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U.S. regulators have formally greenlit the provision of banking services to the legal hemp industry and lifted a five-year-old requirement that lenders automatically submit suspicious activity reports on every transaction related to the substance.

Going forward, banks serving regulated hemp producers should follow standard SAR filing procedures by flagging transactions only “if indicia of suspicious activity warrants,” the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Conference of State Bank Supervisors announced Tuesday.

In a 3-page joint statement, those agencies and the Treasury Department directed banks to continue notifying the Financial Crimes Enforcement Network of any account they hold for firms engaged in the cultivation, processing and sale of marijuana, a related strain of the Cannabis sativa L. plant that remains illegal at the federal level.

The relaxation of U.S. regulations vis-a-vis hemp comes a month after the Agriculture Department, or USDA, issued a final rule for its production pursuant to the 2018 Farm Bill, which removed the non-psychoactive strain from the federal schedule of banned narcotics that includes heroin and LSD.

Tuesday’s guidance augments the USDA’s rule, which further helped confirm hemp producers’ eligibility for banking services after the Farm Bill’s adoption by removing any doubts as to the legal framework under which they should operate, said an East Coast-based compliance executive.

The bill eliminated the possibility that firms involved in handling the proceeds of hemp production could face federal money-laundering charges.

“That [the rule] now means that states can apply for USDA approval for their licensing and regulatory infrastructure and that hemp grown there can be fully legal,” the compliance executive told ACAMS moneylaundering.com. “That’s what I think we as an industry wanted and needed before we could more fully support hemp.”

Under the final rule, from the 2020 growing season onward, hemp producers must either obtain USDA licenses to continue cultivating the product or otherwise operate in accordance with a state or tribal regulatory framework approved by the department.

Hemp v. marijuana

The rule also requires that legal hemp undergo testing for levels of THC, the component of marijuana that makes users high, and that plants containing more than 0.3 percent of the chemical be disposed of.

“The difference between 0.3 and 0.4 percent of THC becomes the difference between a fully legal substance versus a controlled substance,” the East Coast-based compliance executive said. “What is not clear yet is what due diligence regulators expect banks to conduct on their customers to make sure they are growing hemp and not marijuana.”

FinCEN plans to publish additional guidance on maintaining bank accounts for hemp-related firms after reviewing the interim final rule, according to the 3-page joint statement.

Walking the fine line that the USDA has drawn between hemp and marijuana is not the only challenge facing banks, a senior compliance officer for a regional lender on the West Coast said, noting that the Oct. 31 rule does not cover how institutions handle firms that process hemp into derivative products like cannabidiol, or CBD.

The 2018 Farm Bill decriminalized hemp-derived, but not marijuana-derived, CBD, whose alleged therapeutic powers make it a highly valued extract in the production of food, beverages, personal products and drugs.

“Unless states require hemp processors to be licensed, this remains an area of uncertainty,” the compliance officer wrote in an email to moneylaundering.com. “Banks will need to validate that the Cannabis sativa L. used to make the CBD was actually hemp, not marijuana, and this will require obtaining testing certificates.”

Banks that choose to provide services to legitimate hemp firms must maintain anti-money laundering controls “commensurate” to the risks those entities present, regulators said in the joint statement.

Contact Valentina Pasquali at vpasquali@acams.org