Cannabis Banking: Proceed with Caution

33 Min Read By: James J. Black, Marc-Alain Galeazzi

IN BRIEF

  • What is the status of current U.S. federal law relating to the provision of banking services to the marijuana and hemp industries?
  • What are some of the major legislative reform efforts and their potential impact on cannabis banking?
  • This article provides an overview of the answers to these questions and more.

I. Introduction

It is a familiar trope from bank heist movies that the robbers gleefully open the bag stuffed with stolen cash in the get-away car, only to have a hidden canister explode and mark all of the proceeds of their crime with indelible ink. For many marijuana-related businesses (MRBs) in the United States, it must seem that the revenues generated by their businesses bear a similar, if invisible, mark of condemnation, as many MRBs have struggled to find a bank willing to provide basic depositary and other financial services to them. This is due to the curious legal status of marijuana as a federally prohibited controlled substance but a legal and highly sought-after commodity under the laws of most U.S. states (currently 33 states and the District of Columbia have legalized marijuana for medical uses, and 11 states plus D.C. have legalized so-called adult-use marijuana, which can be for purely recreational purposes).

This state of legal limbo, which effectively prevents many MRBs from obtaining banking services, greatly increases the risks to which these businesses are exposed in that they must deal with vast amounts of cash, thereby increasing the risk of robbery and making it difficult to render payment to others (including taxing bodies, many of which do not accept cash payments). Moreover, cash businesses are more readily exploited for money laundering and other nefarious purposes, which undermines the public-policy goal of creating legal and regulated markets. Still, a burgeoning reform effort is slowly chipping away at the blanket prohibition of marijuana at the federal level, with multiple legislative initiatives ongoing in the U.S. Congress. Moreover, hemp, marijuana’s first cousin, and hemp-derived consumer products containing cannabidiol (CBD) are now legal under federal law (although some important legal restrictions on CBD products remain). This article will provide an overview of current U.S. federal law as it relates to the provision of banking services to the marijuana and hemp industries, as well as some of the major legislative reform efforts and their potential impact on cannabis banking.

II. Current Federal Law Relating to Marijuana Banking

A. Federal Criminal Law Enforcement Policy

Federal criminal law enforcement policy relating to marijuana offenses has evolved over time. Under the administration of President Barack Obama, the Department of Justice (DoJ) issued guidance commonly referred to as the Cole Memorandum (for its primary author, Deputy Attorney General James Cole) that instructed federal prosecutors to focus their enforcement efforts relating to marijuana on specific enforcement priorities, such as preventing the distribution of marijuana to minors and ensuring that revenues from the sale of marijuana did not flow to criminal enterprises, and ensuring that state-legal marijuana activity was not used as a cover for trafficking of other illegal drugs.[1] Cases that did not implicate these priorities were to be de-emphasized. Although the Cole Memorandum did not change federal law, it was seen as creating a de facto safe harbor from federal prosecution for state-legal marijuana-related activities that avoided the enumerated criteria. Given that the Cole Memorandum was merely an expression of the enforcement priorities of the DoJ at the time of its publication, it was at all times susceptible to revocation if a new administration took a different view. This is precisely what happened in January 2018, when then-Attorney General Jeff Sessions rescinded the Cole Memorandum and instructed federal prosecutors to enforce the federal prohibition on marijuana based on the principles that govern all federal prosecutions.[2] In spite of this new policy, there is little indication that federal prosecutions of MRBs increased noticeably following January 2018, and current Attorney General William Barr has indicated that he does not intend to “go after” companies that operate in compliance with the Cole Memorandum criteria.[3] However, as before, the enforcement policy of the DoJ is subject to change at any time and does not provide MRBs with legal certainty as to the range of permissible activities.

B. Federal Law Relating to Marijuana Banking

MRBs currently have extremely limited access to banking services, as many banks are wary of potentially violating federal anti-money laundering and other laws by engaging in transactions with the proceeds of federally illegal marijuana operations. There have been numerous anecdotal reports of MRBs that are unable to obtain banking services or have had their banking relationships terminated due to their (direct or indirect) involvement in the marijuana industry. Indeed, to our knowledge, none of the major banks in the United States accepts MRBs as customers, despite the fact that state-legal marijuana is rapidly becoming a large and lucrative industry. In terms of hard data, the federal Financial Crimes Enforcement Network (FinCEN)[4] reports that, as of September 30, 2019, 563 banks and 160 credit unions were providing banking services to MRBs.[5] While this number represents a substantial increase from 375 banks and 111 credit unions as of September 30, 2018,[6] these banks and credit unions represent a small minority of the overall U.S. banking industry, and the data confirm that most banks and credit unions are not currently providing banking services to MRBs. Moreover, the data do not indicate the scope or nature of banking services provided by these institutions, and in some cases the reporting could relate simply to a prudential notice of a transaction involving an MRB by a bank that is not actively serving such customers.

