Originally published by Reid Whitten.
On June 29, 2020, the Financial Crimes Enforcement Network (FinCEN) published updated guidance intended to “enhance the availability of financial services” for the hemp industry (the Guidance). Even though the Agriculture Improvement Act of 2018 legalized hemp[1] at the federal level, some banks have hesitated to provide financing to the hemp industry because they are uncertain of their obligations under the Bank Secrecy Act or Anti-Money Laundering regulations (BSA/AML). The Guidance was published to clarify those obligations, and follows closely on the new National Credit Union Administration guidance for federally-chartered credit unions issued on June 20, 2020.
Generally, U.S. law requires banks to have a robust AML policy and procedures in place. The AML programs must include systems for undertaking customer due diligence (CDD) and implementing a customer identification program (CIP), both in order to identify the ultimate beneficial owner of the banks’ clients. Banks are also required to file a suspicious activity report (SAR) when they identify a suspicious transaction that may be related to money laundering activity. Current regulations do address how those BSA/AML obligations should be applied to hemp customers, but the Guidance goes some way to clarifying the situation.
Customer Due Diligence Requirements
The BSA requires that banks take “Know Your Customer” steps, including following rigorous CDD and CIP protocols to identify the customer (and, as appropriate, the customer’s ultimate beneficial owner) and the customer’s business activity. Using the collected information, banks are required to create a risk profile for each customer, then engage in continuing monitoring of customer activity to update customer information, as well as to identify any aberrant activity that may represent an AML red flag.
The Guidance proposes steps that financial institutions may take to customize the risk profiles of their hemp-industry clients. For example, financial institutions may confirm the hemp grower’s compliance with applicable laws by obtaining either of the following:
- A written attestation by the hemp grower that they are validly licensed, or
- A copy of such license.
The Guidance suggests that financial institutions take a risk-based approach to deciding whether to conduct further diligence on customers by collecting additional information including:
- Crop inspection or testing reports;
- License renewals;
- Updated attestations from the business; or
- Correspondence with the state, tribal government, or the USDA.
Suspicious Activity Reporting Requirements
BSA/AML regulations require financial institutions to take thorough steps to monitor and report suspicious activity among their customers. Financial institutions are required to file SARs if they even have reason to suspect that a transaction involves the proceeds of illegal activity, is an attempt to evade BSA regulations, lacks an apparent lawful purpose, or even if it is not the type of transaction in which the bank would normally expect its customer to engage.
Previous FinCEN guidance provided that SARs were not reqiured solely because a customer is involved in the hemp industry. However, financial institutions are required to use their customer risk profiles, and their ongoing monitoring efforts to identify whether and when a customer engages in suspicious activity, such as an unusual type of transaction. The guidance suggests that suspicious activity may include, among other activities, the following:
- A customer appears to be engaged in hemp production in a state or jurisdiction in which hemp production remains illegal.
- A customer appears to be using a state-licensed hemp business as a front or pretext to launder money derived from other criminal activity or derived from cannabis-related activity that may not be permitted under applicable law.
- A customer engaged in hemp production seeks to conceal or disguise involvement in cannabis-related business activity.
- 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.
Risk and Reward
The Guidance provides a clearer path for banks looking to enter the field of hemp finance, and the potential gains to be realized in the burgeoning industry are significant. However, the risk of a misstep remains – AML penalties are substantial and U.S. regulators still give careful scrutiny to any transaction related to the cannabis industry. The most successful entrants into the field of hemp finance will be those financial institutions that carefully analyze the regulations and guidance, consulting with counsel as appropriate, to map out how they can successfully and compliantly capture a share of the growing market.
FOOTNOTES
[1] Defined as cannabis with less than 0.3% THC.
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