Hemp-related business customers-FinCEN due diligence requirements

Jul 29, 2020
Business risk consulting Anti-money laundering Regulatory compliance

The Financial Crimes Enforcement Network (FinCEN) issued additional guidance on June 29, 2020, to provide information on Bank Secrecy Act/anti-money laundering risk considerations for hemp-related businesses. This includes entities that grow hemp, processors and manufacturers that purchase hemp directly from growers. The new guidance does not replace or supersede the previous guidance from FinCEN on marijuana-related businesses (MRBs) in February of 2014.

As usual, customer due diligence must be performed for all customers, including those entities in hemp-related businesses. For those customers, you may confirm the hemp grower’s compliance with state, tribal government, or the United States Department of Agriculture licensing requirements. There are a couple of ways to accomplish this task; you may obtain a written attestation by the hemp grower that they maintain a valid license, or you may obtain a copy of the license itself. Based on experience, the written attestation will eventually go away due to fraudulent behavior conducted on behalf of customers who have not been granted licenses. Additional due diligence will be determined as to how the organization risk rates its customers, which leaves a path open in the future for regulatory criticism. Given today’s technology and the nominal number of hemp-related businesses that may be customers, best practice would be to collect an electronic copy of the issued license. Leave an attestation as your backup and last resort.

If you do categorize an entity as a higher risk, FinCEN advises that you may collect additional information such as:

  • Crop inspection
  • Testing reports
  • License renewals
  • Updated attestations from the business
  • Correspondence with the state
  • Correspondence with tribal government
  • Correspondence with the USDA

Again, per routine expectations, in order to identify potential risks, it is the liability of the organization to understand the nature and purpose of the customer relationship and perform ongoing monitoring to detect and report suspicious activities. As activity and thresholds may differ for these types of businesses, automated monitoring may need to be enhanced and/or optimized to detect the necessary red flags that meet your risk assessment’s level of risk posed by hemp-related businesses.

Organizations are not required to file a suspicious activity report (SAR) simply because the customer is engaged in the growth or cultivation of hemp (if they are legally licensed and the license is applicable to laws and regulations). However, if there are any suspicious transactions or services requested, FinCEN continues to require a SAR to be filed.  There are various red flags associated with the hemp industry that may assist in the detection of unusual behavior:

  • A customer appears to be engaged in hemp production in a state or jurisdiction in which hemp production remains illegal
  • A customer appears to be using a state-licensed hemp business as a front or pretext to launder money derived from other criminal activity or derived from marijuana-related activity that may not be permitted under applicable law
  • A customer engaged in hemp production seeks to conceal or disguise involvement in marijuana-related business activity
  • The customer is unable or unwilling to certify or provide sufficient information to demonstrate that it is duly licensed and operating consistent with applicable law, or the financial institution becomes aware that the customer continues to operate:
    • After a license revocation
    • Inconsistently with applicable law

If an organization finds that financial transactions of a hemp-related business are comingled with marijuana-related activities, the rules and standards apply from the 2014 guidance from FinCEN. In addition, for Form 8300, currency transaction reporting (CTR) is still filed in the same manner and rules apply—all cash transactions in a single business day in aggregate of $10,000 and above.

As a refresher from the 2014 guidance, it is pertinent to raise the marijuana limited SAR filing requirement that was published from FinCEN. A SAR would be filed on a marijuana-related business if, based on customer due diligence, it does not implicate one of the Cole Memo priorities, or violate state law.  An organization providing services to a marijuana-related business should file a SAR whose content would be limited to:  

  • Identifying information of the subject and related parties
  • Addresses of the subject and related parties
  • State that the filing of the SAR is solely because the subject is engaged in a marijuana-related business
  • State that no additional suspicious activity has been identified
  • The term “marijuana limited” should be used in the narrative section

You may recall 2013’s Cole Memo issued by U.S. Department of Justice Deputy Attorney General James M. Cole; this memorandum to all United States attorneys provided updated guidance to federal prosecutors regarding marijuana enforcement under the Controlled Substances Act. The memo does apply to all states and includes civil and criminal investigation and prosecutions.

The memo reiterates Congress’s determination that marijuana can be a dangerous drug and that illegal distribution and sale is a serious crime.  It provides guidance to focus on persons or organizations that may interfere with any one or more of the following priorities:

  • Preventing the distribution of marijuana to minors
  • Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels
  • Preventing the diversion of marijuana from states where it is legal under state law in some form to other states
  • Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity
  • Preventing violence and the use of firearms in the cultivation and distribution of marijuana
  • Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use
  • Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands
  • Preventing marijuana possession or use on federal property

As part of customer due diligence, you should consider whether a marijuana-related business involves the Cole Memo priorities or violates state law. If a violation or implication does occur, a marijuana priority SAR should be filed and include:

  • Identifying information of the subject and related parties
  • Addresses of the subject and related parties
  • Details regarding the enforcement priorities that have been associated
  • Dates, amounts and other relevant details of the transactions
  • The term “marijuana priority” in the narrative section

If it is deemed necessary to terminate a relationship with a marijuana-related business, the following should be included:

  • Identifying information of the subject and related parties
  • Addresses of the subject and related parties
  • Details of the reasoning behind the termination
  • The term “marijuana termination” in the narrative section

The following is a list of red flags that may indicate that a marijuana-related business may be engaged in an activity that implicates one of the Cole Memo priorities or violates state law.

  • A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law. Relevant indicia could include:
    • The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates.
    • The business receives substantially more revenue than its local competitors or than might be expected given the population demographics.
    • The business is depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for federal and state tax purposes.
    • The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law, as opposed to revenue derived from (i) the sale of other illicit drugs, (ii) the sale of marijuana not in compliance with state law, or (iii) other illegal activity.
    • The business makes cash deposits or withdrawals over a short period of time that are excessive relative to local competitors or the expected activity of the business.
    • Deposits apparently structured to avoid currency transaction report (CTR) requirements.
    • Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals.
    • Deposits by third parties with no apparent connection to the account holder.
    • Excessive commingling of funds with the personal account of the business’s owner(s) or manager(s), or with accounts of seemingly unrelated businesses.
    • Individuals conducting transactions for the business appear to be acting on behalf of other, undisclosed parties of interest.
    • Financial statements provided by the business to the financial institution are inconsistent with actual account activity.
    • A surge in activity by third parties offering goods or services to marijuana-related businesses, such as equipment suppliers or shipping servicers.
  • The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law.
  • The business is unable to demonstrate the legitimate source of significant outside investments.
  • A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a nondescript name (e.g., a consulting, holding or management company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.
  • Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.
  • The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws or regulations.
  • A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries.
  • The owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located.
  • A marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property.
  • A marijuana-related business’s proximity to a school is not compliant with state law.
  • A marijuana-related business purporting to be a nonprofit is engaged in commercial activity inconsistent with that classification, or is making excessive payments to its manager(s) or employee(s).

These red flags serve to indicate potential suspicious activity only, but as our education and understanding of the industry continues to grow, additional identifiers continue to develop. FinCEN encourages the use of section 314(b) to collaborate and work with other financial organizations.