On June 29, 2020, the Financial Crimes Enforcement Network (FinCEN) released guidance (the “Guidance”) on the Bank Secrecy Act (BSA) and anti-money laundering (AML) obligations and considerations surrounding hemp-related customers. These customers include hemp growers, and processors and manufacturers that purchase hemp from such growers. The Guidance supplements a December 2019 interagency statement, summarized in our prior Client Alert, and outlines how financial institutions can comply with their BSA/AML requirements when providing services to hemp-related clients.
Generally, hemp-related businesses are subject to the same requirements as any other customer. However, the Guidance emphasizes that in order to adequately assess risk, financial institutions may need to fully understand the regulatory context in which these customers operate.
The Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) removed hemp from the definition of marijuana in the Controlled Substances Act, thereby declassifying hemp as a Schedule I narcotic. The 2018 Farm Bill also legalized hemp production under certain conditions and instructed the United States Department of Agriculture (USDA) to establish the necessary regulatory framework. In October 2019, the USDA issued an interim final rule, pursuant to which state and tribal governments may: (1) submit plans to the USDA for regulating hemp within their jurisdictions; (2) rely on the USDA’s federal licensing plan; or (3) prohibit hemp entirely within their jurisdictions.
BSA/AML Program Expectations
As with any customer, financial institutions must apply initial and ongoing customer due diligence procedures (customer identification and verification (CIP), beneficial ownership information for legal entity customers, and risk-based customer due diligence/enhanced due diligence (CDD/EDD)) to hemp-related businesses. 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, respectively. In addition, FinCEN’s guidance on marijuana-related businesses remains valid, and it may be implicated by transactions that mingle hemp and marijuana funds.
For hemp growers, compliance with state, tribal government, or USDA licensing requirements may be verified by obtaining either: (1) a copy of the license, or (2) a written attestation from the grower of valid licensure. As for additional due diligence, FinCEN encourages a risk-based approach. Financial institutions may consider requesting crop inspections, testing reports, license renewal information, and copies of correspondence with regulatory agencies.
The Guidance in intended to improve access to financial services for hemp-related businesses, but FinCEN stresses that financial institutions must understand the nature and purpose of a customer relationship to recognize, monitor, and mitigate the related risks. Hemp regulation in the United States is complex, and varies between states, and between the state, tribal government, and federal levels. License requirements may hinge on terms such as “cultivate” and “process,” which may be defined differently between jurisdictions. Hemp-related activities within one state may be regulated by different agencies. Moreover, as the hemp industry expands in the United States, rules and guidance are subject to change frequently. Financial institutions seeking to service hemp-related customers should thoroughly understand the hemp regulatory regime, as well as their hemp customers’ business activities.