Bates Research - 12-12-19

Banking Agencies Clarify SARs Requirements for Hemp, Possibly Paving the Way for Cannabis

Photo by Matteo Paganelli on Unsplash
 

A key to understanding new Bank Secrecy Act (“BSA”) guidance on the “legal status of commercial growth and production of hemp” can be found in provisions of the Agriculture Improvement Act (the “Farm Bill”) signed into law in December of last year. As Bates has noted, bipartisan support for legalization of hemp agricultural products was driven in part by Senate Majority Leader Mitch McConnell (R-KY), who included the provisions into the legislation and pointed out that “the crop is being grown in 101 out of 120 counties in Kentucky.” That legislation distinguished and removed hemp (though not marijuana) as a controlled substance under law, and directed the USDA, together with the U.S. Attorney General, to regulate its production.

Interim rules, issued by the USDA in late October 2019 (to accommodate the 2020 planting season), established a federal licensing approval plan that allows state departments of agriculture and tribal governments to submit plans for monitoring and regulating hemp production. They also establish a federal plan for producers that do not have a USDA-approved plan in their state or territory. The regulations (i) require retention of information “on the land where hemp is produced,” (ii) testing hemp to ensure that certain chemicals (i.e. THC) do not exceed levels that, by law, would make them a controlled substance, (iii) procedures for disposal of hemp that violates those levels, and (iv) other licensing and registration requirements.

Regulatory Clarification under BSA

Given this context, the Federal Reserve Board, the FDIC, FinCEN, the OCC and the Conference of State Bank Supervisors issued a statement clarifying BSA obligations under these new USDA interim rules. (The interim period runs from October 31, 2019 until November 1, 2021.)

The guidance makes clear that banks are no longer obligated to file Suspicious Activity Reports (SARs) on customers that produce hemp, since hemp is no longer on the controlled substance list. However, the agencies also make clear that institutions must still comply with BSA requirements, and, therefore, financial institutions serving hemp producers must establish and maintain effective compliance programs that address the complexity and risks involved in the production of hemp. As with other regulated entities, this means compliance with customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information for legal entity customers. Consequently, these financial institutions must still file SARs based on suspicious activity.

Potential Impact of BSA Clarification

The agencies’ issuance of a clarifying statement on BSA obligations related to hemp production provisions under the Farm Bill and USDA interim rules, paves the way for similar regulatory adjustments should the Secure and Fair Enforcement Banking Act of 2019 ("SAFE Banking Act") become law.                                                                                           

As described in a previous Bates Research post, the SAFE Banking Act creates a safe harbor for depository institutions that provide banking services to state-licensed cannabis businesses. As with hemp before the Farm Bill, financial institutions must file SARs for cannabis firms, regardless of the legal status of cannabis under state law. Should the SAFE Act—which recently passed in the House of Representatives—become law, proceeds from cannabis businesses would not be considered proceeds from illegal activity. That would open the door to the same kind of regulatory adjustments as the newly clarified treatment for hemp production.

Similarly, should the "Marijuana Opportunity Reinvestment and Expungement Act of 2019" (“the MORE Act”)—which passed a vote out of the House Judiciary Committee—become law, cannabis would be removed from the list of federally controlled substances and could potentially be dealt with under the treatment now afforded hemp. (See Bates coverage of the MORE Act here.) Though the MORE Act and SAFE Banking Act have made progress in the House, time is running out for action on the bills by the Senate. Bates will continue to keep you apprised of developments in this area.

 

To learn more about Bates Group’s Financial Crimes and AML services, please contact Managing Director Edward Longridge at elongridge@batesgroup.com

Ed will also be speaking at SIFMA's Anti-Money Laundering and Financial Crimes Conference, February 5-6, 2020 in New York, NY. Visit the Bates booth to meet Ed and discuss AML and Financial Crimes solutions for your firm.

 

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