- The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, has issued new guidelines for providing banking services to the hemp industry.
- Under the new guidance, FinCEN notes that for customers who are hemp growers, financial institutions may confirm the hemp grower's compliance with state, tribal government or U.S. Department of Agriculture (USDA) licensing requirements, as applicable, by obtaining either a written attestation by the hemp grower that they are validly licensed or a copy of such license.
- Otherwise, financial institutions are free to design a customer identification program that aligns with the institution's risk tolerances and the institution's assessment of the level of risk posed by each customer.
The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, issued new guidelines on June 29, 2020, for providing banking services to the hemp industry. Hemp that meets the low-THC standards prescribed in the 2018 Farm Bill is considered "industrial hemp" and therefore is regulated as an agricultural commodity instead of as a controlled substance, such as marijuana.
FinCEN's most recent previous guidance to banks seeking to serve the hemp industry, issued in December 2019, simply affirmed that banks are not required to file suspicious activity reports (SARs) solely because their customers are engaged in the growth or cultivation of hemp in accordance with applicable law and regulations. (See Holland & Knight's previous alert, "Federal Bank Regulators Issue Joint Guidance on Hemp," Dec. 3, 2019.) The June 29, 2020, updated guidance goes further as well as provides additional clarity and suggested best practices as to customer due diligence and when SAR reports might need to be filed.
Highlights of the New Guidance
Under the new guidance, FinCEN notes that for customers who are hemp growers, financial institutions may confirm the hemp grower's compliance with state, tribal government or U.S. Department of Agriculture (USDA) licensing requirements, as applicable, by obtaining either 1) a written attestation by the hemp grower that they are validly licensed or 2) a copy of such license. Beyond this basic information, financial institutions are free to design a customer identification program that aligns with the institution's risk tolerances and the institution's assessment of the level of risk posed by each customer. Additional information might include crop inspection or testing reports, license renewals, updated attestations from the business, or correspondence with the state, tribal government or USDA. Regardless of the specifics of the customer identification program, FinCEN expects financial institutions to "understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and conduct ongoing monitoring to identify and report suspicious transactions, including, on a risk basis, to maintain and update customer information."
As noted above, the federal financial regulatory agencies have advised that a financial institution would not need to file a SAR solely because its customer is engaged in industrial hemp that is legal under the 2018 Farm Bill. This does not mean that hemp-related activities may never cause the filing of a SAR. FinCEN reminds financial institutions that they must apply to hemp-related businesses the same SAR monitoring protocols that they apply to any other customer. FinCEN further provides several examples of when the activities of a hemp industry customer may trigger a SAR filing:
- a customer appears to be engaged in hemp production in a state or jurisdiction in which hemp production remains illegal
- 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
- a customer engaged in hemp production seeks to conceal or disguise involvement in marijuana-related business activity
- 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 1) after a license revocation or 2) inconsistently with applicable law
The new FinCEN guidance also addresses the application of SAR filing protocols to customers that are engaged in both lawful hemp-related activities, as well as marijuana activities. The guidance notes that to the extent that a customer's financial transactions of hemp-related business are comingled with marijuana-related activities, the financial institution should apply FinCEN's 2014 Marijuana Guidance, which sets forth the approach for filing "marijuana limited" and "marijuana priority" SARs. However, the new guidance allows that if the proceeds of a customer's hemp activities are kept separate from the proceeds of its marijuana activities, then the SAR filing requirements would be applicable only to the marijuana-related activities.
Finally, the June 2020 FinCEN guidance notes that the requirements for currency transaction reports (CTRs) apply to hemp customers to the same extent as they apply to any other customer.
Conclusion and Considerations
The June 2020 guidance focuses on an area that financial services regulatory practitioners and their bank clients have had to carefully navigate – the crossroads of industrial hemp, marijuana and federal anti-money laundering laws. Although the customer identification program suggestions in the FinCEN guidance are those that most financial institutions have been providing since passage of the 2018 Farm Bill, the new regulatory guidance provides additional evidence that regulators, while open to banks serving the hemp industry, will be watching closely to ensure that banks appreciate the special risks that hemp customers pose due to the close connection between hemp and its more controversial cousin, marijuana. Notwithstanding this risk, such relationships can be manageable through effective onboarding due diligence, carefully drafted hemp customer questionnaires and effective ongoing monitoring for hemp-related business customers.
It is also notable that in the June 2020 guidance, FinCEN made reference to the provision of banking services to the marijuana industry and merely noted that the 2014 FinCEN guidance is still applicable. FinCEN could have offered new restrictions on cannabis banking services, but it did not do so.
For many banks that are skittish about wading into the weeds of marijuana banking, hemp banking provides a potential trial run into an industry that requires comparable compliance protocols. In fact, many banks establishing hemp banking risk tolerances, policies and procedures are also laying the framework for an eventual marijuana banking program.