The Growing Seeds of the Interaction of the Regulated Banking System and Hemp-related Businesses

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On December 3, 2019, the federal bank regulatory agencies[1] and the Financial Crimes Enforcement Network (FinCEN), in consultation with the Conference of State Bank Supervisors, issued a joint guidance (2019 Hemp Guidance) designed to provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act (BSA) and its implementing regulations. Of primary importance to banks, the guidance confirmed that “[b]ecause hemp is no longer a Schedule I controlled substance under the Controlled Substances Act,[2] 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.”

This was a welcomed development for financial institutions providing banking services to hemp-related businesses as the last formal guidance issued by FinCEN (2014 FinCEN Guidance) did not differentiate between marijuana-related businesses and hemp-related businesses. The 2014 FinCEN Guidance required banks providing services to marijuana-related businesses to file at least one of three types of SARs,[3] even if the bank reasonably believed, based on customer due diligence, that the marijuana-related business was duly licensed under state law to engage in such activities and its activities did not implicate one of the U.S. Department of Justice’s enforcement priorities.[4] The ongoing SAR filing obligations that accompanied banking marijuana-related businesses, including the compliance risk associated therewith, likely discouraged some financial institutions from banking customers participating in the cannabis industry, even if the customer’s activities solely involved the growth or cultivation of hemp.

On June 29, 2020, FinCEN issued additional supplementary guidance explaining how financial institutions can conduct due diligence for hemp-related businesses and identifying the type of information and documentation financial institutions can collect from hemp-related businesses to comply with BSA regulatory requirements.[5] Per FinCEN, the purpose of the guidance was to enhance the availability of financial services for hemp-related businesses.

In light of the recent supplementary guidance, it is worth exploring what effects the 2019 Hemp Guidance has had to date on competition among, and availability of financial services from, banks for customers involved in a hemp-related business. Have we seen an increase in the numbers of banks providing financial services to hemp-related businesses? If not, why not, and what can we expect going forward? First, some further background and data points are appropriate.

The Legal Status of Hemp

The 2019 Hemp Guidance was issued in response to the Agriculture Improvement Act of 2018 (2018 Farm Bill), which was signed into law on December 20, 2018 and removed hemp as a Schedule I controlled substance under the CSA. The term “hemp” is defined in the 2018 Farm Bill as “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 (THC) concentration of not more than 0.3 percent on a dry weight basis.” (emphasis added).[6] The 2018 Farm Bill directed the U.S. Department of Agriculture (USDA), in consultation with the U.S. Attorney General, to regulate hemp production. The 2018 Farm Bill states that hemp production shall be subject to a hemp production regulatory plan established by the USDA, the states, or tribal governments.[7] On October 31, 2019, the USDA issued an interim final rule (Interim Final Rule)[8] establishing the domestic hemp production regulatory program to facilitate the legal production of hemp, as set forth in the 2018 Farm Bill. The Interim Final Rule outlines provisions for the USDA to approve plans submitted by the states for the domestic production of hemp. It also establishes a federal plan for producers in states that do not have their own USDA approved plan. The program includes provisions for maintaining information on the land where hemp is produced, testing the levels of THC, disposing of plants not meeting necessary requirements, licensing requirements, and ensuring compliance with the requirements of the Interim Final Rule.

Thus, while the simple answer is that the production of hemp in now legal under federal law, that statement would oversimplify the complex regulatory requirements that hemp-related businesses must meet in order to operate in accordance with applicable state plans, or in their absence, the federal plan established under the Interim Final Rule.

Banking Hemp-Related Businesses

The exact number of depository institutions providing banking services to hemp-related businesses is unknown. Quarterly, FinCEN produces a Marijuana Banking Update that provides some evidence, but even that data requires some extrapolation. As of March 31, 2020, FinCEN estimated that there were 710 depository institutions (comprised of 525 banks and 185 credit unions) providing banking services to marijuana-related businesses.[9] As of March 31, 2020, there were 5,116 FDIC-insured banks, which means approximately 10% of banks were providing services to marijuana-related businesses.[10] Through examining the SAR filings on which its quarterly numbers are based, FinCEN estimated that at December 31, 2019 approximately 8% of those reporting institutions that indicated they were providing banking services to customers engaged in either the marijuana or hemp industries were actually banking only hemp-related businesses. The data on the banking of hemp-related businesses is further complicated by the passage of the 2018 Farm Bill in December 2018, which removed hemp from the definition of marijuana. If an institution was banking only a hemp-related business, the institution may have ceased to file SARs after December 2018 under the reasonable interpretation that the 2014 FinCEN guidance no longer applied to such customers. This should have resulted in a decrease in the number of institutions filing SARs in 2019 related to marijuana-related businesses, assuming some of such filings solely involved a hemp-related customer.

