On December 3, 2019, four federal agencies – the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (“FDIC”), the Financial Crimes Enforcement Network (“FinCEN”), and the Office of the Comptroller of the Currency (“OCC”) – along with the Conference of State Bank Supervisors, released a statement (the “Statement”) “to provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act and its implementing regulations.” The Statement represents the next step in the normalization of hemp growth and cultivation following its legalization under the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) and was, predictably, applauded by those in the banking community, including the American Banking Association.
The Status of Hemp
The 2018 Farm Bill was signed into law on December 20, 2018. While it contained numerous provisions concerning the agriculture industry, it notably reclassified hemp – defined as a variety of cannabis that contains .3% or less of tetrahydrocannabinol (“THC”) – removing it as a Schedule I controlled substance under the Controlled Substances Act (the “CSA”) by amending the CSA’s definition of marijuana solely to exclude hemp. Though it legalized hemp cultivation and commerce, the 2018 Farm Act created a significant joint state/federal regulatory scheme to oversee and regulate hemp production.
As part of this regulatory framework, the 2018 Farm Bill required the United States Department of Agriculture (“USDA”) to establish a regulatory program for hemp production in the United States. The USDA did so through an Interim Final Rule issued on October 31, 2019. The established framework leaves significant power and discretion to the states, requiring each state submit to USDA its own regulatory program overseeing the land where hemp is produced, methods for monitoring THC levels, plant disposal, and licensing requirements, among other measure. If states fail to comply, the USDA will impose its own licensing and production requirements and standards. Importantly, the Interim Final Rule permits states to prohibit the production of hemp altogether, clarifying that the 2018 Farm Bill did not preempt state or tribal laws regarding the production of hemp that are more stringent than federal law.
Hemp Banking
With hemp legalized and a regulatory structure in place to govern the industry, financial regulators have now explained what this significant legal reclassification means for the banking industry. The answer is simple: banks are now open to hemp-related businesses as to any other lawful industry, and banks are no longer required to file suspicious activity reports (“SARs”) for customers engaging in the growth or cultivation of hemp, so long as those customers operate properly under an approved federal, state or tribal regulatory program.
Prior to the 2018 Farm Bill’s reclassification, hemp would have been included within the definition of “marijuana” under the CSA, and thus subject to FinCEN’s fairly complex analysis of whether engaging in state-legal marijuana cultivation requires the filing of a SAR and what type of SAR. Now, “[f]or hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants.” Of course, and as with any heavily regulated industry, banks must continue to take fulsome steps to ensure customers engaged in the hemp business are doing so lawfully: “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.” FinCEN promises to “issue additional guidance after further reviewing and evaluating the U.S. Department of Agriculture (USDA) interim final rule.”
The Statement also observes that, “[i]n the context of marijuana-related businesses, banks should continue following FinCEN guidance FIN-2014-G001 – BSA Expectations Regarding Marijuana-Related Businesses.” Although this observation is not news, it confirms that the banking regulators continue to regard the provision of financial services to marijuana-related businesses as at least possible under certain circumstances. We regularly blog about the conflict between state and federal law related to cannabis and the uncertainty regarding how federal criminal and BSA law will, or will not, be enforced against financial institutions providing banking services to marijuana-related businesses.
The Reception
Predictably, the Statement was well-received in banking circles. The American Bankers Association (“ABA”), which has lamented how “[t]he rift between federal and state law has left banks trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action” released this statement:
We welcome the guidance issued today by federal banking regulators, FinCEN and the Conference of State Bank Supervisors, which provides greater clarity on banks’ obligations related to hemp producers. This action, which has been long sought by ABA, makes clear that banks are not required to file Suspicious Activity Reports on hemp producers operating under an approved federal, state or tribal license or plan. We are pleased that the guidance also notes that bank customers are responsible for complying with regulatory requirements surrounding hemp, not the banks who serve those customers. We appreciate the steps regulators have taken today to clarify regulatory expectations for banks, and we look forward to working with them as they develop additional guidance.