In order to address the lack of banking services available to MRBs, some states have studied possible ways to encourage the provision of such services to MRBs within the respective states, but no workable solution has yet been found, and it is difficult to imagine a state-level banking system created to serve the marijuana industry that could both achieve the scale needed to meet the rapidly growing industry’s needs and avoid implicating federal law (as even state-chartered banks are subject to a variety of federal laws and the jurisdiction of one or more federal banking regulators). In light of these challenges, any lasting solution to the dearth of banking services available to MRBs will require federal legislative action.

The primary federal law that affects the provision of banking services to MRBs is the Bank Secrecy Act of 1970 (BSA).[7] Among other things, the BSA requires U.S. financial institutions to help federal government agencies detect and prevent money laundering. To this end, it requires banks to report suspicious activity that might signify money laundering, tax evasion, or other criminal activity. These reports are referred to as “suspicious activity reports” (SARs). The federal anti-money laundering statutes make it a crime to knowingly engage in monetary transactions involving proceeds of certain unlawful activity, including the sale of marijuana.[8] Under these laws, all proceeds generated by MRBs (even if operating in compliance with state law) are unlawful, and financial transactions with such proceeds (including accepting deposits, making loans, and other banking services) may constitute illegal money laundering.

Notwithstanding the federal prohibition on transactions involving the proceeds of marijuana-related operations, FinCEN issued guidance in February 2014 on how banks could do business with MRBs.[9] This guidance was expressly based on the principles set forth in the Cole Memorandum and was accompanied by additional guidance issued by the DoJ on the same day that effectively applied the same enforcement priorities set forth in the DoJ’s prior guidance to the enforcement of the BSA.[10] Despite former Attorney General Sessions’ revocation of the Cole Memorandum, FinCEN has confirmed that its 2014 guidance remains in effect.[11]

Although the FinCEN guidance describes how banks may do business with MRBs without triggering BSA enforcement by FinCEN, it does not legalize such activities, and it does not rule out enforcement actions by federal banking regulators or criminal law enforcement agencies. The guidance primarily requires banks to conduct extensive and ongoing due diligence on any MRBs to which they wish to provide banking services in order to ensure their compliance with the Cole Memorandum principles and applicable state laws, and to file SARs for transactions related to MRBs.[12] The due diligence and ongoing monitoring required under the FinCEN guidance are considerably more far-reaching than the normal due diligence that banks must conduct on their customers. Moreover, the guidance does not contemplate a one-time filing for a bank doing business with an MRB; rather, FinCEN expects banks to file continuing activity reports to update a previously filed SAR if their ongoing monitoring indicates that marijuana-related activity is continuing.

The FinCEN guidance mandates three types of SARs for MRB transactions: (1) marijuana limited SARs for transactions involving an MRB that the bank reasonably believes, based on its review, do not implicate the Cole Memorandum priorities or violate state law, (2) marijuana priority SARs for transactions involving an MRB that the bank reasonably believes, based on its review, implicate the Cole Memorandum priorities or violate state law, and (3) marijuana termination SARs to be used if the bank deems it necessary to terminate its relationship with an MRB in order to maintain an effective anti-money laundering compliance program.[13] FinCEN notes some red flags to distinguish priority SARs, including such things as excessive deposits relative to the scope of the MRB’s permitted activities or to local competitors, rapid movements of funds, a lack of satisfactory documentation to demonstrate compliance with state law, and receipt of cash from outside the state.[14] Although the red flags cited by FinCEN are understandable from a regulator’s perspective as indicators of potential illicit activities, one can imagine that they would be extremely difficult for banks to assess and monitor in practice because they would require a high degree of visibility into customers’ operations as well as reliable information on the markets in which the customers operated (including data on competitors). This may be one reason why very few banks appear to have begun providing banking services to MRBs.

The 2014 guidance issued by the DoJ accompanying the FinCEN guidance emphasized that prosecution of a financial institution under the federal anti-money laundering statutes might be appropriate if the financial institution were to discover that a person to whom it was providing banking services was violating one of the Cole Memorandum priorities, such as by diverting marijuana from a state in which marijuana sales are regulated to ones in which such sales are illegal under state law.[15] Notably, the guidance also provided that prosecution might be appropriate if the financial institution were willfully blind to such illegal activity as a result of a failure to conduct appropriate due diligence of the customer’s activities.[16] Consequently, the guidance places a heavy (and potentially impracticable) burden on banks to effectively ascertain the scope and nature of their customers’ MRB activities and to continually monitor those activities to ensure that they do not implicate any of the Cole Memorandum enforcement priorities.

