Federal agencies clarify SAR filing requirements for financial services provided to hemp-related businesses

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On December 3, 2019, four federal agencies, in consultation with state banking regulators, clarified the legal status of hemp growth and production under the Bank Secrecy Act (BSA) for banks1 providing financial services to hemp-related businesses.

More specifically, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, and the Conference of State Bank Supervisors issued a joint statement (the Joint Statement) clarifying that banks are not required to file Suspicious Activity Reports (SARs) on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.2

Background

In February 2014, FinCEN issued guidance clarifying BSA expectations for financial institutions seeking to provide financial services to marijuana-related businesses (the 2014 Guidance).3 The 2014 Guidance sought to clarify how financial institutions can provide financial services to marijuana-related businesses, consistent with their BSA obligations, in light of state legislative efforts to legalize certain marijuana-related activities and the resulting conflict between U.S. state and federal regulation of marijuana.

Because federal law prohibits the distribution and sale of marijuana, the 2014 Guidance clarified that financial transactions involving marijuana-related businesses (even those properly licensed under state law) would generally involve funds derived from illegal activity, which would typically trigger a SAR filing.  Given this, the 2014 Guidance established three separate categories for marijuana-related SARs, namely, Marijuana Limited SARs, Marijuana Priority SARs, and Marijuana Termination SARs, one of which would generally need to be filed anytime a financial institution provided services to a marijuana-related business.

In addition, on December 20, 2018, the Agriculture Improvement Act of 2018 (the 2018 Farm Bill) was signed into law.4 Among other things, the 2018 Farm Bill removed hemp from the Controlled Substances Act’s definition of “marijuana.” The 2018 Farm Bill defined “hemp” as any part of the cannabis plant “with a [THC] concentration of not more than 0.3 percent on a dry weight basis.” As a result of this change, hemp and products derived from hemp, such as cannabidiol (CBD), are no longer Schedule 1 drugs under the Controlled Substances Act.

Finally, on October 31, 2019, the US Department of Agriculture issued an interim final rule establishing a domestic hemp production regulatory program to facilitate the legal production of hemp, as required by the 2018 Farm Bill. The interim final rule will apply to the 2020 growing season and does not affect hemp that was or is being cultivated under the 2014 Farm Bill programs. That hemp remains subject to the requirements of the 2014 Farm Bill.

The Joint Statement

Given this background, the Joint Statement offers banking institutions relief from the practice of filing SARs whenever they engage in financial transactions with hemp-related businesses, as was required under the 2014 Guidance. In accordance with the 2014 Guidance, which was released when hemp was still considered part of the definition of “marijuana” under the Controlled Substances Act, financial institutions were generally required to file SARs whenever they engaged in any financial transaction with a hemp-related business.

However, the Joint Statement updated the 2014 Guidance and clarified that banks are not required to file SARs on customers solely because they are engaged in the growth or cultivation of hemp. As the Joint Statement noted, this clarification was needed because hemp was no longer considered a controlled substance under the Controlled Substance Act as a result of the 2018 Farm Bill and therefore would not automatically trigger one of the special marijuana SARs required by the 2014 Guidance.

The Joint Statement emphasized that banks are expected to follow standard SAR filing requirements for its hemp-related customers in accordance with the BSA requirements, including the filing of SARs when the bank has reason to suspect the financial transaction involves funds derived from illegal activity or is attempted to disguise funds derived from illegal activity. The Joint Statement also clarified that banks should continue following the 2014 Guidance for transactions involving marijuana-related businesses, with the understanding that banks should exclude hemp from their definition of a marijuana-related business in accordance with the 2018 Farm Bill.

Key takeaways

The Joint Statement represents a major shift in FinCEN’s prior guidance of requiring banks to file SARs for providing services to hemp-related businesses. Importantly, the Joint Statement only applies to banks and does not apply to all financial institutions covered by the BSA, such as broker-dealers, investment advisers, investment companies, and insurance companies. Consequently, these non-bank financial institutions (including broker-dealers and investment advisers that may be affiliated with banks) would still need to file SARs for transactions involving hemp-related businesses in accordance with the 2014 Guidance. For instance, broker-dealers opening a customer account for a hemp-related business, such as a company producing hemp or CBD, would still need to file SARs pursuant to the 2014 Guidance.

In addition, even though banks are no longer required to file SARs for providing services to hemp-related businesses solely because they are engaged in the growth or cultivation of hemp, the Joint Statement requires banks to follow the standard SAR filing requirements for its hemp-related customers.  Among other things, this means that banks may need to file SARs if the hemp-related customers derive any of their revenue from illegal activity, including any marijuana-related business.

Legal and compliance professionals for banks and other financial institutions such as broker-dealers should consider how the Joint Statement impacts their SAR reporting requirements, as well as their overall BSA anti-money laundering compliance programs.

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1 For purposes of the joint guidance, the term “bank” includes each agent, agency, branch or office within the United States of commercial banks, savings banks, savings and loan associations, thrift institutions, and foreign banks.

2 The Joint Guidance, Providing Financial Services to Customers Engaged in Hemp-Related Businesses (Dec. 3, 2019), available at https://www.fincen.gov/sites/default/files/2019-12/Hemp%20Guidance%20%28Final%2012-3-19%29%20FINAL.pdf.

3 FinCEN Guidance, BSA Expectations Regarding Marijuana-Related Businesses (Feb. 14, 2014), available at https://www.fincen.gov/sites/default/files/shared/FIN-2014-G001.pdf.

4 See Agriculture Improvement Act of 2018, § 297A, Pub. L. No. 115-334, H.R. Doc. No. 2 (Dec. 20, 2018), available at https://www.congress.gov/115/bills/hr2/BILLS-115hr2enr.pdf.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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