New BSA Guidance on USDA’s Hemp Regulation
Greetings Compliance Friends!
A few weeks ago, we provided an update on the Marijuana Banking Landscape, including NCUA’s recent Regulatory Alert 19-02 which reaffirms credit unions’ authority to serve lawful industrial hemp businesses and provides a Bank Secrecy Act (BSA) framework for hemp banking. Since this time, the U.S. Department of Agriculture (USDA) has issued an interim final rule establishing a regulatory regime for domestic hemp production. In light of these developments, NAFCU expects NCUA to update its guidance at a future time. Until then, recent joint guidance from financial regulators may help credit unions further develop their BSA/AML compliance program if making the business decision to serve hemp-related businesses.
The USDA’s Interim Final Rule
As a refresher, hemp is defined as the plant cannabis sativa and any part or derivative of that plant with a delta-9 tetrahydrocannabinol concentration (THC level) of not more than 0.3 percent. The THC level is what separates hemp from marijuana, and a THC level at or below 0.3 percent does not cause an intoxicating “high” effect. The cultivation of hemp was fully legalized under the Agriculture Improvement Act of 2018 (2018 Farm Bill) which distinguished hemp from the definition of “marihuana” under the Controlled Substances Act of 1970 (CSA). A few years prior, the Agricultural Act of 2014 (2014 Farm Bill) permitted hemp production where authorized through a state or tribe’s research and development pilot program. The 2018 Farm Bill extends this authorization, providing states and tribes the option to regulate hemp production within their borders. The law also requires USDA to establish procedures for approving state or tribal plans and for regulating lawful domestically-produced hemp in states or tribes without a USDA-approved plan.
Issued on October 31, 2019, the USDA’s interim final rule contains provisions for the submission and approval of state or tribal domestic hemp production plans, including annual inspection and information reporting requirements. It also establishes a federal plan for producers located in states and tribes that do not have a USDA-approved state-run plan. The federal plan includes procedures for tracking information on the land where hemp is grown, procedures for sampling and testing to ensure the THC levels of plants do not exceed the 0.3 percent threshold, procedures for disposing of non-compliant plants and licensing requirements.
The interim final rule reiterates that industrial hemp may be grown only with a valid USDA-issued license, with approval under a USDA-approved state or tribal plan, or through a 2014 Farm Bill pilot program. The 2018 Farm Bill and the interim final rule do not preempt state or tribal laws that are more stringent than federal law. A state or tribal government is free to prohibit industrial hemp production even though it is legal under federal law. The interim final rule became effective immediately and is set to expire on November 1, 2021.
Initial BSA Considerations Under USDA’s Interim Final Rule
Shortly after the interim final rule’s release, four federal regulators including FinCEN and the Conference of State Bank Examiners issued joint guidance summarizing the USDA’s regulation and explaining initial BSA considerations. The guidance in particular requires financial institutions to have a BSA/AML compliance program that is commensurate with the level of complexity and risks involved with serving hemp-related businesses. If deciding to serve hemp-related businesses, financial institutions are still expected to comply with applicable requirements for customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information. See, Providing Financial Services to Customers Engaged in Hemp-Related Businesses, 2.
Because hemp is no longer considered a controlled substance under the CSA, the joint guidance explains that financial institutions are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. For hemp-related customers, financial institutions are expected to follow standard procedures, and file a SAR where such businesses are engaging in activity that otherwise seems suspicious. With regard to a financial institution’s BSA obligations for serving marijuana-related businesses, the guidance reiterates FinCEN’s expectation that financial institutions continue to follow its 2014 guidance.
Future Guidance and More in the BSA Blast!
The joint guidance explains the regulators’ intention to issue more detailed analysis after further evaluating the interim final rule, similar to NCUA. As one of NCUA’s 2020 supervisory priorities, the agency will collect data during 2020 examinations about the types of services credit unions are providing in this budding industry. NCUA did not provide a definitive timeline, however, NAFCU will keep credit unions informed as things develop.
We took a deeper dive into all things hemp-related in an upcoming edition of the BSA Blast (member login required). This is NAFCU’s quarterly publication providing updates on recent BSA developments, Q&As received by NAFCU’s Regulatory Compliance team, articles on hot topics, and a BSA Quiz to test your knowledge.
About the Author
Reginald Watson, NCCO, was named regulatory compliance counsel in August 2017. In this role, Watson helps credit unions with a variety of compliance issues.