III. Federal Legalization Efforts

Various bills have been introduced in Congress to legalize marijuana or to provide MRBs with access to essential services. These include, most prominently, the Secure and Fair Enforcement Banking Act of 2019 (SAFE Banking Act), which passed the House of Representatives by a bipartisan vote of 321-103 in September 2019.[17] The SAFE Banking Act remains under consideration by the Senate Banking Committee, where its prospects (once seemingly fairly bright following a public hearing in July 2019) recently dimmed based on a public statement issued by committee chairman Sen. Mike Crapo (R-Idaho). Sen. Crapo had initially indicated that he would hold a committee vote by the end of 2019, but on December 18, 2019, he issued a statement sharply criticizing the bill in its current form and demanding that it be amended to address “the high level potency of marijuana, marketing tactics to children, lack of research on marijuana’s effects, and the need to prevent bad actors and cartels from using the banks to disguise ill-gotten cash to launder money into the financial system.”[18] One particularly controversial element of Sen. Crapo’s comments to the bill is his proposal to introduce a potency limitation of two-percent THC content on all marijuana products, a standard that many products currently on the market in legal states may not meet.[19] Sen. Crapo’s statement did not propose specific textual amendments to the bill and instead requested public comment on the enumerated points, which suggests that his statement may have been a way to avoid, or at least delay, consideration of the bill. In any event, the Senate Banking Committee has yet to take up the bill, and its fate in that committee currently appears to be uncertain at best.

Even if the Senate Banking Committee were to advance the bill, its chances of passage in the full Senate are uncertain, as the bill lacks a champion among Senate Republicans who is willing to drum up support for the bill or press leadership for a floor vote. The financial services industry (including through the American Bankers Association and other industry groups) strongly backs passage of the act,[20] but it appears that action on marijuana banking will have to wait until the SAFE Banking Act is revised to the satisfaction of Sen. Crapo or the balance of power shifts in the Senate following the 2020 elections.

Notwithstanding its currently unclear chances of being enacted into law, the SAFE Banking Act represents an important model of limited legislative action that seeks to facilitate specific commercial activities ancillary to the marijuana industry without addressing the fundamental (and politically more difficult) question of legalization of marijuana itself. The act would prohibit federal banking regulators from taking various punitive measures against a bank (including terminating or limiting deposit insurance) solely because it provides or has provided financial services to a “cannabis-related legitimate business” or service provider.[21] The range of financial services that would be protected under the act is broadly defined, and the term “cannabis-related legitimate business” means any person that participates in any business that is legal under state law that involves cultivating, producing, manufacturing, selling, transporting, displaying, dispensing, distributing, or purchasing cannabis or cannabis products.[22] It is crucial that the act includes protection of service providers, as many businesses that are not directly involved in the marijuana business, such as commercial landlords, construction companies, providers of hydroponic equipment, lighting systems. and the like, are currently at risk of losing access to banking services if it becomes known that MRBs are among their customers.

Additionally, the act would clarify that, for purposes of the federal anti-money laundering statutes, the proceeds of a transaction involving activities of a cannabis-related legitimate business or service provider would not be considered proceeds of an unlawful activity and would provide that a bank or insurer that provides a financial service to a cannabis-related legitimate business or service provider may not be held liable solely for providing such a financial service or for further investing any income derived from such a service.[23]

The act would also provide that a bank that has a legal interest in the collateral for a loan or other financial service to a cannabis-related legitimate business or service provider, or to an owner or operator of real estate or equipment leased or sold to such a business, would not be subject to criminal, civil, or administrative forfeiture of that legal interest pursuant to any federal law for providing such loan or service.[24] Finally, the act would call for FinCEN to issue new guidance for the submission of SARs for transactions with cannabis-related legitimate businesses or service providers that is designed to not significantly inhibit the provision of financial services to such businesses.[25]

The SAFE Banking Act would represent an important milestone in the slow march toward the creation of a legal and regulated nation-wide marijuana market in the United States, but it would not be a panacea for banks or for their customers. Among other issues, since the bill would not decriminalize marijuana under the Controlled Substances Act, MRBs and their officers, directors, and employees could still face federal criminal prosecution for violating federal law. If this were to happen to an MRB served by a bank, it could adversely affect the viability and creditworthiness of the affected MRB; this, in turn, would result in heightened commercial risks for banks that elect to provide financial services to MRBs compared to customers in other industries. Moreover, banks would effectively be responsible for ensuring that their marijuana-industry customers are operating in compliance with all applicable state laws, as state-law compliance is a precondition for the legal protection afforded by the act. As a result, banks’ compliance costs would likely be significantly higher when serving such customers, and this, combined with the heightened commercial risks, may deter many banks from taking advantage of the opportunity that Congress is seeking to create.

