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We have a mortgage lending and deposit relationship with a customer that rents an industrial property to a tenant that manufactures and distributes CBD gummies. The tenant plans to begin manufacturing marijuana gummies and will obtain the necessary license from the Illinois Department of Agriculture. What are the risks in banking a customer with a tenant that manufactures CBD gummies, and what would the risks be if the tenant manufactures marijuana gummies?

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CBD Gummies

We believe the risks involved in banking the landlord of a tenant that manufactures CBD gummies would be akin to the risks of banking a hemp-related business directly. In either case, the risk is that the hemp-related business is in fact producing marijuana products rather than hemp or CBD products. As such, we believe it would be prudent to follow the guidance on banking hemp-related businesses with respect to this customer’s tenant, as discussed below.

With the passage of the 2018 Farm Bill, hemp and hemp-derived CBD products no longer are illegal controlled substances under the federal Controlled Substances Act. Similarly, Illinois enacted the Industrial Hemp Act in 2018, which removed industrial hemp from the Illinois Criminal Code’s definition of cannabis. Under both federal and Illinois law, “hemp” and “industrial hemp” mean “the plant Cannabis sativa L. and any part of that plant . . . with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.”

The federal banking agencies’ interagency guidance on banking hemp-related businesses states that because hemp no longer is a Schedule I controlled substance, “banks are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.” The guidance notes that bank customers engaged in hemp-related business activities are responsible for complying with applicable regulations. Whether to bank such customers is a business decision. If you decide to bank a hemp-related customer, you must “comply with applicable regulatory requirements for customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers.”

As part of your risk-based customer due diligence, you may wish to confirm that your client’s tenant is manufacturing its gummies using hemp-derived CBD obtained from legal sources. The Illinois Department of Agriculture (IDOA) oversees the licensure of Illinois hemp cultivators (which plant, grow, harvest, and store plants or crops) and the registration of Illinois hemp processors (which convert “raw industrial hemp plant material into a form that is presently legal to import from outside the United States under federal law”). We recommend inquiring about the source of the tenant’s CBD and requesting documentation of the licensure and registration of any hemp cultivators or processors the tenant may work with.

The Illinois Department of Financial and Professional Regulation (IDFPR)’s industrial hemp guidance also notes that the Food and Drug Administration (FDA) has the authority to regulate hemp products such as CBD oil used as a food ingredient or dietary supplement. The FDA has published Q&As indicating that whether selling CBD products is legal depends on the intended use of the product and how it is labeled and marketed. The FDA currently prohibits CBD products from being sold as dietary supplements or marketed with unsubstantiated therapeutic claims. Consequently, you may wish to examine how the tenant labels and markets its CBD gummies to ensure they do not violate the FDA’s regulations.

Marijuana Gummies

If the tenant begins manufacturing and distributing marijuana gummies, we believe the tenant would be considered a “direct” marijuana-related business (MRB), and your customer would be considered an “indirect” MRB. The risk-related considerations involved in banking an indirect MRB are described in more detail below, and we would caution against pursuing any remedy in your loan agreement that would involve taking rents from a direct MRB.

FinCEN’s guidance on banking MRBs does not expressly define “direct MRBs” but indicates that in general, such businesses are directly involved in growing, distributing, or dispensing marijuana. Likewise, the guidance does not expressly define “indirect MRBs” but recognizes that many banks provide financial services to customers who themselves provide goods or services to direct MRBs, such as “a commercial landlord that leases property to a marijuana-related business.” According to the FinCEN guidance, whether a bank wishes to accept deposits from and provide other financial services to these indirect MRBs is a risk-based business decision. If a bank knowingly does so, it generally should look to the rules for filing standard SARs, as opposed to the three types of marijuana-specific SARs required for direct MRBs.

While licensed marijuana infusers and distributers may operate legally under Illinois law, it remains illegal under the federal Controlled Substances Act to manufacture, distribute, or dispense marijuana. The federal law also provides that anyone who “aids, abets, counsels, commands, induces or procures its commission” is punishable as if they were a principal to the crime. The fact that federal entities such as FinCEN and the U.S. Department of Justice have published guidance on maintaining banking relationships with MRBs does not change the underlying federal law, which continues to treat marijuana as an illegal controlled substance.

