• Anti-Money Laundering Programs for Dealers in Precious Metals, Stones or Jewels
  • November 29, 2005 | Author: Stephen J. McHale
  • Law Firm: Patton Boggs LLP - Washington Office
  • On June 3, 2005, the Financial Crimes Enforcement Network ("FinCEN") issued regulations requiring dealers in precious metals, precious stones, and jewels to establish anti-money laundering programs by January 1, 2006. Since precious metals, jewels and precious stones are a universally accepted medium of exchange and a highly concentrated form of wealth, they can be highly attractive to money launderers and other criminals, including those involved in the financing of terrorism. These regulations apply equally to all dealers; not just those who act in complicity with the illegal activities of their customers.

    The new regulations were first authorized in 2001 by the USA PATRIOT Act, but FinCEN deferred issuing them to allow itself time to study the precious metals, stones and jewels industries and to consider how anti-money laundering controls could best be applied to them. Up until now, FinCEN has issued regulations focused primarily on banks and other money services businesses.
    A dealer's failure to comply with the USA PATRIOT Act can cause it to be subject to a civil penalty of up to $1 million as well as criminal sanctions of up to twenty years.

    THE DISTINCTION BETWEEN DEALERS AND RETAILERS
    Of primary importance in the regulation is the distinction between "dealers" and "retailers." Unfortunately, the distinction may prove difficult to apply in practice. The regulation applies only to "dealers" in "covered goods." "Covered goods" include jewels,1 precious metals,2 and precious stones,3 and finished goods (including, but not limited to, jewelry, numismatic items, and antiques) that derive 50 percent or more of their value from jewels, precious metals, or precious stones contained in or attached to the finished goods.

    FinCEN has defined the term "dealer" to mean a person who is not a "retailer" and who both purchases and sells covered goods. Additionally, FinCEN has included dollar thresholds in the definition of dealer: A person must have purchased at least $50,000, and sold at least $50,000, worth of covered goods during the preceding year. The dollar threshold is intended to ensure that the rule applies only to persons engaged in the business of buying and selling a significant amount of these items, rather than to very small businesses, occasional dealers, and persons dealing in such items for hobby purposes.

    The term "retailer" is defined by FinCEN to mean a person engaged within the U.S. in sales of covered goods primarily to the public. According to FinCEN, retailers, as defined, do not pose the same level of risk for money laundering as dealers do. If retailers generally purchase covered goods only from U.S.-based dealers and other retailers, and sell only to the general public, the retailers will not be required to establish anti-money laundering programs.

    Application of this definition can be tricky. For example, a retailer that purchases up to $50,000 of covered goods from persons other than U.S.-based dealers or retailers is covered by the retailer exemption. However, if during the prior tax or calendar year a business both purchased more than $50,000 of covered goods from persons other than U.S. dealers or retailers and sold more than $50,000 of covered goods to anyone, then it would be deemed a dealer and would have to develop and implement an anti-money laundering program.

    Under the regulation, licensed or registered pawnbrokers are specifically exempted from the definition of "dealer." As a result, pawnbrokers are not required to establish anti-money laundering programs under the rule if they are properly licensed or registered with the appropriate state or local government and engaged in pawn transactions.

    REQUIREMENTS OF AN ANTI-MONEY LAUNDERING PROGRAM
    Dealers, at a minimum, must establish an anti-money laundering program that contains following elements:

    (1) Policies, procedures and internal controls, based on the dealer's assessment of the money laundering and terrorist financing risk associated with its business, that are reasonably designed to enable the dealer to comply with the applicable requirements of the Bank Secrecy Act and to prevent the dealer from being used for money laundering or terrorist financing.

    A dealer's anti-money laundering program must be in writing and correctly incorporate applicable law. It must accurately reflect the dealer's operations, including an assessment of the money laundering and terrorist financing risks associated with its products, customers, suppliers, distribution channels, and geographic locations. It should assist in identifying suspicious activity and unusual transactions and include measures to identify high-risk persons or entities.

    (2) A compliance officer who is responsible for ensuring that the program is implemented effectively. The regulation requires a dealer to designate an individual as its compliance officer to oversee the implementation of the anti-money laundering program. The compliance officer should be involved in the drafting of the internal controls, policies and procedures that make up the anti-money laundering program. This person should also be responsible for implementing and monitoring internal employee training. The compliance officer should be familiar with the law and have experience in the detection, prevention, and reporting of money laundering.

    (3) Ongoing training of appropriate persons concerning their responsibilities under the program.
    Once the anti-money laundering program has been established, a Dealer's employees must be adequately trained. At a minimum, the training program should ensure that employees are knowledgeable about their role in the dealer's anti-money laundering program and provide for periodic refresher training.

    (4) Independent testing to monitor and maintain an adequate program.
    The regulation requires annual testing of the anti-money laundering program. This audit function must be performed by a person or group of persons who are not working specifically for the compliance officer responsible for the anti-money laundering program. This audit function should test the anti-money laundering program's compliance with applicable law and employee's compliance with the program.

    Unlike banks and other money services businesses, FinCEN will not be requiring dealers to report suspicious activity, although it encourages them to do so. A dealer's anti-money laundering program must be made available to the Department of Treasury upon request.

    IMPLEMENTATION DATE OF ANTI-MONEY LAUNDERING PROGRAMS
    A dealer, as defined by the rule, is required to implement an anti-money laundering program based on whether its business activities during calendar year 2005 would require it to have an anti-money laundering program for 2006. Pursuant to the regulation, if a dealer's tax year is different than the calendar year, the tax year may be utilized instead. After conducting this analysis, if the dealer is required to have an anti-money laundering program for 2006, it must be implemented by January 1, 2006, or six months after the date on which the dealer becomes subject to the anti-money laundering program requirement. Dealers subject to the anti-money laundering program requirements should start developing their programs as soon as practicable to ensure compliance by January 1, 2006.

    If a dealer is not required to establish an anti-money laundering program based on their 2005 activities, the same assessment must be made with respect to their activities during 2006 in order to determine if they must establish an anti-money laundering program in 2007. This same assessment must be made on an annual basis. A dealer is required to maintain their anti-money laundering program as long as they meet the definition of dealer under the rule.

    THE REGULATION WILL BE BINDING
    FinCEN issued the regulation as an "interim final rule." This means that it is effective now, but might be changed later in response to comments FinCEN receives. Comments may be filed with FinCEN until July 18, 2005. Specifically, FinCEN is seeking public comment regarding the following issues.
    (1) Should silver be removed from the definition of "precious metal"?
    (2) Should "precious stones" and "jewels" be defined more specifically, for example, by reference to a minimum price per carat, and if so how?
    (3) Is 50 percent the appropriate value threshold for determining whether finished goods (including jewelry) containing jewels, precious metals, or precious stones should be subject to the rule?
    (4) In addition, FinCEN is requesting comments on the potential impact of the rule on small businesses (including manufacturers, dealers, wholesalers, distributors, and retailers) that may be "dealers" subject to provisions of the rule.
    According to FinCEN, it will continue to issue guidance to this industry, and will continue to work with the Internal Revenue Service, which has been delegated the authority to examine dealers for compliance with the interim final rule.