The Financial Crimes Enforcement Network (“FinCEN”) recently released guidance for bank and financial institutions regarding the requirements and obligations for financial institutions under the Bank Secrecy Act (BSA) and anti-money laundering (AML) laws for conducting due diligence on hemp-related businesses and customers. The most recent guidance, published on June 29, 2020, supplements the December 2019 interagency statement on the same issue.
The Agricultural Improvement Act of 2018 (the “2018 Farm Bill”) removed hemp from the definition of marijuana in the Controlled Substances Act and directed the establishment of a regulatory framework for its legal production. On October 31, 2019, the US Department of Agriculture (“USDA”) issued an Interim Final Rule that allowed for state and tribal governments to submit plans to the USDA for regulating hemp within their jurisdictions, relying on the USDA’s federal licensing plan, or prohibit hemp production entirely within their jurisdictions.
Although financial institutions are always required to complete customer due diligence (“CDD”), the most recent guidance from FinCEN emphasizes its importance with respect to hemp-related business, such as growers, processors and manufacturers.1
As an initial matter, financial institutions should ensure they gather basic identifying information about the business through customer identification programs and risk-based CDD processes. Financial institutions must also confirm the hemp grower’s compliance with state, tribal, or USDA licensing requirements by obtaining (1) a written confirmation the grower is validly licensed, or (2) a copy of the license.
Due diligence for hemp-related businesses does not end there, but further due diligence should be based on an individualized risk assessment of the particular business or customer. For hemp-related businesses, additional diligence may include: crop inspection, testing reports, license renewals, or correspondence with the company’s regulating body. The recent guidance makes clear that FinCEN expects financial institutions to tailor risk assessments to each individual customer and file reports as outlined under the BSA and other laws and regulations.
As is standard practice, Suspicious Activity Reports and Currency Transaction Reports must be filed upon discovering suspicious activity and currency transactions above $10,000 in aggregate on a single business day via FinCEN Form 8300. Examples of suspicious activity in hemp-related businesses may include: engaging in hemp production in states or jurisdictions where it remains illegal, using a hemp business as a pretext for laundering money or for illegal cannabis activity, or if a customer is unwilling to certify or provide applicable licensing information.
The new guidance relates only to hemp businesses and does not impact FinCEN’s prior guidance regarding marijuana-related businesses. To the extent a business is involved with both hemp and marijuana, and the funds or proceeds from those two separate business lines are comingled, financial institutions should look to, and apply, the December 2019 guidance focused on marijuana-related businesses.
Despite the changes to the law arising out of the 2018 Farm Bill there is still considerable uncertainty at both the state and federal level, as the administrative regulations have not yet been finalized and other laws governing hemp and marijuana continue to be in flux. As such, financial institutions are encouraged to have both a robust, yet tailored, CDD system for hemp customers. In addition, in order to minimize the risks associated with doing business with customers in the hemp industry, financial institutions should thoroughly understand their customers’ businesses to appreciate how they are impacted by the current legal and regulatory environment.
1 Hemp customers include growers, processors, and manufacturers.