The dearth of federally insured cannabis banking prevents cannabis industry participants from utilizing banking services.
Banking has been an impediment for the cannabis industry because the Bank Secrecy Act of 1970 (BSA) and related regulations―which seek to prevent money laundering and other financial crimes―place onerous requirements on banks when a transaction is suspected to involve illegal activity. 12 C.F.R. Section 21.11. Notwithstanding billions of state-legal cannabis dollars exchanging hands, the commercial banking industry, which is largely federally regulated, is virtually nonexistent in the cannabis space. In 2014, the Treasury’s Financial Crimes Enforcement Network (FinCEN) provided guidance intended to enhance the banking of cannabis-related monies by establishing a category of suspicious activity reporting for “marijuana related businesses.” But, according to FinCEN, as of June 30, 2019, just 553 commercial banks and 162 credit unions had filed an SAR for a “marijuana-related business.”
The dearth of federally insured cannabis banking prevents cannabis industry participants from utilizing banking services like payroll and credit card processing, results in private financing at high interest rates, and risks physical harm in transporting large amounts of cash. In addition, it prevents noncannabis companies from entering or providing services to the industry for fear of bank account closures or claims of money laundering. Because the BSA and anti-money-laundering laws apply to “financial institutions,” insurance companies have been reluctant to provide coverage to the industry.
On December 20, 2018, the Agriculture Improvement Act of 2018 (2018 Farm Bill) removed hemp, a strain of cannabis containing low or no psychoactive chemicals, from the definition of “marijuana” under the Controlled Substances Act, making hemp as defined in the 2018 Farm Bill a federally lawful agricultural commodity. See 7 U.S.C. 1639r(a)(1). By removing the “unlawful” label previously applied to hemp, as a strain of cannabis, it was expected that traditional financial institutions would begin to provide their services to businesses and individuals involved with hemp, but not marijuana. However, in the absence of USDA regulations implementing the 2018 Farm Bill, most financial institutions remained reluctant and steered clear.
On October 29, 2019, the USDA released its draft version of the interim final rule setting forth regulations for the establishment of a Domestic Hemp Production Program. The rule is not yet final (and won’t be until it is published in the Federal Register), but it sets forth provisions governing, among other things: sampling and testing of THC in hemp, hemp transportation, hemp cultivation licensing requirements and penalties for violations of the 2018 Farm Bill. Most importantly, the regulations allow approval of state hemp programs by the USDA, provided they comport with the USDA’s regulatory structure.
In light of the USDA regulations, on December 3, 2019, FinCEN, along with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, in consultation with the Conference of State Bank Supervisors, issued their “statement to provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act (BSA) and its implementing regulations.” Acknowledging the 2018 Farm Bill and the interim final rule, the federal banking regulators’ statement informs banks that they “are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp.” Instead, the statement instructs that “for hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants.” Importantly, the bank regulators’ statement emphasizes the still unlawful nature of marijuana and notes that “[i]n the context of marijuana-related businesses, banks should continue following FinCEN guidance FIN-2014-G001 – BSA Expectations Regarding Marijuana-Related Businesses.”
While it is not going to change the dearth of banking for marijuana-related business, the federal banking regulators’ guidance for banks providing financial services to hemp-related businesses is welcome news for the hemp industry, as financial institutions may now readily provide their services to hemp-related businesses like businesses in any other industry. It likely will also be well-received by banks, insurers and other financial institutions that have been interested in, but have largely foregone, providing financial services to the hemp industry, which has grown into a multibillion-dollar market with exciting potential.
Hemp industry participants should be mindful that FinCEN will issue additional guidance after further reviewing and evaluating the interim final rule. The USDA is accepting public comment on the proposed Domestic Hemp Production Program until December 30, 2019.