July 1 2019
The world of marijuana banking has been rife with compliance risks for years. While marijuana is still illegal federally, many states have legalized marijuana for medical and recreational use. Financial institutions must weigh the pros and cons and potential risks of providing services to businesses that sell marijuana or its derivatives. The risks and significant compliance burden of serving a business that is still federally illegal has led to a smaller number of institutions choosing to serve these customers.
Legal Hemp Growing
However, there has been progress on the national level. The passing of the 2018 Farm Bill provides new opportunities for financial institutions to legally serve a certain class of marijuana-related business. The Farm Bill changes the classification of hemp to an agricultural product. This allows the use of hemp fiber, which is generally used for rope, clothing, and other materials, as well as CBD oil. The legalization of these specific types of cannabis enables financial institutions to provide services to these businesses without fear of legal ramifications, so long as the institution takes appropriate regulatory measures.
Each state is responsible for following the guidelines for what constitutes legal growing and use of hemp products when creating their regulatory framework. The framework must do the following: record and describe land where hemp is grown; have a process for testing the tetrahydrocannabinol (THC) levels to ensure they remain below the acceptable threshold; establish procedures for disposal of products that don’t comply with the requirements; and determine how to enforce the regulation. In many cases this means an application process, license or certification of some kind, testing the fields for THC levels, destroying crops that contain too much THC, and other measures to ensure compliance with the regulation.
Bank Secrecy Act Compliance
The Bank Secrecy Act is a very important regulation that financial institutions will adhere to when offering products and services to hemp-related businesses. There are three main areas that institutions will have to address in their policy and procedures: identification of hemp businesses; verification of their legal status; and ongoing due diligence and monitoring.
Financial institutions should already have identification procedures in place to identify their customers. These procedures should include identifying when a business is a marijuana-related business and now should include identification of hemp businesses separate from the marijuana-related businesses. During the institution’s initial due diligence, they should verify the legal status of the business as well. This should include verifying their certification or license (depending on the state requirement). The financial institution also needs to have procedures and be able to identify these businesses for existing customers.
Once the financial institution has identified the business, they need to risk rate the customer and determine whether they need to be added to the list of higher risk customers and subject to ongoing monitoring. Due to the nature of hemp businesses, it is generally considered to be a higher risk business and subject to the additional due diligence procedures. This includes periodic, ongoing monitoring of the activity in the account, as well as reverification of the business’s legal status. The timing of the ongoing monitoring depends on the institution’s level of risk and their high-risk monitoring policies and procedures. As part of the monitoring, they should determine whether the customer may be conducting business outside the scope of what they are legally able to and filing a Suspicious Activity Report (SAR) if they suspect the customer has violated law or regulation.
Suspicious Activity Reports
When it comes to providing services to the true marijuana-related businesses in the states where it has been legalized, the same priorities as above apply, with the addition of filing marijuana related SARs. Due to the illegality of marijuana on the federal level, if a financial institution chooses to serve marijuana-related businesses, they must file SARs on the businesses on a continual basis. This means after filing the initial SAR, they must conduct the continuous 90-day monitoring and file the SAR within the required timeframes if the marijuana-related activity continues.
There are three types of SARs the institution must file based on the situation. The Limited SAR, the Priority SAR, and the Termination SAR. The Limited SAR is what the financial institution will file when the marijuana-related business is conducting legal business according to the state and appears in compliance with all the requirements of the state. The Priority SAR is what the institution must file when it suspects or has knowledge that the business is in violation of any of the legal requirements. The Termination SAR is what the institution will file when it has made the decision to terminate the relationship with the business.
As with all things compliance, it is important that financial institutions implement appropriate policies and procedures to outline what the institution must do and ensure that they are commensurate with what the institution is doing. It is also imperative that the institution’s employees understand the difference between true marijuana and hemp or CBD, and the different requirements for each. With proper policies, procedures, and training in place, providing services to these types of businesses may be a lucrative opportunity for financial institutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.