In addition to the SAFE Banking Act, several bills have been proposed in Congress that would not merely protect banks and others from criminal enforcement actions for the provision of services to the marijuana industry, rather they would address the federal prohibition itself either by legalizing marijuana at the federal level or by requiring the federal government to abide by any state-level legalization. These bills include most prominently the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (MORE Act) and the Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act).

The MORE Act was introduced by Sen. Kamala Harris (D-California) and Rep. Jerold Nadler (D-New York) and would remove marijuana from Schedule I under the Controlled Substances Act,[26] which would effectively legalize it under federal law.[27] It would also include extensive provisions intended to provide redress for the historically inequitable enforcement of the federal marijuana laws, including by retroactively legalizing marijuana for criminal liability purposes and by providing for various social justice measures to address effects of the so-called War on Drugs, including expungement of many marijuana-related criminal convictions.[28] This bill was voted out of the House Judiciary Committee (with two Republican votes) on November 20, 2019,[29] but it remains subject to the jurisdiction of various other committees, and no floor vote is yet in sight.

The STATES Act was introduced in the Senate by Sens. Elizabeth Warren (D-Massachusetts) and Cory Gardner (R-Colorado) and in the House by Rep. Earl Blumenauer (D-Oregon) and would amend the Controlled Substances Act so that its provisions would no longer apply to any person acting in compliance with state or tribal laws relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marijuana.[30] The result of this bill would be that marijuana would remain illegal under federal law in states that have not legalized it (or to the extent that state-level legalization is limited to certain uses or under specific criteria), but it would become legal under federal law in states that have legalized it.

To address financial issues caused by the federal prohibition on marijuana, the STATES Act would provide that state-legal marijuana transactions do not constitute trafficking of illegal substances or result in the proceeds of an unlawful transaction, which should (in theory) remove transactions with the proceeds of marijuana businesses from the scope of the federal anti-money laundering laws and make the provision of banking services to MRBs legal.[31] However, it is unclear how this would work in practice and whether the federal banking regulators would take the view that transactions with the proceeds of state-legal marijuana transactions are, in fact, no longer illicit transactions subject to SAR reporting and other requirements of federal law.

Moreover, the STATES Act would place the entire burden on banks to determine whether their customers (or other entities transacting with their customers) are conducting their marijuana-related operations in compliance with state law. This may prove to be an unreasonable burden that prevents many banks from taking on such customers in that any financial transactions with companies that purport to operate within state law but in fact are not in compliance (even inadvertently) would likely constitute violations of the federal anti-money laundering statutes that would require the submission of SARs under the BSA (subject to any further guidance that FinCEN may issue following passage of such a law) and potentially the termination of the bank’s relationship with such customers. From a banking perspective, the STATES Act is an imperfect approach, but it seems to be an attempt to garner bipartisan support for something that is akin to federal marijuana legalization without requiring members of Congress to vote for full legalization, and it seems designed to have bipartisan appeal by advancing a federalism argument in favor of respecting the decisions of the individual states. It remains unclear whether this approach will gain sufficient support to advance to a floor vote in either house of Congress.

Other efforts to legalize marijuana at the federal level, or to facilitate the provision of banking and other services to MRBs, include the Responsibly Addressing the Marijuana Policy Gap Act of 2019,[32] which would remove state-legal marijuana-related activities from the scope of the Controlled Substances Act and seek to ensure that MRBs have access to banking services, bankruptcy proceedings, and certain tax deductions; the State Cannabis Commerce Act,[33] which would not change marijuana’s status as an illegal controlled substance under federal law, but would prohibit any federal agency from using appropriated funds to prevent any state from implementing any law legalizing the use, distribution, possession, or cultivation of marijuana within that state; and the Marijuana Justice Act of 2019,[34] which would remove marijuana from the purview of the Controlled Substances Act and effect a variety of social justice provisions intended to address the effects of disparate enforcement of the federal drugs laws.