Also, the federal “Crack House Statute” makes it illegal under federal law to knowingly lease or rent a property for the purpose of “manufacturing, distributing, or using any controlled substance,” or to manage or control a property “as an owner, lessee, agent, employee, occupant, or mortgagee” and to “knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.”

Consequently, if your customer leases the property to a tenant that manufactures and distributes marijuana gummies, we recommend verifying that the tenant has obtained the necessary cannabis infuser license from the IDOA and adult use dispensing organization license from the IDFPR — if it distributes the marijuana-infused gummies “to any person other than a dispensing organization.” The IDOA’s current list of adult use cannabis business establishment licensees (including infusers) and the IDFPR’s current lists of licensed adult use cannabis and licensed medical cannabis dispensing organizations are linked to in the resources below.

You may consider filing a standard SAR for loan payments that aggregate at least $5,000, with ongoing monitoring and continuous SAR filings made for each 90-day reporting period thereafter. However, you also may wish to contact FinCEN to inquire if this is necessary if there is no other suspicious activity that would serve as an independent basis for filing a SAR.

If your customer defaults on the loan, we caution against enforcing any assignment of rents clause in your loan agreement or having a receiver appointed to collect rents, which could result in your bank accepting rents directly from the marijuana gummy manufacturer and distributer. We believe this would be a violation of the Crack House Statute, which indiscriminately forbids mortgagees from profiting from a property used for the purpose of manufacturing or distributing a controlled substance.

For resources related to our guidance, please see:

  • Controlled Substances Act, 21 USC 802(16) (“(A) Subject to subparagraph (B), the term ‘marihuana’ means all parts of the plant Cannabis sativa L. . . . (B) The term ‘marihuana’ does not include

(i) hemp, as defined in section 1639o of Title 7; or

(ii) the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.”)

