The New Year Rings In a New Requirement for the Precious Metal, Precious Stone, and Jewel Industries

January 1, 2006, is an important date for the precious metals, precious stones, and jewels industry.  It is the deadline for industry dealers in the United States to establish and implement anti-money laundering (AML) programs, as required by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) ruling that became effective in July of 2005. 

Under the new rule, dealers in precious metals, precious stones, and jewels will be subject to the same anti-money laundering program requirement as other financial institutions, such as banks, money services businesses, casinos, and brokers-dealers.  The industry is vulnerable to money laundering and other financial crimes, including terrorist financing, because precious metals, stones, and jewels are highly concentrated forms of wealth, which are easily converted to cash and also are very transportable.

Dealers affected are defined by the rule as those who have both purchased and sold at least $50,000 of “covered goods” during the preceding calendar or tax year.  “Covered goods” include jewels, precious metals, precious stones, and finished goods that derive 50 percent or more of their value from the jewels, precious metals, or precious stones they contain.  

Most retailers will not have to establish anti-money laundering programs because retailers do not face the same money laundering risk as dealers.  Under the rule, a retailer is a person engaged in the U.S. in the business of selling covered goods primarily to the public.  However, if during the prior tax or calendar year, a retailer both purchased more than $50,000 of covered goods from persons other than U.S. dealers or retailers (such as non-U.S. dealers and members of the general public), and sold more than $50,000 of covered goods, then the retailer would be deemed a “dealer” and would have to develop and implement an anti-money laundering program.  Under such circumstances, the anti-money laundering program would only be required to address purchases from non-U.S. dealers (including members of the general public).  The program would not be required to address sales. 

The rule provides for additional exceptions to the anti-money laundering program requirement for certain services or products, including toll refiners, pawnbrokers, certain “trade-in transactions,” and certain machinery or equipment used for industrial purposes.

After a business determines that it meets the definition of a dealer, the first step for developing an effective anti-money laundering program is to assess the extent to which the business is susceptible to the risks of money laundering and terrorist financing.  This risk assessment must consider all aspects of the business, as well as what the business has learned from colleagues in the industry and from industry trade associations.   Risk factors include, but are not be limited to, the types of products the dealer buys and sells; the nature of the dealer’s customers, suppliers, and distribution channels; the dealer’s geographic location(s); the extent to which the dealer engages in transactions with established customers or other dealers subject to the rule; and whether the dealer engages in transactions for which payment is routed to or through accounts in jurisdictions that pose a particular threat of money laundering or terrorist financing (e.g. jurisdictions designated as “non-cooperative” by the Financial Action Task Force, as state sponsors of international terrorism by the Department of State, or as warranting special measures due to “money laundering concerns” by the Secretary of the Treasury).

The dealer’s second step is to write and implement an anti-money laundering program that is reasonably designed to prevent the dealer’s purchases and sales of covered goods from being used to facilitate money laundering or terrorist financing.  The written program must include four minimum requirements: 

• Policies, procedures, and internal controls reasonably designed to assure compliance with Bank Secrecy Act (BSA) requirements, including the identification, investigation, and termination of transactions designed to use the dealer to launder money or finance terrorism.  The program must also address its obligation to report on Form 8300 the receipt of cash or certain non-cash instruments totaling more than $10,000 in a single or a related transaction.  Some dealers may be subject to additional BSA requirements such as reporting interests in foreign financial accounts and reporting the physical transfer of currency and monetary instruments into or out of the United States.   In addition, dealers may adopt procedures for voluntarily filing Suspicious Activity Reports by using Form TD F 90-22.56, Suspicious Activity Report by Money Services Business, and for reporting suspected terrorist activities by calling FinCEN’s Financial Institutions Hotline (1-866-556-3974).
• A designated compliance officer responsible for day-to-day compliance with the BSA and the AML program.  This person will be responsible for implementing and updating the program and ensuring that appropriate employees are trained on plan requirements. The compliance officer should have extensive knowledge about the business, its anti-money laundering program, and BSA rules and requirements.
• On-going education and/or training programs for appropriate personnel concerning their responsibilities under the program, including recognizing possible signs of money laundering and terrorist financing.  The level, frequency, and focus of the training should be determined by the responsibilities of the employees, and any factors the dealer has identified in its risk assessment.  Employees should receive periodic updates and refresher training regarding the program.
• An independent review to monitor, maintain, and confirm that the program is adequate and operating properly.  The reviewer(s) cannot be the compliance officer, or an employee working specifically for the compliance officer on the anti-money laundering program.   Independent testing does not mean that an outside party must be hired, although outside parties may be utilized to conduct the independent review.  The testing should be a fair and unbiased appraisal of the adequacy of the anti-money laundering program, and the dealer’s success in implementing the anti-money laundering program.  The independent test results and any recommendations for improvement should be in writing.

Additional information about anti-money laundering programs, other BSA requirements, and forms and publications is available at www.fincen.gov or IRS.gov, or by calling the FinCEN regulatory helpline at 1-800-949-2732. 

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