In the aftermath of 9/11 and the war on terror, the USA PATRIOT Act called for all financial institutions, as so defined by the Bank Secrecy Act ("BSA"), to establish comprehensive anti-money laundering compliance programs. Since the BSA identified more than 20 different types of financial institutions, many of which had no prior experience in establishing such a program, the Treasury Department’s Financial Crime Enforcement Network ("FinCEN") decided to introduce this requirement in stages. This gradual approach enabled FinCEN to properly assess the risk for each financial institution and create the appropriate anti-money laundering program for that industry.

On June 9, 2005, FinCEN issued a new Interim Final Rule ("Rule") requiring that dealers in precious metals, precious stones, and jewels establish comprehensive anti-money laundering programs. According to FinCEN, these items are easily transportable, highly concentrated forms of wealth that can be highly attractive to money launderers and other criminals.

Each item subject to the Rule is defined as follows.

  • A "jewel" means an organic substance with gem-quality, market-recognized beauty, rarity, and value, and includes pearl, amber, and coral;
  • A "precious metal" means gold, iridium, osmium, palladium, platinum, rhodium, ruthenium, or silver having a level of purity of 500 or more parts per thousand, and an alloy containing 500 or more parts per thousand, in the aggregate, of two or more of the metals listed above;
  • A "precious stone" means a substance with gem-quality, market-recognized beauty, rarity, and value, and includes diamond, corundum (including rubies and sapphires), beryl (including emeralds and aquamarines), chrysoberyl, spinel, topaz, zircon, tourmaline, garnet, crystalline and cryptocrystalline quartz, olivine peridot, tanzanite, jadeite jade, nephrite jade, spodumene, feldspar, turquoise, lapis lazuli, and opal.

The Rule itself applies to a "covered good," meaning not only individual jewels, precious metals, and precious stones, but also finished goods that derive 50 percent or more of their value from jewels, precious metals, or precious stones contained in or attached to such finished goods.

In order to distinguish between dealers and persons who trade in precious metals, precious stones, and jewels as a hobby or on a more occasional basis, the Rule defines a dealer as a person with a physical presence in the United States who has purchased at least $50,000 and sold at least $50,000 worth of covered goods during the preceding year. The Rule further distinguishes between a dealer and a retailer, i.e., a person engaged within the United States in sales of covered goods primarily to the public. Most retailers are exempt from the Rule, since according to FinCEN, they do not pose the same level of risk for money laundering as dealers. However, if during the prior tax or calendar year a retailer both purchased more than $50,000 of goods from persons other than U.S. dealers or retailers, and sold more than $50,000 of covered goods, then the retailer would be deemed a dealer and required to establish an anti-money laundering program to review all purchases from non-U.S. dealers. A retailer’s anti-money laundering program under such circumstances would not be required to address sales.

In addition to the retailer exception, the Rule explicitly excludes pawnbrokers from the definition of a dealer. Furthermore, trade-in transactions where a dealer or retailer accepts a covered good from a customer, the value of which the retailer or dealer credits to the account of the customer and where no funds are provided to the customer, are excluded from the terms "sale" and "purchase" for calculating whether the $50,000 threshold has been met. The terms "sale" and "purchase" further do not include the purchase of jewels, precious metals, or precious stones that are incorporated into machinery or equipment to be used for industrial purposes, as well as the purchase and sale of such machinery or equipment.

If a person qualifies as a "dealer" for the year 2005, then that person is required to have an anti-money laundering program in place by January 1, 2006 (or six months after that date that a person becomes subject to the anti-money laundering program requirement). Any anti-money laundering program must contain the following components:

  • Policies, procedures, and internal controls, based on a company’s overall risk of money laundering activities;
  • The appointment of a compliance officer to ensure that the program is implemented effectively;
  • Ongoing employee training; and
  • The establishment of an independent testing mechanism to monitor the program.

Unlike other financial institutions, dealers are not required to prepare Suspicious Activity Reports, although they still are required to report all cash transactions in excess of $10,000 to the IRS.

In addition to implementing the anti-money laundering requirements for dealers, the Rule seeks comment on the following issues:

  • Should silver be removed from the definition of a "precious metal"?
  • Should "precious stones" and "jewels" be defined more specifically, for example, by reference to a minimum price per carat, and if so, how?
  • 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?
  • What is the Rule’s potential impact on small businesses that may be "dealers" subject to this Rule?

Comments regarding the above questions must be received by FinCEN by July 25, 2005, and Reed Smith can help you in the preparation and submission of such comments. Finally, FinCEN is still considering introducing mandatory anti-money laundering programs for other financial institutions (most notably, insurance companies and persons involved in real estate closings and settlements), and the Sentinel will update all new requirements as they are released by FinCEN.

This article is presented for informational purposes only and is not intended to constitute legal advice.