What can be clearly seen by looking at earlier FinCEN Marijuana Banking Updates is that the number of depository institutions banking customers involved in the cannabis industry is increasing. During the 2019 fiscal year, there was a 34% increase in the number of depository institutions that filed a marijuana-related SAR.[11] Presumably, the number of institutions banking “hemp only” customers would have been increasing at a similar, if not faster, pace due to the legalization of the commercial production of hemp under the 2018 Farm Bill. The exact rate of increase is simply not known at this juncture, however.

Conclusions

While precise, hard data is difficult to obtain, the indicators suggest that we should continue to see an increase in the number of banks providing financial services to hemp-related businesses. Supporting this conclusion is the increase in hemp production over the course of 2019. Hemp acreage reported to the USDA, Farm Service Agency increased from 32,464 acres in 2018 to 146,065 acres in 2019.[12] This is not a surprising statistic given that, nationally, the number of producers reported to have approved hemp licenses increased from 292 in 2014 to 3,852 in 2018.[13] With the legalization of hemp and definitive guidance from the bank regulatory agencies on banking such businesses, the seeds have been planted for a growing trend of regulated financial institutions providing banking services to hemp-related businesses in 2020. This would surely be welcomed by businesses operating in the cannabis industry, who have historically had trouble finding financial institutions willing to bank cannabis businesses, whether marijuana- or hemp-related businesses. It will be worth watching the growth of the interaction of the regulated banking system with hemp-related businesses as the states continue to roll out, and have approved by the USDA, state hemp-production plans.

 


[1] The federal bank regulatory agencies include the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

[2] 21 U.S.C. §§ 801, et seq. (CSA).

[3] The three types of SARs are “Marijuana Limited,” Marijuana Priority,” and “Marijuana Termination” SAR filings.

[4] The enforcement priorities, which are detailed in the 2014 FinCEN Guidance are commonly referred to as the “Cole Memo priorities.”

[5] Neither the 2019 Hemp Guidance nor FinCEN’s supplementary guidance issued in June 2020 changed the SAR reporting obligations related to marijuana-related businesses. The 2014 FinCEN Guidance continues to be applicable to marijuana-related businesses.

[6] 7 U.S.C. 1639o(1).

[7] See, 2019 Hemp Guidance, citing the 2018 Farm Bill.

[8] The Agricultural Marketing Service of the USDA recently reopened the comment period on the Interim Final Rule, such that new comments must be received by October 8, 2020. More information is available here.

[9] See, Marijuana Banking Update, FinCEN, available at, https://www.fincen.gov/sites/default/files/shared/508_293283_MJ_Banking_Update_2nd_QTR_FY2020_Public_Final.pdf (last accessed July 7, 2020). The number of institutions is extrapolated based on SAR filings with FinCEN.

[10] See, FDIC Quarterly Banking Profile, First Quarter 2020, available at, https://www.fdic.gov/bank/analytical/qbp/2020mar/qbp.pdf#page=1 (last accessed July 7, 2020).

[11] See, Marijuana Banking Update (showing 551 depository institutions banking marijuana-related businesses at December 2018 versus 739 at December 2019).

[12] Mark, Tyler, Jonathan Shepherd, David Olson, William Snell, Susan Proper, and Suzanne Thornsbury. February 2020. Economic Viability of Industrial Hemp in the United States: A Review of State Pilot Programs, EIB-217, U.S. Department of Agriculture, Economic Research Service, at pg. 22, available at, https://www.ers.usda.gov/webdocs/publications/95930/eib-217.pdf.

[13] Id. at pg. 3.

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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