  • Agriculture Marketing Act of 1946, 7 USC 1639o(1) (“The term ‘hemp’ means the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”)
  • Illinois Cannabis Control Act, 720 ILCS 550/3 (“‘Cannabis’ includes marihuana, hashish and other substances which are identified as including any parts of the plant Cannabis Sativa . . .”)
  • Illinois Industrial Hemp Act, 505 ILCS 89/5 (“‘Industrial hemp’ means the plant Cannabis sativa L. and any part of that plant, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis that has been cultivated under a license issued under this Act or is otherwise lawfully present in this State, and includes any intermediate or finished product made or derived from industrial hemp.”)
  • Providing Financial Services to Customers Engaged in Hemp-Related Businesses (December 3, 2019) (“Because hemp is no longer a Schedule I controlled substance under the Controlled Substances Act, banks are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. For hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants.”)
  • Providing Financial Services to Customers Engaged in Hemp-Related Businesses (December 3, 2019) (“Bank customers engaged in hemp-related business activities are responsible for complying with the requirements set forth in the 2018 Farm Bill and applicable regulations. It is generally a bank’s business decision as to the types of permissible services and accounts to offer, and banks must have a BSA/AML compliance program commensurate with the level of complexity and risks involved. When deciding to serve hemp-related businesses, banks must comply with applicable regulatory requirements for customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers.”)
  • Illinois Industrial Hemp Act, 505 ILCS 89/10(a) (“No person shall cultivate industrial hemp in this State without a license issued by the Department.”)
  • Illinois Industrial Hemp Act, 505 ILCS 89/5 (“‘Department’ means the Department of Agriculture.”)
  • IDOA Industrial Hemp Act Rules, 8 Ill. Adm. Code 1200.10 (“‘Cultivating’ means planting, growing, harvesting and storing a plant or crop.”)
  • Illinois Industrial Hemp Act, 505 ILCS 89/10(b-5) (“A person shall not process industrial hemp in this State without registering with the Department on a form prescribed by the Department.”)
  • Illinois Industrial Hemp Act, 505 ILCS 89/5 (“‘Process’ means the conversion of raw industrial hemp plant material into a form that is presently legal to import from outside the United States under federal law.”)
  • IDFPR, Industrial Hemp Guidance (July 25, 2019) (“The law is still unsettled on the U.S. Food and Drug Administration’s (FDA) position regarding hemp-derived CBD oil use as a food ingredient or dietary supplement. The 2018 Farm Bill does not impact the FDA’s authority to regulate hemp products or alter the regulatory requirements for FDA products such as food, dietary supplements, cosmetics, or drugs.”)
  • USDA, FDA Regulation of Cannabis and Cannabis-Derived Products, Including CBD, Q&A #8 (“Is it legal for me to sell CBD products? A. It depends, among other things, on the intended use of the product and how it is labeled and marketed. Even if a CBD product meets the definition of ‘hemp’ under the 2018 Farm Bill . . . it still must comply with all other applicable laws, including the FD&C Act.”)
  • USDA, FDA Regulation of Cannabis and Cannabis-Derived Products, Including CBD, Q&A #9 (“Can THC or CBD products be sold as dietary supplements? No. Based on available evidence, FDA has concluded that THC and CBD products are excluded from the dietary supplement definition under section 201(ff)(3)(B) of the FD&C Act [21 U.S.C. § 321(ff)(3)(B)]. Under that provision, if a substance (such as THC or CBD) is an active ingredient in a drug product that has been approved under section 505 of the FD&C Act [21 U.S.C. § 355], or has been authorized for investigation as a new drug for which substantial clinical investigations have been instituted and for which the existence of such investigations has been made public, then products containing that substance are excluded from the definition of a dietary supplement.”)
  • USDA, FDA Regulation of Cannabis and Cannabis-Derived Products, Including CBD, Q&A #4 (“Aside from Epidiolex, are there other CBD drug products that are FDA-approved? What about the products I’ve seen in stores or online? A. No. There are no other FDA-approved drug products that contain CBD. We are aware that some firms are marketing CBD products to treat diseases or for other therapeutic uses, and we have issued several warning letters to such firms. Under the FD&C Act, any product intended to have a therapeutic or medical use, and any product (other than a food) that is intended to affect the structure or function of the body of humans or animals, is a drug. . . . FDA continues to be concerned at the proliferation of products asserting to contain CBD that are marketed for therapeutic or medical uses although they have not been approved by FDA. Often such products are sold online and are therefore available throughout the country. Selling unapproved products with unsubstantiated therapeutic claims is not only a violation of the law, but also can put patients at risk, as these products have not been proven to be safe or effective.”)
  • FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (“The Controlled Substances Act (‘CSA’) makes it illegal under federal law to manufacture, distribute, or dispense marijuana. . . . Notwithstanding the federal ban, as of the date of this guidance, 20 states and the District of Columbia have legalized certain marijuana-related activity.”)
  • FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (“Similarly, a financial institution could be providing services to a non-financial customer that provides goods or services to a marijuana-related business (e.g., a commercial landlord that leases property to a marijuana-related business). In such circumstances where services are being provided indirectly, the financial institution may file SARs based on existing regulations and guidance without distinguishing between 'Marijuana Limited' and 'Marijuana Priority.' Whether the financial institution decides to provide indirect services to a marijuana-related business is a risk-based decision that depends on a number of factors specific to that institution and the relevant circumstances. In making this decision, the institution should consider the Cole Memo priorities, to the extent applicable.)
  • FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (Outlining three marijuana-specific SARs for marijuana-related business customers and when to file them)
  • FinCEN Guidance, FIN-2014-G001 BSA Expectations Regarding Marijuana-Related Businesses (February 14, 2014) (“In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.”)
  • Cannabis Regulation and Tax Act, 410 ILCS 705/1-10 (“‘Infuser organization’ or ‘infuser’ means a facility operated by an organization or business that is licensed by the Department of Agriculture to directly incorporate cannabis or cannabis concentrate into a product formulation to produce a cannabis-infused product.”)
  • Cannabis Regulation and Tax Act, 410 ILCS 705/1-10 (“‘Cannabis-infused product’ means a beverage, food, oil, ointment, tincture, topical formulation, or another product containing cannabis or cannabis concentrate that is not intended to be smoked.”)
  • Cannabis Regulation and Tax Act, 410 ILCS 705/35-40 (“Renewal of infuser organization licenses and agent identification cards. (a) Licenses and identification cards issued under this Act shall be renewed annually. . . . (b) If an infuser organization fails to renew its license before expiration, it shall cease operations until its license is renewed.”)
  • Cannabis Regulation and Tax Act, 410 ILCS 705/1-10 (“‘Dispensing organization’ means a facility operated by an organization or business that is licensed by the Department of Financial and Professional Regulation to acquire cannabis from a cultivation center, craft grower, processing organization, or another dispensary for the purpose of selling or dispensing cannabis, cannabis-infused products, cannabis seeds, paraphernalia, or related supplies under this Act to purchasers or to qualified registered medical cannabis patients and caregivers. As used in this Act, ‘dispensing organization’ includes a registered medical cannabis organization as defined in the Compassionate Use of Medical Cannabis Program Act or its successor Act that has obtained an Early Approval Adult Use Dispensing Organization License.”)
  • Cannabis Regulation and Tax Act, 410 ILCS 705/15-5(c) (“No person shall operate a dispensing organization for the purpose of serving purchasers of cannabis or cannabis products without a license issued under this Article by the Department. No person shall be an officer, director, manager, or employee of a dispensing organization without having been issued a dispensing organization agent card by the Department.”)
  • Controlled Substances Act, 21 USC 841(a)(1) (“Unlawful acts. Except as authorized by this subchapter, it shall be unlawful for any person knowingly or intentionally — (1) to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance; . . . .”); 21 USC 802(6) (A controlled substance is “a drug or other substance, or immediate precursor, included in schedule I, II, . . .”); 21 USC 812(c)(c)(10) (Schedule I drugs include marijuana.); 18 USC 2(a) (“Whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.”)
  • Crack House Statute, 21 USC 856(a) (“Except as authorized by this subchapter, it shall be unlawful to— (1) knowingly open, lease, rent, use, or maintain any place, whether permanently or temporarily, for the purpose of manufacturing, distributing, or using any controlled substance; (2) manage or control any place, whether permanently or temporarily, either as an owner, lessee, agent, employee, occupant, or mortgagee, and knowingly and intentionally rent, lease, profit from, or make available for use, with or without compensation, the place for the purpose of unlawfully manufacturing, storing, distributing, or using a controlled substance.”)
  • Cannabis Regulation and Tax Act, 410 ILCS 705/35-25(d) (“An infuser may not sell or distribute any cannabis to any person other than a dispensing organization, or as otherwise authorized by rule.”)
  • Cannabis Regulation and Tax Act, 410 ILCS 705/1-10 (“‘Adult Use Dispensing Organization License’ means a license issued by the Department of Financial and Professional Regulation that permits a person to act as a dispensing organization under this Act and any administrative rule made in furtherance of this Act.”)
  • FinCEN SAR Rules, 31 CFR 1020.320(a)(2) (“A transaction requires reporting under the terms of this section if it is conducted or attempted by, at, or through the bank, it involves or aggregates at least $5,000 in funds or other assets, and the bank knows, suspects, or has reason to suspect that (i) The transaction involves funds derived from illegal activities . . . as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation; . . . ”)
  • FFIEC BSA/AML Manual, Suspicious Activity Reporting (“FinCEN’s guidelines have suggested that banks should report continuing suspicious activity by filing a report at least every 90 calendar days. Subsequent guidance permits banks with SAR requirements to file SARs for continuing activity after a 90 day review with the filing deadline being 120 calendar days after the date of the previously related SAR filing. Banks may also file SARs on continuing activity earlier than the 120 day deadline if the bank believes the activity warrants earlier review by law enforcement.”)