The below article is the Special Focus section of the July 2020 Compliance Journal. The full issue may be viewed by clicking here.
On December 20, 2018, the Agriculture Improvement Act of 2018 (2018 Farm Bill) was signed into law. Previously, under the 2014 Farm Bill, production of hemp was permitted for research purposes only. Many States, including Wisconsin, implemented research programs under the 2014 Farm Bill. The 2018 Farm Bill contains provisions clarifying the status of hemp, transitioning it from a research crop to a commodity. The 2018 Farm Bill thus necessitates revision to existing programs regulating hemp production.
In Wisconsin, hemp production continues to be legal under existing State programs, implemented under the 2014 Farm Bill. However, financial institutions should be aware that those requirements are shifting, and policy adjustments should be made accordingly. This article provides a background and reminder of hemp’s status under the law, timelines of the shift to 2018 Farm Bill programs, practical considerations, and recent activity from the Financial Crimes Enforcement Network (FinCEN) and the Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP).
Background and Status of Hemp in Wisconsin
The 2018 Farm Bill clarifies the legality of hemp and sets all pilot programs established under the 2014 Farm Bill to expire on October 31, 2020. Late last year, the United States Department of Agriculture (USDA) published an interim final rule specifying regulations governing the production of hemp in accordance with the 2018 Farm Bill. Wisconsin also responded with 2019 Wisconsin Act 68 (Act 68) to make several changes to its laws governing industrial hemp. USDA’s rule establishes a Federal program governing hemp production nationally. It also outlines provisions under which States may submit their own plan for approval under the Federal program. Thus, States are automatically subject to the Federal program, unless their program is approved. Wisconsin Act 68 directs DATCP to write new rules, and the expectation is for DATCP to submit its plan to USDA for approval under the Federal program.
Previously, the 2017 Wisconsin Act 100 implemented Wisconsin’s current program (pilot program), pursuant to the 2014 Farm Bill, and DATCP wrote EmR1807 (prior rule) in 2018 implementing the pilot program. DATCP issued licenses beginning late last year under the pilot program, and hemp can be grown and produced legally during Wisconsin’s 2020 hemp season by meeting existing program requirements, as discussed in more detail below. DATCP expects to begin a new program under the 2018 Farm Bill, pending USDA’s approval, in 2021.
DATCP’s Emergency Rule
DATCP’s prior rule implementing the pilot program expired on July 1, 2020. Before expiration, on June 27, 2020, DATCP issued EmR2016 (emergency rule) to maintain the program until October 31, 2020, when the pilot program terminates. The emergency rule also makes the following changes to the program to conform to the 2018 Farm Bill and Act 68:
- Updates the definition of hemp.
- Adds definitions for the terms “THC” and “decarboxylated” to clearly state regulatory testing requirements and to provide additional clarity that THC content includes THC-A, consistent with state and federal law, and existing testing requirements.
- Uses the term “lot” instead of “crop” to more clearly explain how regulatory sampling and testing requirements apply to all hemp.
- Uses the term “growing location” instead of “field” and “greenhouse” to refer to where hemp is grown.
- Clarifies that after a failed initial test, the entire lot must be destroyed within 10 days after service of DATCP’s destruction order unless the grower requests a re-test prior to the expiration of the 10 days.
- Clarifies that a grower cannot request a re-test of the original sample, but that a grower can request a new sample be collected for re-testing by DATCP.
- Clarifies that a lot must be sampled prior to harvest, but that a lot does not need to be tested prior to harvest.
- Clarifies that a fit for commerce certificate must be obtained by a grower prior to the hemp being transported from the growing location. Allows for movement of harvested hemp within, but not from, a growing location.
- Clarifies that hemp found without a required fit for commerce certificate is subject to destruction.
- Clarifies that a grower with unpaid invoices may not annually register and may be subject to license suspension.
- Updates requirements for the planting report and final report to meet current program practices.
- Updates requirements that a licensee must notify DATCP in writing of the variety of hemp they intend to plant before planting. Licensees may plant only approved varieties.
- Updates the dates and deadlines for transitioning to a new hemp program under the USDA.
The emergency rule will remain in effect until Wisconsin’s hemp pilot research program expires on October 31, 2020. At that time, DATCP will transition to a new program under the USDA interim final rule. WBA will provide updates as more information from DATCP becomes available on the transition.
FinCEN Guidance Regarding BSA Due Diligence Requirements
On June 29, 2020, the Financial Crimes Enforcement Network (FinCEN) issued guidance on Bank Secrecy Act (BSA) requirements for hemp-related business customers. The guidance provides that, in addition to conducting customer due diligence (CDD) on hemp-related businesses at time of application, financial institutions must establish risk-based procedures for conducting ongoing CDD. Specifically, for customers who are hemp growers, financial institutions may confirm the hemp grower’s compliance with state, tribal government, or the USDA licensing requirements, as applicable, by either obtaining:
- A written attestation by the hemp grower that they are validly licensed, or
- A copy of such license.
Financial institutions might also consider seeking additional information based upon their assessment of potential risk posed by each customer. FinCEN suggests that additional information might include crop inspection or testing reports, license renewals, updated attestations from the business, or correspondence with the state, tribal government, or USDA. It is important for financial institutions to know the nature of their customer’s business to best determine their risk profile.
The guidance also clarifies that because hemp is no longer a Schedule I controlled substance, financial institutions are not required to file a Suspicious Activity Report on customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.
Lastly, the guidance confirms that financial institutions must report currency transactions in connection with hemp-related businesses in the same manner they would for any other customers.
A key takeaway is that the 2018 Farm Bill removed hemp from the definition of marijuana in the Controlled Substances Act. These changes shift toward treating hemp as a regulated commodity. The new regulatory framework starts with USDA’s interim final rule, which sets the stage for State programs. WBA published an article that explores USDA’s interim final rule in greater detail, which is included below.
From a Wisconsin standpoint, as discussed above, Wisconsin will continue to operate under the pilot program (as revised by emergency rule) until October 31, 2020. It is important to note that 2019 Act 68, and DATCP’s emergency rule does not relate specifically to financial institutions. However, as seen in FinCEN’s guidance, financial institutions are expected to conduct due diligence on hemp-related businesses. Thus, it is important to understand how the industry operates, and is regulated.
DATCP’s emergency rule offers clarity in areas not covered under its previous rule. The extent to which a financial institution will need to be familiar with these requirements depends on its customer base. For example, a customer might be looking to just try hemp on a small field they have available. Another might have a large production operation that involves the purchase of large quantities of different seed varieties, and the harvest and shipping of hemp for uses of both oil and fiber. The extent to which a financial institution gathers information in either scenario may depend on the perceived risk of each business’ operation.
In either case, financial institutions should start with licensure, knowing that is FinCEN’s minimum requirement, and work from there. Next steps will likely involve a discussion with the customer to better understand their operation. This way, a financial institution can gather information to make its own business decisions, and meet BSA requirements. Some financial institutions may wish to accomplish this by obtaining certifications from their customers. For financial institutions looking to use this method, WBA has created a hemp questionnaire and certification available through FIPCO, which has been designed with DATCP’s program requirements in mind.
Wisconsin’s pilot program, under which currently licensed growers and processors currently operate, expires on October 31, 2020. Hemp-related businesses may continue to operate under the existing program, but later this year, DATCP will provide new information on a transition to a new program under the USDA interim final rule. While WBA does not anticipate the new program will place any new requirements on financial institutions, it is important to be aware of the changes when they occur from a know-your-customer standpoint for both the business and BSA considerations discussed above. WBA will report upon the details of the new program when they become available.