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Risks Remain for Banks Servicing the Hemp Industry

While the latest guidance on regulating financial services for hemp businesses may feel like a turning point, current banking regulations will likely continue to inhibit hemp businesses from integrating into the mainstream financial system.

In December 2019, federal regulators including the Federal Reserve System and the Financial Crimes Enforcement Network (FinCEN) issued a release that removed the requirement for banks to file Suspicious Activity Reports (SARs) on customers based solely on the customers’ hemp cultivation activity. The change follows the 2018 Farm Bill that removed hemp from the definition of marijuana as a Schedule I controlled substance. Although hemp and marijuana are both cannabis sativa plants, the bill differentiated hemp from marijuana as a plant containing less than 0.3 percent THC (the psychoactive compound in cannabis). Other than removing the SAR requirement, the December release does not otherwise address the anti-money laundering (AML) requirements for financial institutions serving hemp businesses.

To comply with AML requirements, banks must not only file SARs, but they must conduct risk-based due diligence on all clients. When dealing with high-risk products or industries, banks must conduct “enhanced” due diligence with more invasive and frequent client inquiries. Enhanced due diligence often requires banks to review financial statements, identify the sources of client wealth, research negative media, monitor account activity, and identify a client’s customers and suppliers. To avoid the regulatory burden and risk, many banks have abandoned or “de-risked” current or potential high risk clients.

According to FinCEN guidance released in 2014, financial institutions must conduct enhanced due diligence on “marijuana-related businesses” to include a review of state licensing documents. After the 2018 bill, it was an open question whether hemp businesses would remain “marijuana-related.” By addressing only the SAR requirement and stating that the 2014 guidance remains in effect, the December release seems to suggest that all other marijuana-related enhanced due diligence requirements remain in place for hemp businesses.

The removal of the SAR requirement for banking hemp businesses may be a sign that federal regulators will continue to deregulate. But financial institutions seeking to serve the hemp industry should recognize that significant regulatory risks and ambiguities remain.

© 2020 Schiff Hardin LLPNational Law Review, Volume X, Number 27


About this Author

Ryan Bintz Associate Chicago litigation, financial markets, trusts and estates, and business transactions.

Ryan brings a unique combination of military service and international experience to his law practice. He assists on investigations and a wide range of matters related to litigation, financial markets, trusts and estates, and business transactions. Ryan leverages his diverse experiences abroad to offer a matured approach to client service and legal problem-solving.

Prior to law school, Ryan served for 10 years as a Marine Corps Infantry Officer with operational deployments to Afghanistan, Cuba, and throughout the Asia-Pacific region. He served with the 1st Marine Regiment where he...

Lawrence H. Heftman, Schiff Hardin, commercial litigation disputes lawyer, multi-district litigation attorney

Larry is a trial lawyer and commercial litigator. From the outset of a case, he uses his experience as a champion debater to strategically evaluate both sides’ positions to focus the litigation on the key issues, and targets discovery with an eye to being trial-ready. He always provides a candid assessment to his clients so they can make the most informed business judgment regarding settlement and trial strategy.

Larry has applied this approach to a broad range of commercial litigation disputes, achieving a strong record of success in state and federal courts across the country. He has won both bench and jury trials and successfully defended those victories on appeal. He has also won numerous motions to dismiss, including defeating multimillion dollar claims with no expense to his client from discovery. On the plaintiff side, he has prosecuted claims and obtained multimillion dollar settlements for his clients.