Hemp production has been legalized under both Federal and South Dakota law, and to the surprise of many, South Dakota voters recently approved a constitutional amendment legalizing marijuana.  Bankers are already experiencing deposit-opening and loan requests from hemp-related businesses.  A review of hemp statutes and regulatory guidance can provide a framework for a bank’s policy regarding hemp-related businesses and can lay the groundwork for a future policy on marijuana-related businesses. The following is an article from Davenport Evans lawyer Dixie K. Hieb, which appeared in the December 2020 edition of The Bottom Line, a publication of The Independent Community Bankers of South Dakota.


Davenport Evans lawyer Dixie Hieb

Davenport Evans lawyer Dixie K. Hieb

The 2018 Farm Bill removed hemp as a Schedule I controlled substance and directed USDA to regulate hemp production.  In 2019 USDA established the domestic hemp production regulatory program, under which state ag departments and tribal governments may submit plans for regulating hemp production.  The hemp program includes requirements for maintaining information on the land where hemp is produced, testing hemp for tetrahydrocannabinol (THC) levels, disposing of plants with more than .3% THC, and licensing of hemp producers.

Hemp remained illegal in South Dakota, however, until passage of House Bill 1008 earlier this year, which revised the definition of marijuana to exclude cannabis with a THC concentration of no more than .3% and added a chapter on Industrial Hemp to the SD Code.  The SD Department of Agriculture subsequently submitted its Industrial Hemp Plan to USDA and received approval in October.

Many tribal governments were well ahead of South Dakota in legalizing hemp production, and currently six South Dakota tribes have received USDA approval of their hemp plans.


In late 2019 the federal and state banking regulators issued a joint statement clarifying the legal status of hemp and the Bank Secrecy Act requirements for banks providing services to hemp-related businesses.  The key points highlighted in the joint guidance include (1) hemp may be grown only with a valid USDA-issued license or under a USDA-approved state or tribal plan; (2) a state or tribal government may prohibit the production of hemp; and (3) marijuana remains a controlled substance (and thus illegal) under Federal law.  Per the joint guidance, it is a bank’s business decision as to the services and accounts to offer, and a bank must have a BSA/AML program commensurate with the level of complexity and risks involved.

FinCEN recently issued guidance to address hemp-related BSA/AML requirements, instructing banks to obtain basic identifying information in accordance with their CIP and risk-based customer due diligence (CDD) processes, including beneficial ownership collection and verification, and to establish appropriate risk-based procedures for conducting ongoing CDD.

Because hemp is now legal at both the Federal and state level, banks are not required to file a SAR on customers solely because they are engaged in a hemp-related business.  A hemp-related SAR would be required in some situations, such as when it appears the customer is engaged in hemp production in a state where it is illegal, is using a state-licensed hemp business as a front for money laundering or to conceal involvement in a marijuana-related business, or cannot show that it is licensed and operating consistent with applicable law.


Banking a hemp-related production business will involve more risk, and will thus require greater due diligence and oversight, than banking other agricultural commodities.  The bank must be familiar with USDA requirements and applicable South Dakota or tribal law, and the bank must be prepared to comply with the regulatory requirements with respect to the hemp-related business customer.  The bank should develop a specific Hemp Banking Policy that details the risk assessment of providing services to hemp-related businesses, the types of hemp customers the bank is willing to accept and the types of services it will provide (e.g., loans, deposit accounts, cash management), and any dollar or volume limitations that may apply.

The risk assessment itself will present a challenge, even for a bank that intends that its hemp-related banking be limited to growers.  Hemp by definition cannot contain more than .3% THC; however, THC levels are impacted by weather conditions (temperature, sunlight, rain) beyond the grower’s control.  THC levels can vary across the same growing area and can continue to fluctuate after harvest.  And while crop insurance will apparently be available to hemp growers, it is not expected to cover crops that must be destroyed because they exceed the maximum THC level.

The bank’s Hemp Banking Policy should also address CDD and BSA/AML reporting requirements.  The CDD requirements will differ based on whether the customer is a producer, transporter, seller, etc.  For hemp growers, a bank may confirm compliance with licensing requirements by either obtaining a written attestation or a copy of the license.  Information requests of the grower may include type of seed, size of field, and other questions to determine the grower’s understanding of and ability to comply with legal requirements.  Ongoing CDD with respect to a grower will depend on the risk assessment and may include license renewals and crop inspection or testing reports.  For any business on the post-production side, questions regarding the type of business, product, and volume should be asked, as well as the anticipated purchasers of the product.


Despite the approval of recreational marijuana by SD voters, implementation will require the passage of state statutes and local ordinances.  More importantly, marijuana remains illegal under Federal law, so it will likely be some time before South Dakota banks begin accepting marijuana-related business customers.  However, that time will certainly come, and a well-developed Hemp Business Policy can serve as a sound starting point for a Marijuana Business Policy.

Both policies will require a complex risk assessment and detailed policies and procedures, and banks hoping to serve these industries should move now to get those pieces in place.

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Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.