Although the Agriculture Improvement Act of 2018 (2018 Farm Bill)1 removed hemp as a Schedule I substance under the Controlled Substances Act, many financial institutions understandably have been hesitant to provide financial services to lawful hemp-related businesses. On December 3, 2019, three federal banking agencies2 and the Financial Crimes Enforcement Network (FinCEN), in consultation with the Conference of State Bank Supervisors (collectively, the Agencies), issued a joint statement that takes at least one step in providing long sought-after guidance (Joint Guidance). The Joint Guidance clarified that "banks3 are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations." While this statement is a welcome clarification, the practical implications for banks are limited and challenges presented by banking hemp-related businesses remain unaddressed. In short, notwithstanding this guidance, banks still must exercise appropriate diligence with respect to hemp industry customers, including continuing to file SARs if such entities are not operating in compliance with applicable laws and regulations, or are otherwise engaged in suspicious activity.
The Agencies Finally Respond to the 2018 Farm Bill
In addition to removing hemp from the list of Schedule I controlled substances, the 2018 Farm Bill directed the U.S. Department of Agriculture (USDA) to regulate hemp production. On October 31, 2019, in time for the 2020 growing season, the USDA issued an interim final rule setting out the requirements for state and tribal plans to regulate the production of hemp in their territories. The interim final rule also established a federal licensing plan for regulating hemp producers in state or tribal territories that do not have a USDA-approved plan.4
Despite pleas throughout 2019 from the financial services industry and Congress (including from Senate Majority Leader Mitch McConnell) to the federal banking agencies and FinCEN to issue guidance that would alleviate concerns with and open up banking for hemp-related businesses, the Agencies had remained largely silent, evidently awaiting the USDA's interim final rule. Now that the interim rule has been issued, the Agencies remain somewhat circumspect; the Joint Guidance is rather limited, replete with disclaimers, and notable for what it does not say.
The Joint Guidance first underscores several key points:
- Hemp may be grown only with a valid USDA-issued license or under a USDA-approved state or tribal plan;
- A state or tribal government may prohibit the production of hemp, even though it is legal under federal law; and
- (Lest there be any doubt) marijuana is still illegal under federal law.
In making these "key points" the Agencies appear to be signaling that banks should not take this Joint Guidance as permission to relax their BSA/AML requirements pertaining to cannabis-related businesses generally; rather this Joint Guidance pertains only to customers who are lawfully growing or cultivating hemp and not otherwise engaged in unlawful or suspicious activity.
After setting the parameters of the Joint Guidance, the Agencies then provide the substantive clarification:
Because hemp is no longer a Schedule I controlled substance under the Controlled Substances Act, banks are not required to file a SAR on customers solely because they are engaged in growth or cultivation of hemp in accordance with applicable laws or regulations. (emphasis added).
Important Considerations for Banks
While this statement provides some clarity on banks' obligations to file SARs, banks should keep in mind the following points:
First, banks must still follow standard SAR procedures for hemp-related customers; the Joint Guidance merely provides that the lawful production of hemp alone is not "suspicious activity" requiring a SAR.
Second, the Joint Guidance reminds banks of their obligation to implement and maintain risk-based BSA/AML programs that are commensurate with the specific risks presented to institutions by their customer bases. Accordingly, if a bank decides to provide services to hemp-related businesses, it should consider developing written policies and procedures that govern how the bank will mitigate any elevated BSA/AML risk presented by this specific type of customer.
Third, earlier this year, the banking industry specifically asked the federal banking agencies and FinCEN for confirmation that banks may rely on a state- or USDA-issued licenses to confirm that a hemp industry customer is operating lawfully, and that their product qualifies as "hemp," as opposed to marijuana. While the Joint Guidance provides that "[b]ank customers engaged in hemp-related business activities are responsible for complying with" the 2018 Farm Bill, the Agencies notably did not quite go so far as creating the safe harbor the banking industry had sought. Thus, notwithstanding the fact that customers may possess an appropriate hemp-cultivation license, banks must continue to diligently monitor their customers' activities. In addition to their standard customer due diligence and transaction monitoring procedures, banks should understand the requirements imposed by state and federal regulatory plans to ensure that customers have—and can provide the bank with copies of—the appropriate licenses or certifications under those plans. Further, banks should continue to monitor developments in state law, as it is important to remember that some state governments prohibit or limit the growth and distribution of hemp even though it may be lawful under federal law.
Prospects for Additional Clarification on Cannabis Banking
The Joint Guidance notes that FinCEN will issue additional guidance on providing financial services to the hemp industry after it further evaluates the USDA final interim rule. Of course, the financial services industry also has long been awaiting clarification from the banking agencies and Congress on banking marijuana-related businesses operating lawfully under state law. As is well-known, the conundrum is that while marijuana is legal to some degree in 33 states, it remains fully illegal under federal law. This conflict has caused some financial institutions to avoid marijuana-related businesses altogether, regardless of their legitimacy under state law.
On October 2, 2019, the California Department of Business Oversight (DBO) provided guidance to California state-chartered financial institutions that largely tracks FinCEN's 2014 guidance on banking marijuana-related businesses and, notably, affirmed that the DBO will not take regulatory action against state-chartered banks or credit unions solely for establishing a banking relationship with a licensed marijuana-related business. The federal banking agencies have yet to make a similar commitment, which even California state-chartered banks must keep in mind as they consider banking marijuana-related businesses.
The financial services industry thus continues to closely monitor the progress of the Secure and Fair Enforcement (SAFE) Banking Act, which, among other things, would prohibit a federal banking agency from taking an enforcement action against or limiting the deposit insurance of a depository institution solely because it provides financial services to cannabis-related (including marijuana-related) businesses operating in compliance with state law. The US House of Representatives passed the SAFE Banking Act on September 25, 2019; however, its prospects for Senate and Presidential approval remain uncertain, particularly in the current political environment.
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Financial institutions seeking advice on providing financial services to hemp-related or marijuana-related businesses, including the development of written polices or procedures, are encouraged to contact any of authors of this Advisory or their usual Arnold & Porter contact. The authors are members of Arnold & Porter's cannabis working group, which monitors developments in this area and advises clients on implications for their businesses.
1 Pub. L. 115-334, 132 Stat. 4490.
2The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.
3 The Joint Guidance defines "bank" for purposes of this statement as "each agent, agency, branch or office within the United States of commercial banks, savings banks, savings and loan associations, thrift institutions, and foreign banks."
4 See Establishment of a Domestic Hemp Production Program, 84 Fed. Reg. 58522 (Oct. 31, 2019) (to be codified at 7 C.F.R. 990); see also Arnold & Porter's November 14, 2019 client advisory, " USDA Issues Interim Final Rule for Hemp."
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