Here’s the introduction to a piece written by Jessica Caballero, CRCM, CERP for the ABA Banking Journal
Industrial hemp is growing in popularity, and hemp-based products are becoming more readily accessible in communities across the country. Strong businesses are thriving in this industry while successfully managing compliance, and it’s likely that your institution has been approached by at least one of these hemp-related businesses looking for a long-term banking relationship.
More states are passing legislation and designing oversight programs for many areas within the supply chain from seed engineering to retail sales. However, despite their status as federally legal, industrial hemp businesses have difficulty finding a financial institution willing to take their deposits or extend credit.
However, there are institutions successfully serving these businesses. The ones that are not banking hemp have either made a conscious decision to avoid the risks, or they find the task of designing a program daunting. However, the road to designing and implementing a program for banking hemp doesn’t need to be a difficult one. Applying basic risk management principles and educating your institution on the industry will get you there quicker than you think.
When new industries appear suddenly that are perceived to be higher risk, institutions often look to the federal functional regulators to publish guidance on how to provide services to the industry in a safe, sound, and compliant manner while adequately mitigating the perceived risks.
In December 2019, the banking industry received joint guidance from the Federal Reserve, the FDIC, the OCC, the Conference of State Bank Supervisors and the Financial Crimes Enforcement Network entitled
“Providing Financial Services to Customers Engaged in Hemp-Related Businesses.” Although the guidance was almost singularly focused on the agricultural sector, it did confirm that FinCEN marijuana-related business SARs are not required for businesses solely engaged with hemp. Instead, covered institutions are directed to file a SAR only if other indications of suspicious activity warrant it, a step which seamlessly aligns with the NCUA guidance. The guidance reiterated the legality of hemp at the federal level and its separation from marijuana under federal definition. Like many BSA/AML related guidance preceding it, the guidance focuses on a risk-based approach that requires the program to be commensurate with the level of complexity and risks involved. While its scope is limited, the agencies promise a deeper dive from FinCEN soon.
Steps to building your hemp-related program enterprise risk assessment
Using those guidelines, institutions can begin confidently building out their program for serving hemp-related businesses. This process should start with an enterprise wide risk assessment considering how such a program may affect the institution’s risk profile. You may quickly identify risks such as regulatory risk, compliance risk, customer risk and the risks associated with the complex and dynamic legal environment to which these businesses are subject. However, it is important to recognize that a hemp program may bring other exposures, including credit risk, liquidity risk, concentration risk, and reputation risk. Once identified, you may begin to build out a system of controls and your risk management system to measure, mitigate, monitor, and report hemp-related risks.
Contact your regulatory agency
Regulatory risk is still present despite guidance, as there are still many areas of uncertainty. One of the earliest steps in this process of building out a hemp program should be to contact your regulatory agency to discuss whether or not accepting the risks of these businesses is a good fit for your institution’s unique risk position. The formula for risk management includes a balanced look at your risk appetite, risk tolerance and capacity for risk. If you have recently received criticism related to your BSA/AML program, you may not have the capacity to take on the risks that hemp-related business may bring to your institution. When discussing this with your agency contact or exam team, ask questions about the agency or regional office’s comfort level with the industry, to gauge how they may be examining hemp programs going forward. These conversations will help you both measure regulatory risk and design the proper controls to mitigate regulatory risk.
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