On June 29, 2020, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidance (the 2020 Guidance) clarifying requirements under the Bank Secrecy Act (BSA) for financial institutions providing services to hemp-related businesses.1
More specifically, the 2020 Guidance applies to all “financial institutions” as defined in FinCEN’s regulations. 2 It clarifies how these financial institutions can conduct due diligence on hemp-related businesses in order to comply with BSA regulatory requirements, including Customer Due Diligence (CDD) requirements for account opening purposes and Suspicious Activity Reporting (SAR) requirements. The 2020 Guidance also supplements an earlier December 2019 joint statement (the 2019 Joint Statement) issued by FinCEN and three other federal agencies, in consultation with state banking regulators, clarifying how banks3 may provide financial services to hemp-related businesses.4
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).5 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 US 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.6 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 state pilot programs authorized by the 2014 Farm Bill. That hemp remains subject to the requirements of the 2014 Farm Bill.
The 2020 Guidance
Given this background, the 2020 Guidance offers financial 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 2020 Guidance updated the 2014 Guidance and clarified that financial institutions are not required to file SARs on customers solely because they are engaged in the growth or cultivation of hemp. 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. Nonetheless, the 2020 Guidance emphasized that financial institutions 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 financial institution has reason to suspect the transaction involves funds derived from illegal activity or is attempted to disguise funds derived from illegal activity. FinCEN provided examples of activities that could be considered suspicious, including:
- Engaging in hemp production in a state in which it is not legal,
- Using a state-licensed hemp business as a front for laundering the proceeds of illegal activity, and
- Failing to certify or provide sufficient information demonstrating compliance with applicable law.
In addition to clarifying SAR filing requirements, the 2020 Guidance also elaborated upon FinCEN’s expectations for financial institutions when collecting CDD information for legal entity customers, including hemp-related businesses. When collecting CDD information, FinCEN recommended that financial institutions should confirm the hemp grower’s compliance with state or federal licensing requirements by either obtaining a written attestation by the hemp grower that they are validly licensed or a copy of such license. The 2020 Guidance emphasized that financial institutions may request additional CDD information for hemp-related businesses depending on the risk profile of the business, where such additional information may include crop inspections or testing reports, license renewals, updated attestations from the business, or correspondence with state or federal regulators.
Key Takeaways
The 2020 Guidance, together with the 2019 Joint Statement, represent a major shift in FinCEN’s prior guidance of requiring financial institutions to file SARs for providing services to hemp-related businesses. Importantly, the 2019 Joint Statement only applied to banks and did not apply to all financial institutions. However, the 2020 Guidance expanded upon the 2019 Joint Statement, and extended the SAR relief to all financial institutions covered by FinCEN’s regulations, including banks, broker-dealers, mutual funds, money services businesses and introducing commodity brokers. As a result of this extension, broker-dealers and certain other non-bank financial institutions would no longer need to automatically file SARs for hemp-related businesses pursuant to the 2014 Guidance.
In addition, the 2020 Guidance clarified that financial institutions should continue following the 2014 Guidance for transactions involving marijuana-related businesses, with the understanding that financial institutions should exclude hemp from their definition of a marijuana-related business in accordance with the 2018 Farm Bill. As FinCEN explained, this means that financial institutions must file SARs in accordance with the 2014 Guidance if the hemp business is comingled with the marijuana business. However, if the proceeds of the businesses are kept separate, and the financial institution is able to distinguish the hemp and cannabis business lines, then the 2014 Guidance would only apply to the marijuana-related portion of the business and not the hemp business.
Legal and compliance professionals for financial institutions such as banks and broker-dealers should consider how the 2020 Guidance impacts their SAR reporting requirements and due diligence process for onboarding new hemp-related business customers, as well as their overall BSA anti-money laundering compliance programs. In particular, firms should consider reviewing their BSA anti-money laundering policies and procedures, and making any necessary adjustments or revisions if they decide to take advantage of the 2020 Guidance.
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1 FinCEN Guidance, FinCEN Guidance Regarding Due Diligence Requirements under the Bank Secrecy Act for Hemp-Related Business Customers (June 29, 2020), available at https://us.eversheds-sutherland.com/portalresource/FinCEN_Hemp_Guidance_508_FINAL.pdf.
2 See 31 CFR § 1010.100(t).
3 For purposes of the 2019 Joint Statement, 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.
4 The Joint Guidance, Providing Financial Services to Customers Engaged in Hemp-Related Businesses (Dec. 3, 2019), available at https://us.eversheds-sutherland.com/portalresource/Hemp-Guidance-(Final-12-3-19)-FINAL.pdf.
5 FinCEN Guidance, BSA Expectations Regarding Marijuana-Related Businesses (Feb. 14, 2014), available at https://us.eversheds-sutherland.com/portalresource/FIN-2014-G001.pdf.
6 See Agriculture Improvement Act of 2018, § 297A, Pub. L. No. 115-334, H.R. Doc. No. 2 (Dec. 20, 2018), available at https://us.eversheds-sutherland.com/portalresource/BILLS-115hr2enr.pdf.
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