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At Long Last, FinCEN Offers Much Awaited Guidance Regarding BSA Due Diligence Requirements for Hemp Businesses



Ever since Congress passed the 2018 Farm Bill and hemp was declassified under federal law as a Schedule I controlled substance, financial institutions have struggled with whether and how to bank the hemp industry. Many bankers simply feared that the distinction between legal hemp (which cannot contain more than 0.3 percent THC on a dry-weight basis) and illegal marijuana placed too high a burden (and cost) on banks to police compliance and too much risk without sufficient reward to enter the fray. Those fears might soon fade thanks to recent materials published by the regulators with the Financial Crimes Enforcement Network (FinCEN).

On June 29, 2020, FinCEN issued supplemental guidance under the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations to clarify due diligence requirements for federally compliant hemp businesses.[1] FinCEN's stated goal in offering the Guidance is to increase the availability and transparency of financial services for hemp-related businesses, while reinforcing existing BSA expectations for marijuana-related businesses.[2] The Guidance clarifies that the customer due diligence (CDD) process for hemp-related businesses should be similar to the CDD process that a financial institution uses for its non-hemp customers, provided that the financial institution tailors its BSA/AML program to reflect the unique risks associated with hemp businesses and establishes appropriate procedures for on-going diligence. The Guidance explains, for example, that in order to vet a customer who grows and produces hemp under a USDA or USDA-approved program, the financial institution could confirm the customer’s compliance with applicable state, tribal, or USDA licensing requirements by obtaining either: (1) a written attestation of compliance from the customer; or (2) a copy of the license issued by the applicable agency as part of the financial institution’s initial CDD and application process.

However, the Guidance suggests that confirming a customer’s hemp license is just the beginning and the bare minimum a financial institution should do (depending on the institution’s risk tolerance and risk assessment). Additional on-going diligence measures the Guidance proposes include seeking documentation on items such as: (1) crop inspection or testing reports; (2) license renewals; (3) updated attestations; or (4) correspondence confirming compliance with the applicable regulatory agency. The Guidance further recommends that each financial institution take the time to understand the nature, purpose, and relationships of the hemp business for the purpose of developing and maintaining a risk profile and appropriate diligence measures. In addition to discussing the expectations of due diligence for hemp businesses, the Guidance offers clarity on suspicious activity reports (SARs) now that hemp is no longer a Schedule I controlled substance—financial institutions are not required to file SARs on customers merely because they are engaged in hemp activity in compliance with state and federal laws, but should follow standard SAR procedure if they become aware of suspicious activity, such as:

  • Hemp activity in a jurisdiction in which it is illegal;
  • Evidence of money laundering;
  • Evidence of involvement in a marijuana-related business; or
  • Failure (or unwillingness) by the customer to demonstrate regulatory compliance.

It's clear from the Guidance that FinCEN is attempting to encourage financial institutions to open their doors to hemp-related businesses, provided that those institutions take a risk-based approach to establish appropriate diligence procedures to evaluate each hemp customer's compliance with the complex web of hemp regulations. While the Guidance may not create banking solutions for hemp-related businesses overnight, it is certainly a step toward helping an industry that has struggled with finding financial services solutions.

[1] See “Providing Financial Services to Customers Engaged in Hemp-Related Businesses,” Dec. 3, 2019, available here.

[2] See FIN-2014-G001, "BSA Expectations Regarding Marijuana-Related Businesses," Feb. 14, 2014, available here.

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