The likelihood of passage of any of these attempts to legalize marijuana federally or to facilitate the provision of services to the marijuana industry under any of the models described above, or of another approach that may emerge, is unclear and may depend to some extent on the results of the 2020 presidential and congressional elections. Although a Democratic takeover of the White House and the Senate (while retaining a majority in the House) would not ensure passage of full federal marijuana legalization, the recent linking of social justice measures with legalization may go a long way to garner broad support among otherwise reluctant Democratic lawmakers.

In the meantime, we might expect that any substantive federal action on marijuana will come piecemeal in the form of amendments to federal appropriations bills. Under one amendment that has been part of appropriations bills since 2014 and that was included in the federal funding bill that was signed into law by President Donald Trump on December 20, 2019, the DoJ is prohibited from using funds appropriated under the law to enforce the federal marijuana prohibition against state-legal medical marijuana businesses and users.[35] President Trump attached a so-called signing statement to the bill that suggested that his DoJ may disregard this rider to the extent that he believes it interferes with his “constitutional responsibility to faithfully execute the laws of the United States,”[36] but the import of this statement is as yet unclear. It is notable that several other marijuana-related riders were included in the House version of the spending bill (including one that would have extended the prohibition on the DoJ’s use of funds to enforce the federal marijuana prohibition beyond medical marijuana to also include state-legal, adult-use marijuana activities), but they were eliminated in the reconciliation of the House and Senate versions and therefore did not make their way into the final legislation.

IV. Hemp Banking

Hemp is a close relative of marijuana in that both plants are varietals of the cannabis sativa L plant, and there is no definitive scientific point of demarcation between hemp and marijuana. Instead, the distinction between hemp and marijuana is primarily a matter of laws that distinguish the two substances based on the percentage content of THC (the primary intoxicating substance in marijuana). The legal distinction between hemp and marijuana is of great significance, as hemp was legalized at the federal level by the Agriculture Improvement Act of 2018 (2018 Farm Bill),[37] whereas marijuana remains illegal under federal law. Under the 2018 Farm Bill, hemp may not have a THC concentration of greater than 0.3 percent on a dry-weight basis,[38] and cannabis or derivative products with THC in excess of this threshold are legally classified as marijuana.

In connection with the legalization of hemp (by removing it from Schedule I under the Controlled Substances Act), the 2018 Farm Bill requires the U.S. Department of Agriculture (USDA) to issue rules governing the industrial cultivation of hemp.[39] Any hemp that is produced in accordance with the 2018 Farm Bill and USDA rules, and products derived therefrom (such as consumer products containing CBD), will not be deemed to be controlled substances under the Controlled Substances Act. Moreover, although the 2018 Farm Bill does not require states to remove any existing legal prohibitions or legal limitations on hemp or its derivative products, the law does prohibit state or tribal constraints on the inter-state movement of hemp, which is essential to facilitating the formation of a nation-wide hemp industry.[40] The 2018 Farm Bill also aims to promote industrial-scale cultivation of hemp by making hemp producers eligible for federal crop insurance programs and USDA grants and development programs.[41]

The USDA issued its interim final rule on October 31, 2019, establishing the initial parameters for commercial hemp production.[42] Although the public comment period was initially scheduled to end on December 30, 2019, the USDA extended that period until Jan. 29, 2020, in order to provide stakeholders with more time to submit comments.[43] To date, over 1,800 comments have been posted.[44] The USDA intends to issue its final rule by late 2021.[45]

Under the interim final rule, states and Indian tribes may submit plans for approval by the USDA for the production of hemp in their respective territories.[46] If a state or tribe declines to submit a plan, or if their plan is not approved by the USDA, then the USDA’s rules will govern hemp production in those states and tribal territories.[47] Any commercial hemp production operations must be approved under a USDA-approved state or tribal licensing regime or directly by the USDA. Licenses for hemp production will be nontransferable and must be renewed every three years, and criminal background checks will be required for all “key participants” in hemp businesses (includes owners of direct or indirect financial interests and senior executives).[48]

The USDA rules contain two provisions that have been the subject of many critical public comments. First, the USDA requires that THC content be measured on the basis of “total potential THC,” which would take into account not only the level of psychoactive Delta-9 THC but also what the USDA refers to as the potential conversion of delta-9-tetrahydrocannabinolic acid (THCA), which in its unconverted form is not intoxicating to humans, into THC.[49] This approach diverges from the widely understood basis for the legal distinction between hemp (containing no more than 0.3 percent THC without counting THCA) and marijuana, and this aspect of the USDA interim final rule appears to have caught many in the industry off-guard. Many of the public comments submitted to the USDA have suggested that requiring hemp to remain within the cap of 0.3 percent THC content based on “total potential THC” will decimate the nascent industry because much of the hemp that is currently produced would not meet this standard (and the risk of inadvertently exceeding the prescribed level of THC content would be unreasonably high).[50] Moreover, many commentators have argued that it is unnecessary to include THCA in the THC content test because THCA is not itself psychoactive (rather it may be converted under specific circumstances into psychoactive THC).[51]

