Financial institutions now have new guidance to address questions related to Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulatory requirements for hemp-related business customers (the Guidance).1 Although the Financial Crimes Enforcement Network (FinCEN) issued this notice on June 29, 2020, right before the holiday weekend, this important guidance should not be overlooked.
Financial institutions will need to look closely at the Guidance to ensure their BSA/AML programs reasonably address regulatory expectations for customer due diligence as well as monitoring and reporting of suspicious activity for hemp-related business customers. Despite the re-classification of hemp under the Controlled Substance Act (CSA), financial institutions still have significant BSA/AML regulatory obligations to assess hemp-related business customers.2
The Guidance supplements the December 3, 2019 interagency statement on providing financial services to customers engaged in hemp-related business;3 however, it does not replace or supersede FinCEN’s previous guidance on the BSA expectations regarding marijuana-related businesses.4 Instead, the Guidance provides financial institutions with risk considerations only for hemp-related businesses (i.e., businesses or individuals that grow hemp and processors and manufacturers that produce hemp directly from such growers).
Specifically, the Guidance:
- explains how financial institutions can conduct due diligence for hemp-related businesses;
- identifies the type of information and documentation financial institutions can collect from hemp-related businesses to comply with BSA/AML regulatory requirements, including an apparent minimum requirement for hemp grower’s compliance with applicable law;
- provides certain risk considerations for the financial institution with hemp-related business customers; and
- sets forth FinCEN’s expectations regarding risk-assessments for ongoing monitoring and reporting obligations related to suspicious transactions and activities associated with hemp-related business customers.
Clarifying BSA Customer Due Diligence Expectations for Financial Institutions With Hemp-Related Business Customers
The Guidance is intended to enhance the availability of financial services for, and the financial transparency of, hemp-related businesses in compliance with federal law. As a result, FinCEN sets forth the following expectations for financial institutions with hemp-related business customers:
- Financial institutions must obtain basic information related to hemp-related business customers through the application of their customer identification program and risk-based customer due diligence (CDD) processes, including beneficial ownership collection and verification (where applicable); and
- Financial Institutions must establish risk-based procedures for conducting ongoing CDD.
In addition, the Guidance clarifies that in order for the financial institution to identify the risk-posed by the hemp-related business customer, the financial institution must understand the nature and purpose of the customer relationship for the purpose of developing the customer risk profile.
Indeed, the Guidance appears to be suggesting a minimum requirement that financial institutions may need to incorporate into their CDD collection processes. Specifically, FinCEN states that financial institutions may confirm the hemp grower’s compliance with state, tribal government, or the USDA licensing requirements, as applicable, by either:
- A written attestation by the hemp grower that they are validly licensed; or
- A copy of such license.
In addition, the Guidance further states that the need for additional information beyond the attestation and/or copy of the license will depend upon a financial institution’s assessment of the level of risk posed by each customer. Financial institutions may consider collecting additional information from hemp-related business customers, including:
- Crop inspections or testing reports;
- License renewals;
- Updated attestations from the business; or
- Correspondence with the state, tribal government or USDA.
While these items appear to be suggestive in nature, they also clearly identify documentation that FinCEN believes may be useful for financial institutions to consider collecting, depending upon the financial institution’s risk assessment of the particular hemp-related business customer.
Monitoring of Hemp-Related Business Customer Transactions for Suspicious Activity and Filing of Reports
The Guidance provides that FinCEN expects financial institutions to tailor their BSA/AML programs to reflect the risks associated with the hemp-related business customers’ particular risk profile and file reports required under the BSA.
Importantly, however, the Guidance makes clear that if the financial transactions of a hemp-related business customer are comingled with marijuana-related activities, financial institutions should apply FinCEN’s 2014 Marijuana Guidance. Notably, however, the Guidance states that if the proceeds of the businesses are kept separately, or the customer and its financial institution are able to identify which proceeds are marijuana-related and which are hemp-related, then the 2014 Marijuana Guidance, including specific SAR filing, applies only to the marijuana-related part of the business. While this provides helpful context for financial institutions to consider, the challenges of rooting out what part of a transactions is hemp-related versus marijuana-related in practice remains less clear.
- A customer appears to be engaged in hemp production in a state or jurisdiction in which hemp production remains illegal;
- A customer engaged in hemp production seeks to conceal or disguise involvement in marijuana-related business activity; and
- The customer is unable or unwilling to certify or provide sufficient information to demonstrate that it is duly licensed and operating consistent with applicable law, or the financial institution becomes aware that the customer continues to operate (i) after a license revocation, or (ii) inconsistently with applicable law.
While the instances of what FinCEN considers suspicious activity are helpful, to monitor for this type of activity, financial institutions may face challenges when trying to incorporate these suggestions into their monitoring programs. For example, how far will a financial institution have to research to determine that a hemp-related business may not be operating “consistent with applicable law”?
2 The Agricultural Improvement Act of 2018 removed hemp from the definition of marijuana in the Controlled Substances Act. See Pub. L. 115-334, 132 Stat. 4500 (2018).
3 See Providing Financial Services to Customers Engaged in Hemp-Related Businesses,” December 3, 2019
4 See FIN-2014-G001, “BSA Expectations Regarding Marijuana-Related Businesses, February 14, 2014
5 The Guidance reminds financial institutions that they must file still file Currency Transaction Reports (CTRs) for currency transactions with hemp-related businesses in the same manner they would for any other customers (i.e., report all currency transactions above $10,000 in aggregate on a single business day.
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