Financial Due Diligence for Hemp-Related Businesses: Banking Update

In June of 2020, the Financial Crimes Enforcement Network (“FinCEN”) issued updated guidance regarding the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) regulations for hemp-related business consumers. Financial institutions must do their due diligence for customers, but especially for hemp-related businesses, as the legalities and recommended practices are continually changing. Additionally, the National Credit Union Administration (“NCUA”) recently put forth further guidance for credit unions serving hemp-related businesses. As the hemp industry continues to progress, the banking industry is actively organizing their expectations and guidelines to keep up and simplify hemp-related interactions. Below, we summarize each of these resources to give you the straightforward essentials. 

Background: The 2018 Farm Bill and The USDA Interim Final Rule

The Agricultural Improvement Act of 2018, more commonly known as the 2018 Farm Bill, provides a legal definition of hemp, exempting it from the definition of marijuana in the Controlled Substances Act (“CSA”). The 2018 Farm Bill defines “hemp” as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids . . . with a delta-9 THC concentration of not more than 0.3 percent on a dry weight basis.” 7 U.S.C. Section 1639o. The U.S. Department of Agriculture (“USDA”) issued an Interim Final Rule that developed a domestic hemp production program to support and facilitate the legal production of hemp in the United States. 

These initiatives preserve the U.S. Food and Drug Administration’s (“FDA”) ability to monitor and regulate hemp products, in hopes of establishing uniformity and order surrounding the hemp industry. Additionally, this progress encourages entrepreneurship in the hemp and cannabis space, and the banking industry should prepare accordingly. 

FinCEN Guidance Regarding BSA/AML in the Hemp Industry 

FinCEN maintains that financial institutions should conduct due diligence for hemp-related businesses, as they would for all customers. This risk analysis includes basic identifying information, beneficial ownership collection and verification, and compliance with the appropriate state or tribal government on licensing requirements and other regulations. Depending on the assessment of risk posed by each customer, financial institutions should proceed beyond these steps to an appropriately correlated extent. Additionally, they must be prepared to conduct “ongoing monitoring to identify and report suspicious transactions” and update client information regularly.   

FinCEN Guidance Regarding Suspicious Activity in the Hemp Industry

Because of the 2018 Farm Bill’s updated definition of “hemp,” FinCEN also indicates that financial institutions are no longer required to file a Suspicious Activity Report (“SAR”) on hemp-related organizations based solely on their involvement with the growth or cultivation of the hemp plant. However, an SAR should be filed if:

  • A customer is involved in hemp cultivation or distribution in a geographical area where it is not legalized;
  • A customer is using state-licensed hemp operations as a front for money laundering as a result of other criminal activity;
  • A customer is using hemp to disguise marijuana-related business activity;
  • A customer is unwilling or unable to provide sufficient and required licensing.

Read the full FinCEN guidance for additional information and details. 

NCUA Guidance Regarding Servicing Hemp Businesses

The NCUA issued additional guidance to help credit unions stay current with federal, state, and Native American tribal laws and regulations regarding hemp-related businesses with a detailed question and answer guide. Of note, this guidance summarizes the USDA’s interim final rule to properly inform credit union employees on its particulars. The NCUA does not prohibit credit unions from providing services to hemp-related businesses, as many credit unions have an extensive background supporting the agriculture industry. Rather, the NCUA strongly encourages credit unions to consider hemp businesses as new opportunities and  ensure safe and proper relationships. However, credit unions also maintain the right to refuse service to any hemp-related business if it is deemed too risky. The NCUA guidelines further recommend that credit unions may want to seek legal counsel “when determining the appropriate amount of due diligence.”   

As hemp lawyers, the attorneys at Ritter Spencer PLLC stay up-to-date on legal reform and banking activity in the cannabis community. Chelsie Spencer, a hemp attorney, specializes in marijuana, hemp, and CBD law and has worked with a wide range of cannabis businesses regarding transactional and litigation issues, trademark law, copyright law, and other facets of the cannabis and hemp industries. Contact Ritter Spencer or give us a call at 214.295.5074 for more information. 

Ritter Spencer, PLLCFinancial Due Diligence for Hemp-Related Businesses: Banking Update

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