The second part of the USDA interim final rule that has garnered a flood of critical public comments relates to the testing requirements—namely, that the THC-content testing be done in a laboratory that is approved by the Drug Enforcement Agency (DEA) and that the THC content of each lot of hemp be tested not more than 15 days prior to harvesting.[52] Numerous commentators have pointed out that there is a limited number of DEA-approved labs in many parts of the country, and that the 15-day window for testing is impractical, particularly for large producers or ones in remote areas with limited access to approved labs.[53] To date, the USDA has not responded to any of the public comments, and it remains to be seen whether the final rule (which in any event may not be issued until late 2021) will remedy any of these issues. It remains to be seen how hemp producers will work with (or around) these controversial aspects of the USDA rules, but it seems clear that, although federal legalization of hemp is a major and necessary step, the hemp cultivation industry will experience some growing pains along the way to the development of a vibrant, nationwide market.

The consumer-facing side of the hemp industry has grown rapidly since legalization, in particular with a wide range of consumer products containing CBD hitting the market over the past 18 months. However, the legalization of hemp and its derivative products in the 2018 Farm Bill does not mean that the industry is free of federal regulation (beyond the USDA rules for cultivation). Among other regulators, the Federal Trade Commission (FTC) retains the authority under the Federal Trade Commission Act[54] to regulate the manner in which CBD products are marketed and sold, and the Food and Drug Administration (FDA) has the power to regulate the compliance of CBD products with the Federal Food, Drug, and Cosmetic Act,[55] including any potential sales of such products as unapproved drugs or dietary supplements and the use of misleading or impermissible health claims in the marketing of CBD. Both the FTC and FDA have issued warning letters to various companies citing apparent violations of federal law and requiring the recipients to remedy such violations.[56]

Many participants in the nascent hemp industry appear to have taken an aggressive approach to putting products on the market that may not comply with federal law and in making at times expansive claims about the health benefits of their products. On the other hand, federal regulators have been slow to issue guidance on the precise extent of permissible uses and claims relating to CBD products, which has made it difficult for producers to know where the line between permissible marketing and illegal claims lies. Additionally, consumer advocates have reported that quality control in the CBD product space appears to be uneven, with both the CBD content and the THC content in these products in some cases diverging substantially from the levels stated on their labels (which may mean, in the case of a higher-than-stated THC level, that the products may constitute illegal marijuana products instead of legal hemp products). One hopes that regulators will take a constructive approach and work with the industry to formulate clear and practicable rules to facilitate its growth in a manner that promotes public health and safety.

Following hemp legalization in the 2018 Farm Bill, various U.S. senators requested guidance on hemp banking from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Farm Credit Administration (FCA).[57] The senators noted that despite hemp legalization, hemp businesses were having difficulty accessing capital and obtaining banking services and urged the federal banking regulators to issue public guidance that would provide banks and credit unions with greater clarity on the scope of permissible banking activities and any specific requirements applicable to such services.[58]

The first federal banking regulator to provide public guidance on hemp banking was the NCUA, which issued a statement in August 2019.[59] The NCUA indicated that credit unions that wish to provide banking services to hemp businesses should implement an anti-money-laundering compliance program that mirrors that contemplated by the 2014 FinCEN guidance, including with respect to filing SARs, but it noted that no SARs will be required for legal hemp-related transactions.[60] Among other things, the NCUA noted that an adequate risk assessment requires credit unions to understand the specific state laws governing each customer’s hemp business.

The Federal Reserve, FDIC, OCC, and FinCEN, in consultation with the Conference of State Bank Supervisors, responded to the senators’ entreaties by issuing a joint statement on December 3, 2019, that took note of hemp legalization and provided guidance for banks to engage in banking relationships with hemp-related businesses.[61] The guidance provided that because hemp is no longer a Schedule I substance under the Controlled Substances Act, banks are not required to file SARs solely because a customer engages in the growth or cultivation of hemp in accordance with applicable laws and regulations.[62] It also stated that banks are expected to follow standard SAR procedures, including by filing a SAR if indicia of suspicious activity warrant, when serving hemp-related customers.[63] The guidance emphasized the importance of banks’ compliance with applicable regulatory requirements for customer identification, suspicious activity reporting, currency transaction reporting, and risk-based customer due diligence, including the collection of beneficial ownership information for customers that are legal entities, when electing to serve hemp-related businesses.[64] Finally, the joint statement indicated that FinCEN will release additional guidance on hemp banking after further review of the USDA hemp regulations and noted that, as before hemp legalization, FinCEN’s 2014 guidance continues to apply to the provision of banking services to MRBs.[65]

