The Financial Crimes Enforcement Network Releases Guidance For Financial Institutions Providing Services To Hemp-related Business Customers
On June 29, 2020, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) released guidance for financial institutions on Bank Secrecy Act/Anti-Money Laundering (BSA/AML) regulatory requirements for hemp-related business customers. Specifically, the guidance addresses how financial institutions can conduct due diligence for hemp-related businesses and identifies the type of information and documentation financial institutions can collect from hemp-related businesses to comply with BSA regulatory requirements. This article will provide background, summarize the guidance, and highlight potential implications of the guidance for hemp-related businesses.
The Agriculture Improvement Act of 2018 removed hemp as an illegal controlled substance under the Controlled Substances Act (CSA) and directed the establishment of a regulatory framework for the legal production of hemp. Before the passage of the Agricultural Improvement Act, most financial institutions avoided providing services to hemp-related business customers out of concerns involving the BSA/AML. In particular, financial institutions have been concerned about the need to file Suspicious Activity Reports (SARs) for hemp-related business customers because hemp was previously considered an illegal controlled substance. Without adequate banking options or financing options, these businesses have had to rely on cash and private equity, which has limited the overall growth of the industry in the United States. However, in December of 2019, FinCEN issued guidance stating financial institutions did not need to file SARs just because a customer engaged in legal hemp-related business activities. The latest guidance further supplements the December 2019 guidance.
FinCEN expects financial institutions to treat hemp-related businesses customers the same as any other customer for purposes of the BSA/AML.
Financial institutions must conduct customer due diligence (CDD) for all customers, including obtaining basic identifying information about hemp-related businesses through the application of the financial institution’s customer identification programs and risk-based CDD processes, including beneficial ownership collection and verification, as they would for all customers.
Financial institutions may confirm the hemp grower’s compliance with state, tribal government, or the USDA licensing requirements, as applicable, by either obtaining 1) a written attestation by the hemp grower that they are validly licensed, or 2) a copy of such license.
When conducting risk-based CDD, financial institutions may seek additional information such as crop inspections, testing reports, license renewals, updated attestations from the business, or correspondence with the state, tribal government, or the U.S. Department of Agriculture.
Financial institutions are not required to file a SAR on customers solely because they engage in the legal growth or cultivation of hemp. However, financial institutions are expected to follow standard SAR procedures and file a SAR if the financial institution becomes aware of suspicious activity.
If a hemp-related business also engages in other marijuana-related business activities, then the business will still be subject to increased scrutiny under BSA/AML. However, if the proceeds of the hemp and marijuana business activities are kept separate, or the customer and its financial institution can identify which proceeds are from hemp versus marijuana activities, then the increased scrutiny and obligation to file a SAR will apply only to the marijuana related part of the business.
One of the stated goals of the clarification is to enhance the availability of financial services for hemp-related businesses. Ideally, hemp-related business customers will have greater access to financial services from a wider variety of financial institutions. This enhanced availability of services may make it easier for hemp-related businesses to engage in transactions such as payroll, billing, and paying suppliers.
Unfortunately, the latest guidance focuses solely on businesses or individuals that grow hemp, and processors and manufacturers who purchase hemp directly from such growers. This specific focus means that any business in the hemp industry that does not grow hemp or purchase hemp directly from growers, such as a manufacturer of hemp-infused products who purchases hemp oil from a hemp processor rather than a grower, may still have difficulty accessing financial services.
An attorney experienced in hemp & cannabis law can help your hemp-related business get off the ground, grow, and continually navigate the changing landscape of state and federal laws and regulations. With years of experience representing banks and credit unions, our attorneys can also assist financial institutions interested in lending to businesses in the industrial hemp industry from the initial due diligence requests, throughout the review process, and through closing.
Disclaimer: Possessing, using, distributing, and/or selling cannabis or cannabis-based products may not be legal in all states, and may constitute a federal crime. No legal advice we give is intended to provide any guidance or assistance in violating federal or state law, nor will any such advice provide any guidance or assistance in complying with federal law or the law of any state where such activity is illegal. Please also note that we are not advising you regarding the federal, state, or local tax consequences of engaging in any business in this industry.