FinCEN Releases Guidance Regarding Due Diligence under the BSA for Hemp-Related Business Customers

FinCEN Releases Guidance Regarding Due Diligence under the BSA for Hemp-Related Business Customers

July 6, 2020, Covington Alert

            On June 29, 2020, the Financial Crimes Enforcement Network (“FinCEN”) released guidance regarding financial institutions’ Bank Secrecy Act (“BSA”) and anti-money laundering (“AML”) risk considerations with respect to hemp-related businesses.[1] The guidance is intended to enhance the access of lawful hemp-related businesses to financial services and to support the financial transparency of their activities.

            Among other things, the guidance outlines the customer due diligence steps banks should take to confirm that their hemp-related business customers are compliant with applicable state, tribal, and federal law. The guidance specifies that financial institutions generally are no longer required to file suspicious activity reports (“SARs”) on financial transactions involving hemp-related businesses that comply with state, tribal, and federal law on hemp production. At the same time, the guidance does not cover the financial activities of businesses dealing in marijuana products other than hemp, and transactions by such businesses generally remain subject to SAR obligations, as well as other BSA obligations outlined in FinCEN’s 2014 guidance on BSA Expectations Regarding Marijuana-Related Businesses (“2014 Marijuana Guidance”).[2]

            Background. Up until 2018, hemp was considered a Schedule I controlled substance under the Controlled Substances Act (“CSA”) because it fell under the definition of marijuana.[3] The 2018 Farm Bill modified the CSA’s definition of marijuana to exclude hemp, which the Farm Bill defined as encompassing products derived from Cannabis sativa L. with no greater than 0.3 percent THC.[4] The Farm Bill further directed the establishment of a regulatory framework for the legal production of hemp.[5] In accordance with that directive, in October 2019, the U.S. Department of Agriculture (“USDA”) issued an interim final rule establishing a domestic hemp production regulatory scheme.[6] Under the interim final rule, state and tribal governments may submit plans to the USDA for approval to monitor and regulate the production of hemp.[7]The interim final rule also establishes a federal licensing plan for jurisdictions that do not have their own USDA-approved plans and also do not prohibit hemp production.[8] Following the release of the interim final rule, federal and state bank regulators, in December 2019, issued an interagency statement to provide clarity regarding the legal status of hemp production.[9]

            Due Diligence Requirements. FinCEN’s guidance echoes and expands upon the December 2019 interagency statement. It provides that financial institutions must conduct customer due diligence (“CDD”) for hemp-related businesses -- as they do for all customers -- which includes obtaining basic identification and beneficial ownership information and establishing appropriate risk-based procedures for ongoing CDD.[10] In addition, financial institutions should confirm hemp growers’ compliance with state, tribal, or USDA licensing requirements by obtaining either (1) a written attestation by the hemp grower that it is validly licensed, or (2) a copy of such license.[11] Further, financial institutions may need to seek additional information, depending on the level of risk posed by the customer. This could include crop inspection or testing reports, license renewals, updated attestations, or correspondence with the state, tribal government, or USDA.[12] The guidance cautions that financial institutions must tailor their BSA/AML programs to reflect the risks associated with a hemp customer’s particular risk profile.

            Suspicious Activity Reporting. Because hemp is no longer a Schedule I controlled substance under the CSA, the FinCEN guidance provides that financial institutions are not required to file SARs on customers solely because they engage in hemp growth or cultivation.[13] Rather, financial institutions should follow normal SAR procedures and only file a report if they become aware of suspicious activity.[14] This could include: a customer engaging in hemp production in a jurisdiction in which hemp production remains illegal; a customer using a state-licensed hemp business as a front or pretext for money-laundering; a customer engaging in hemp production seeking to conceal or disguise involvement in marijuana-related business activity; or a customer being unwilling to provide sufficient information to demonstrate that it is licensed and operating consistent with applicable law. The guidance further directs financial institutions to refer to FinCEN’s 2014 Marijuana Guidance in the event that the financial transactions of a hemp-related business are comingled with marijuana-related activities.[15]

            Other Reporting. Finally, the guidance reminds financial institutions that they must report currency transactions in connection with hemp-related businesses as they would for any other customer by reporting all currency transactions above $10,000 in aggregate on a single business day.[16]

If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services practice below.