Although further legislative action may not be technically required for banks to begin servicing hemp businesses, there have not yet been notable federal legislative efforts to specifically address the difficulty that hemp businesses continue to have in obtaining banking products and services. However, the SAFE Banking Act does make note of this fact and would require federal banking regulators to issue guidance within 90 days of enactment to confirm the legality of providing financial services to hemp businesses and to create best practices for financial institutions to follow. Until the SAFE Banking Act or similar legislation is passed, banks that wish to provide services to hemp businesses must rely on the guidance issued by the federal regulators and the fact that hemp is legal under federal law without further legislative action.

The provision of banking services to hemp businesses requires a carefully calibrated know-your-customer process and ongoing compliance monitoring system that allows banks to identify and limit potential risks and to navigate the many challenges that the industry faces, not least the constraints found in the USDA interim final rule, as well as the risk of FTC and/or FDA enforcement actions. For banks that are willing to invest in creating the necessary policies and structures, however, hemp is a rapidly growing industry with a vast need of capital and financial services that, given its limited access to banking services, offers attractive margins. Moreover, early entrants into the hemp space will be well positioned to quickly and with limited risk enter the much larger and more lucrative, fully legal marijuana market, when and if one comes to pass.


DISCLAIMER: Morrison & Foerster LLP makes available the information in this article for informational purposes only, and it does not constitute legal advice and should not be relied on as such. Morrison & Foerster LLP renders legal advice only after compliance with certain procedures for accepting clients and when it is legally permissible to do so. Readers seeking to act upon any of the information contained in this article are urged to seek their own legal advice.


[1] Memorandum from James M. Cole, Deputy Attorney Gen. to All United States Attorneys Regarding Guidance Regarding Marijuana Enforcement (Aug. 29, 2013).

[2] Memorandum from Jefferson B. Sessions, Attorney Gen. to All United States Attorneys Regarding Marijuana Enforcement (Jan. 4, 2018).

[3] See, e.g., U.S. attorney general nominee will not target law-abiding marijuana businesses, Reuters, Jan. 15, 2019.

[4] FinCEN is a part of the U.S. Treasury Department that is charged with implementing, administering, and enforcing the Bank Secrecy Act of 1970, the main federal anti-money-laundering statute.

[5] Financial Crimes Enforcement Network, Marijuana Banking Update: Depositary Institutions (by type) Providing Banking Services to Marijuana Related Businesses (SARs filed through Sept. 30, 2019).

[6] Financial Crimes Enforcement Network, Marijuana Banking Update: Depositary Institutions (by type) Providing Banking Services to Marijuana Related Businesses (SARs filed through Sept. 30, 2018).

[7] The term “Bank Secrecy Act” is used herein to refer to the Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970, Pub. L. No. 91-508 (12 U.S.C. §§ 1829b, 1951–59; 31 U.S.C. §§ 5311–32), as well as several subsequent laws that have amended and expanded its scope, including (among others) the Money Laundering Control Act, Pub. L. No. 99-570 (18 U.S.C. §§ 1956 and 1957), and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act), Pub. L. 107-56, 115 Stat. 272. These laws are also referred to herein generally as the federal anti-money-laundering statutes.

[8] Id.

[9] Financial Crimes Enforcement Network, BSA Expectations Regarding Marijuana-Related Businesses, (Feb. 14, 2014).

[10] Memorandum from James M. Cole, Deputy Attorney Gen. to All United States Attorneys Regarding Guidance Regarding Marijuana Related Financial Crimes (Feb. 14, 2014).

[11] Letter from Drew Maloney, Asst. Secretary of the Treasury for Legislative Affairs to Rep. Denny Heck (Jan. 31, 2018).

[12] Financial Crimes Enforcement Network, supra note 9, at 2-3.

[13] Id. at 3-5.

[14] Id. at 5-7.

[15] Memorandum from James M. Cole, Deputy Attorney Gen. to All United States Attorneys Regarding Guidance Regarding Marijuana Related Financial Crimes (Feb. 14, 2014), at 2.

[16] Id.

[17] H.R. 1595, 116th Cong. (2019); S. 1200, 116th Cong. (2019) (passage through the House).

[18] Press Release, U.S. Senate Committee on Banking, Housing, and Urban Affairs, Chairman Crapo Outlines Concerns with Cannabis Banking Legislation (Dec. 18, 2019).

