Ballard Spahr to Present on Banking and Cannabis
FinCEN and the National Credit Union Administration Both Issue Guidance on Hemp and Banking
We are really pleased to presenting on July 9, 2020 to the National Association of Federally-Insured Credit Unions (“NAFCU”) on banking issues relating to cannabis. The cannabis and hemp industry continues to pose a fascinating mix of competing opportunities and risks – particularly from an anti-money laundering (“AML”) perspective. Changing societal opinions and business opportunities can conflict with daunting legal landscapes and a spectrum of potential AML risks.
This is an important topic with evolving real-world implications, particularly for credit unions, which generally have been more willing to cater to cannabis and hemp-related clients than other financial institutions. Of course, we frequently have blogged on cannabis, hemp and banking, for which the legal landscape would change significantly if pending federal legislation were to pass.
Ultimately, this topic produces constant twists and turns, including two sets of guidance – described below – recently issued by the Financial Crimes Enforcement Network (“FinCEN”) and the National Credit Union Administration (“NCUA”). Both are consistent with a (slowly) growing acceptance of cannabis and hemp-related banking by both government and the financial industry.
FinCEN Guidance on Hemp-Related Banking
FinCEN issued Guidance on June 29, 2020 regarding due diligence requirements under the Bank Secrecy Act (“BSA”) for hemp-related business customers. Although hemp is no longer per se illegal under federal law, persons involved in the hemp industry still must obtain licenses under a federally-sanctioned state law regime, and the associated compliance costs associated with banking the hemp industry still can be substantial. After noting that financial institutions of course must conduct customer due diligence (“CDD”) for all customers, the FinCEN Guidance states that, in the case of a customer that grows hemp, financial institutions may confirm the customer’s compliance with state, tribal government, or the U.S. Department of Agriculture (“USDA”) licensing requirements by either (1) obtaining a written attestation by the hemp grower that they are validly licensed, or (2) a copy of such license. The FinCEN Guidance further provides:
The extent to which a financial institution will seek additional information beyond the steps outlined above will depend on the financial institution’s assessment of the level of risk posed by each customer. Additional information might include crop inspection or testing reports, license renewals, updated attestations from the business, or correspondence with the state, tribal government, or USDA. In order to identify the risks posed, financial institutions must understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and conduct ongoing monitoring to identify and report suspicious transactions, including, on a risk basis, to maintain and update customer information.
The FinCEN Guidance notes that, as with any customer, “financial institutions [must] tailor their BSA/AML programs to reflect the risks associated with the [hemp-related] customer’s particular risk profile and file reports required under the BSA.”
As for Suspicious Activity Reports, or SARs, regarding hemp-related customers, the FinCEN Guidance observes that standard SAR-filing requirements apply because hemp is no longer listed as a Schedule I controlled narcotic, and then provides a list of potential red flags for SAR filings:
- 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 marijuana-related activity that may not be permitted under applicable law.
- A customer engaged in hemp production seeks to conceal or disguise involvement in marijuana-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.
The FinCEN Guidance also acknowledges that things can become more complicated if the transactions of a hemp-related customer are commingled with transactions involving cannabis, in which case FinCEN’s 2014 Guidance regarding SAR filings for cannabis-related customers will apply.
NCUA Guidance on Hemp-Related Banking
On June 19, 2020, the NCUA issued Guidance to credit unions that are considering engagement with the hemp industry. Recognizing that there is still confusion in the banking sector about what is allowed under the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”), the NCUA Guidance seeks to clarify the steps that credit unions should undertake when serving hemp-related businesses.
The NCUA Guidance begins by reminding credit unions that they are allowed to serve hemp-related businesses, provided the businesses are in compliance with the appropriate state and federal laws and regulations. This determination requires an understanding of the existing regulatory scheme for hemp under the 2018 Farm Bill.
The 2018 Farm Bill removed hemp from the list of Schedule I controlled substances under federal law. It also allowed states to submit individual plans for growing, cultivating, and producing hemp as an agricultural crop. Credit unions may serve hemp producers that have been licensed by the USDA under the 2018 Farm Bill. Growers and producers in states with USDA-approved plans are governed by such plans. While each state may have slightly different requirements, the 2018 Farm Bill set the minimum level of requirements necessary. Hemp producers in states without USDA-approved plans are governed by the USDA directly.
The NCUA Guidance notes that the 2018 Farm Bill does not cover the hemp-related industries of manufacturing, processing, distribution, shipping, and retail. Unlike hemp producers, which must be licensed by the USDA, these industries fall under state and tribal regulations. Thus, credit unions that intend to serve any hemp-related business outside of hemp production must be well-versed in the applicable state laws to ensure that the business is in compliance.
The NCUA Guidance also provides practical tips regarding the due diligence that should be conducted by credit unions serving the hemp industry. Not unlike FinCEN’s Guidance above, the NCUA “expects each credit union to employ sufficient customer due diligence procedures to reasonably ensure that credit union member businesses producing or selling hemp-related products are compliant with applicable laws and regulations.” Credit unions should set the level of CDD on a case-by-case basis, weighing both the type of hemp-related business and the financial risk involved. And, as with any business, credit unions must comply with BSA/AML requirements to file SARs when they suspect suspicious activity or involvement in money laundering.
Finally, the NCUA Guidance refers to a joint statement from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, FinCEN, and the Office of the Comptroller of the Currency, reminding banking organizations that they “are not required to file a SAR on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.”
The NCUA Guidance sends a clear message: as long as hemp-related businesses are in compliance with state and federal law, credit unions should give them the green light. As a final word of encouragement, the NCUA Guidance provides:
Credit unions may provide the customary range of financial services for business accounts, including loans, to lawfully operating hemp-related businesses within their fields of membership. Hemp provides new opportunities for communities with an economic base involving agriculture. The NCUA encourages credit unions to thoughtfully consider whether they are able to safely and properly serve hemp-related businesses.