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.