer or merchant as well as its bank and payment processor subject to severe penalties, including a law enforcement action by the U.S. Attorney General.

President Trump signed the Farm Bill on December 20.