[19] Id.

[20] See, e.g., American Bankers Assoc, Cannabis Banking: Bridging the Gap between State and Federal Law.

[21] H.R. 1595, 116th Cong. (2019); S. 1200, 116th Cong. (2019) § 2.

[22] Id. § 14(4).

[23]  Id. § 4(a).

[24] Id. § 4(d)(2).

[25] Id. §§ 6, 7.

[26] Comprehensive Drug Abuse Prevention and Control Act of 1970, Pub. L. No. 91-513 (21 U.S.C. §§ 801–904).

[27] H.R. 3884, 116th Cong. (2019); S. 2227, 116th Cong. (2019) § 2.

[28] Id. §§ 5, 9.

[29] Press Release, U.S. House of Representatives Judiciary Committee, House Judiciary Passes MORE Act to Decriminalize Marijuana at Federal Level (Nov. 20, 2019).

[30] H.R. 2093, 116th Cong. (2019); S. 1028, 116th Cong. (2019) § 2.

[31] Id. § 5(b).

[32] H.R. 1119, 116th Cong. (2019); S. 421, 116th Cong. (2019).

[33] H.R. 3546, 116th Cong. (2019); S. 2030, 116th Cong. (2019).

[34] H.R. 1456, 116th Cong. (2019); S. 597, 116th Cong. (2019).

[35] Consolidated Appropriations Act, 2020, H.R. 1158, 116th Cong. (2019), Div. B, § 531.

[36] Statement by President Donald J. Trump (Dec. 20, 2019).

[37] Agriculture Improvement Act of 2018, Pub. L. No. 115-334, § 10113.

[38] Id.

[39]  Id.

[40] Id. §. 10114.

[41]  Id. §. 10113.

[42] U.S. Department of Agriculture Agricultural Marketing Service, Interim Final Rule on Establishment of a Domestic Hemp Production Program (Oct. 31, 2019).

[43] Press Release, U.S. Department of Agriculture Agricultural Marketing Service, USDA Extends U.S. Domestic Hemp Production Program Interim Final Rule Comment Period to January 29 (Dec. 17, 2019).

[44] See comments on the Hemp Farm Bill.

[45] U.S. Department of Agriculture Agricultural Marketing Service, Interim Final Rule on Establishment of a Domestic Hemp Production Program (Oct. 31, 2019).

[46] Id.

[47] Id.

[48] Id.

[49] Id.

[50] See comments on the Hemp Farm Bill.

[51] Id.

[52] U.S. Department of Agriculture Agricultural Marketing Service, Interim Final Rule on Establishment of a Domestic Hemp Production Program (Oct. 31, 2019).

[53] See comments on the Hemp Farm Bill.

[54] 15 U.S.C. §§ 41–58.

[55] 21 U.S.C. §§ 301–392 supp.

[56] See, e.g., Press Release, Federal Trade Commission, FTC Sends Warning Letters to Companies Advertising Their CBD-Infused Products as Treatments for Serious Diseases, Including Cancer, Alzheimer’s, and Multiple Sclerosis (Sept. 10, 2019); Press Release, U.S. Food and Drug Administration, FDA warns 15 companies for illegally selling various products containing cannabidiol as agency details safety concerns (Nov. 25, 2019).

[57] See, e.g., Press Release, Michael Bennet, U.S. Senator for Colorado, Bennet Urges Financial Regulators to Provide Guidance, Certainty for Hemp Farmers and Processors (June 14, 2019); Press Release, Ron Wyden, U.S. Senator for Oregon, Wyden, McConnell Urge Federal Financial Regulators to Prevent Discrimination of Legal Hemp Industry (April 2, 2019).

[58] Id.

[59] National Credit Union Admin., Regulatory Alert to Federally Insured Credit Unions Regarding Serving Hemp Businesses (Aug. 2019).

[60] Id.

[61] Press Release, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, Office of the Comptroller of the Currency, Conference of State Bank Supervisors, Agencies Clarify Requirements for Providing Financial Services to Hemp-Related Businesses (Dec. 3, 2019).

[62] Id.

[63] Id.

[64] Id.

[65] Id.

ABOUT THE AUTHORS

James J. Black

James J. Black is Of Counsel in Morrison & Foerster’s Business Restructuring & Insolvency Group and has more than 20 years of experience advising companies on mergers and acquisitions, financings…

Marc-Alain Galeazzi

Marc-Alain Galeazzi is a partner in the Financial Services Practice Group of Morrison & Foerster’s New York office. Marc-Alain’s practice focuses on advising and counseling global banks, financial…

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