Last week, the Financial Crimes Enforcement Network (FinCEN) issued new guidelines (the "FinCEN guidelines") for financial institutions that work with hemp companies. The FinCEN guidelines focus on due diligence in connection with the Banking Secrecy Act (BSA). These guidelines closely follow the new National Credit Union Administration (NCUA) guidelines for state-chartered credit unions that were released on June 20 (see our view here).
The FinCEN guide is not the first bite of the network on the apple. Last December, the Federal Reserve System Board of Governors, the Federal Deposit Insurance Corporation, FinCEN, and the Currency Auditor Office, in consultation with the State Bank Regulators Conference, issued a tripartite hemp bank statement. The aim of this declaration was to help financial institutions deal with compliance with BSA and the fight against money laundering (AML), since hemp is no longer a Schedule I-controlled substance under federal law. The FinCEN guidelines clarify and expand the declaration for 2019.
After the hemp bank statement of 2019, the biggest gain for financial institutions was probably the fact that customers don't need any special or enhanced Suspicious Activity Report. ". . because they grow or grow hemp in accordance with applicable laws and regulations. “In essence, banking regulators say that financial institutions should treat" cannabis companies "like any other company when it comes to SAR submissions (as opposed to state-licensed cannabis companies that have their own dedicated SAR notification system under the 2014 guidelines). The 2019 Hemp Bank Declaration continued: "When deciding to serve hemp businesses, banks must comply with applicable regulatory requirements for customer identification, reporting suspicious activity, reporting currency transactions, and risk-based customer due diligence, including the reporting of, provide beneficial ownership information to legal entity customers. “No surprises there.
Interestingly, the 2019 hemp bank statement, like the recent NCUA guidelines, did not address the legality of financial institutions trying to bank hemp CBD business. This is likely to make sense given the Food and Drug Administration ("FDA" )’s current enforcement position with regard to hemp CBD and violations of the Food, Drug and Cosmetic Act. Readers of this blog know that the FDA's 2018 Farm Bill will not deprive them of the ability to regulate hemp products, including hemp CBD. The FinCEN guidelines follow on this issue. In the FinCEN guidelines, "hemp business" is essentially only defined as "companies or individuals who grow hemp as well as processors and manufacturers who buy hemp directly from such producers". This means that the profitability and legality of hemp CBD banking business remains really cloudy at best under federal law.
What does the FinCEN guide say? According to FinCEN, “this guide explains how financial institutions can conduct due diligence for companies related to hemp and identifies the type of information and documentation that financial institutions can collect from companies related to hemp to meet the regulatory requirements of the BSA. “Here are the key highlights that financial institutions should look out for when looking after hemp companies:
- For hemp producers, financial institutions should “confirm compliance with government, tribal government, or USDA licensing requirements by the hemp producer by either (1) obtaining a written certificate from the hemp producer that they have a valid license, or (2)) a copy of that license ";
- Based on the risk of a hemp producer, a financial institution can obtain additional information such as crop control or test reports, license renewals, updated company certificates, or correspondence with the state, tribal government, or the USDA.
- Financial institutions must already monitor their customers for compliance with BSA and AML. This is no different for companies related to hemp, as a financial institution needs to update the specific advantages and disadvantages of a particular company related to hemp in order to fully assess the customer risk profile to enable effective compliance monitoring. Ultimately, this means that the financial institution must invest in a deep understanding of the 2018 Farm Bill and the specific state laws on hemp production, processing, licensing, and registration in the specific states in which its customers operate.
- There is still no special SAR filing system for these companies. However, the 2020 hemp bank guidelines state that when deciding whether to submit a SAR, the following behavior should set the red flag for a financial institution: a. A customer appears to be producing hemp in a state or jurisdiction where hemp production remains illegal. B. A customer appears to be using a government-licensed hemp shop as a front or pretext to launder money resulting from other criminal or marijuana-related activities that may not be permitted under applicable law. c. A customer producing hemp tries to hide or disguise participation in marijuana-related business. d. The Client is unable or unwilling to certify or provide sufficient information to demonstrate that it is properly licensed and operates in accordance with applicable law, or the financial institution becomes aware that the Client (i) is subject to a License withdrawal continues or (ii) contrary to applicable law. "; and
- When a financial institution serves a customer who mixes their hemp and state-licensed cannabis revenue and accounts (which is a terrible idea for several legal and business reasons), the financial institution must apply the 2014 FinCEN guidelines.
Overall, the new FinCEN guide is more comprehensive than the cross-agency hemp bank statement of 2019. For financial institutions, compliance with these guidelines should be straightforward in comparison to the FinCEN guidelines of 2014 for companies with a marijuana relationship. However, that doesn't mean that banking hemp businesses will be easy. Hemp will always be subject to a broad overlay of state and federal regulations that financial institutions must know and monitor. At least they now have some guidelines.