Last week, the Financial Crimes Enforcement Network (FinCEN), issued new guidance (the “FinCEN Guidance”) for financial institutions working with hemp-related businesses. The FinCEN Guidance centers on due diligence requirements as related to the Bank Secrecy Act (BSA). This guidance follows closely on the new National Credit Union Administration (NCUA) guidance for federally-chartered credit unions, which was issued on June 20 (see our take here).
The FinCEN Guidance is not the Network’s first bite at the apple. Last December, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, FinCEN and the Office of the Comptroller of the Currency, in consultation with the Conference of State Bank Supervisors, issued a three-page hemp banking statement. The purpose of that statement was to to help financial institutions deal with BSA and anti-money laundering (AML) compliance in light of the fact that hemp is no longer a Schedule I controlled substance under federal law. The FinCEN Guidance clarifies and expands upon the 2019 statement.
Under the 2019 hemp banking statement, the biggest win for financial institutions was probably the fact that no special or enhanced Suspicious Activity Report (“SAR”) filings are required for customers “. . . because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.” Essentially, banking regulators are saying that financial institutions should treat “hemp-related businesses” like any other business when it comes SAR filings (unlike state-licensed cannabis businesses, which have their own special SAR filing system under the 2014 guidelines). Further, the 2019 hemp banking statement sets forth that “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.” No surprises there.
Interestingly, the 2019 hemp banking statement, much like the recent NCUA guidance, did not address the legalities around financial institutions trying to bank hemp-CBD businesses. That’s probably purposeful given the Food and Drug Administration’s (“FDA”) current enforcement position around hemp-CBD and violations of the Food, Drug, and Cosmetic Act. Readers of this blog know that the 2018 Farm Bill does not take away the FDA’s ability to regulate hemp products, including hemp-CBD. The FinCEN Guidance follows suit on this issue. The FinCEN Guidance essentially defines “hemp-related business” to only mean “businesses or individuals that grow hemp, and processors and manufacturers who purchase hemp directly from such growers.” This means that the viability and legality of banking hemp-CBD businesses under federal law really remains murky at best.
So, what does the FinCEN Guidance say? Per FinCEN, “This guidance explains how financial institutions can conduct due diligence for hemp-related businesses, and identifies the type of information and documentation financial institutions can collect from hemp-related businesses to comply with BSA regulatory requirements.” Here are the main highlights to which financial institutions should pay attention when considering serving hemp-related businesses:
- For hemp growers, financial institutions should “confirm the hemp grower’s compliance with state, tribal government, or the USDA licensing requirements, as applicable, by either obtaining (1) a written attestation by the hemp grower that they are validly licensed, or (2) a copy of such license”;
- Based on the level of risk posed by a hemp grower, a financial institution can seek additional information like crop inspection or testing reports, license renewals, updated attestations from the business, or correspondence with the state, tribal government, or USDA;
- Financial institutions already have to monitor their customers for compliance with BSA and AML. This is no different for hemp-related businesses in that a financial institution is going to need to come up to speed (and fast) on the specific ins and outs of a given hemp-related business in order to fully assess the customer risk profile and to enable effective compliance monitoring. This ultimately means that the financial institution will need to invest in a deep understanding of the 2018 Farm Bill and specific state laws around hemp production, processing, licensing, and registration in the specific states in which their customers operate;
- There is still no special SAR filing system for these businesses. However, with just standard SAR practice, the 2020 hemp banking guidelines state that, when determining whether to file a SAR, the following conduct should pose red flags for a financial institution: a. A customer appears to be engaged in hemp production in a state or jurisdiction in which hemp production remains illegal;b. A customer appears to be using a state-licensed hemp business as a front or pretext to launder money derived from other criminal activity or derived from marijuana-related activity that may not be permitted under applicable law; c. A customer engaged in hemp production seeks to conceal or disguise involvement in marijuana-related business activity; d. The customer is unable or unwilling to certify or provide sufficient information to demonstrate that it is duly licensed and operating consistent with applicable law, or the financial institution becomes aware that the customer continues to operate (i) after a license revocation, or (ii) inconsistently with applicable law.”; and
- If a financial institution is serving a customer that commingles its hemp-related and state-licensed-cannabis related proceeds and accounts (which is a horrible idea for multiple legal and business-related reasons), the financial institution must apply the 2014 FinCEN guidelines.
All in all, the new FinCEN Guidance is more comprehensive than the 2019 inter-agency hemp banking statement. For financial institutions, complying with these directives should be straightforward compared to the 2014 FinCEN guidelines for marijuana-related businesses. That doesn’t mean it’s going to be easy to bank hemp-related businesses, however. Hemp will always be subject to a broad overlay of state and federal regulations, which financial institutions must know and monitor. At least now they have some guidelines.