Fallout from the Sept. 11, 2001, terrorist attacks continues to plague the jewelry, gems, and precious metals industries. In this case, it takes the form of a new set of federal rules about to be implemented under the USA PATRIOT Act. Passed by Congress just weeks after the attacks on the World Trade Center in New York City and the Pentagon outside Washington, D.C., and signed into law by President Bush on Oct. 26, 2001, the law is designed to prevent further acts of terrorism on U.S. soil. Or as President Bush noted when signing the law, it’s designed to give “intelligence and law enforcement officials important new tools to fight a present danger.” It also contains provisions designed to curb money laundering, which relates specifically to the jewelry, gems, and precious metals industries.
At the time of this writing, a final version of the law’s requirements for these industries was still being drafted by the U.S. Treasury Department, the federal agency responsible for implementing and enforcing the law. During a PATRIOT Act workshop held in November and sponsored by several jewelry-related organizations, Michael A. Dawson, a deputy assistant in the Treasury Department, told the audience that the draft regulation is close to what the final version will be. It is expected to be published in the first quarter of 2004. After publication, the jewelry industry will have at least 90 days to comply, although leaders from the affected industries have asked for an extension.
Jewelers as financial institutions. Title III, Section 352 of the PATRIOT Act directs the Treasury Department to require “financial institutions” to “create, implement, and test anti-money-laundering (AML) programs,” Dawson said. (Under the law, “financial institutions” is a broad term that includes the majority of individuals and persons in the jewelry, gems, and precious metals industries.)
“Some may not think of jewelers as financial institutions,” Dawson told the group of retailers, manufacturers, and gem and jewelry dealers at the event in New York City. “Unfortunately, criminals can and do think of jewelers as financial institutions. Your products can be—and have been—used by criminals to launder criminal proceeds, store value, transport to other jurisdictions, and convert the value into liquid forms to fuel criminal enterprises.”
The law applies to anyone defined as a “dealer”—generally someone who buys and sells precious metals, stones, and jewels. There are a few exemptions. One is for businesses that buy or receive less than $50,000 a year in jewels, gems, and precious metals from non-dealers. Dealer purchases also are exempt.
The law as currently written states the following explanation for the exemptions:
“Thus, a retailer that purchases jewels, precious metals, precious stones, or jewelry from a dealer (for example, from a wholesaler), would not fall within the definition of “dealer,” even if its gross sales of jewels, precious metals, stones, and jewelry exceeded $50,000 in the prior calendar or tax year. However, a retailer that, in the prior calendar or tax year, purchased more than $50,000 in jewels, precious metals, precious stones, or jewelry from sources other than a dealer (for example, from the general public), would be a dealer for purposes of the rule. The rationale for this limited exception is that, in order to abuse this industry, a money launderer must be able to sell as well as purchase the goods. Therefore, there is substantially less risk that a retailer who purchases goods exclusively or almost exclusively from dealers subject to the proposed rule will be abused by money launderers.”
Other exemptions include those who buy gems and precious metals for industrial and fabrication purposes, and companies that provide a platform for selling jewelry, gems, and precious metals but do not buy and sell the products themselves, such as Internet sites like eBay.
Cecilia Gardner, executive director and general counsel of the Jewelers Vigilance Committee (one of the workshop sponsors), told attendees that it is safe to say that most jewelry, gems, and precious metals retailers, manufacturers, and dealers will be included under the law.
Documentation is key. While regulations vary among industries, Dawson said the required anti-money-laundering programs must have four common elements:
a written anti-money-laundering program;
the designation of at least one employee (a compliance officer) to head the program and to provide guidance to other employees on the program and to oversee its implementation;
training for employees; and
independent testing of the program to ensure that it is operating appropriately and effectively.
Gardner noted that the key message in terms of compliance with the law is that those in the industry must get detailed information on companies they deal with and clearly document the information.
Gardner also stressed that it’s important for businesses to plan now for the provisions. She said the first step is to assign someone to the role of compliance officer.
“It is highly recommended you identify and appoint a person now,” Gardner said. “You should begin today to start thinking about that. Then senior management should write a letter describing who that person is and what his responsibilities are.”
Possible loopholes. For approximately the past 18 months, Dawson said, the Treasury Department has been studying and working with the jewelry industry to enact effective anti-money-laundering rules while trying not to infringe on the way gem and jewelry operations do business.
The proposed rules were first published Feb. 21, 2003, followed by a comment period that ended in late April. Final rules were supposed to be published during the summer of 2003. However, Dawson said, creating the document took longer than anticipated because: It had to reflect the diversity of the industries being regulated; there were concerns about crafting rules that were too intrusive; and it was necessary to provide information for retailers and manufacturers who are unfamiliar with anti-money-laundering programs.
During the public comment period, several jewelry and gem organizations submitted a letter addressing industry concerns over a few of the proposed rules and possible remedies. The letter was signed by the leadership of JVC, Jewelers of America, Manufacturing Jewelers and Suppliers of America, American Gem Trade Association, Diamond Manufacturers and Importers of America, American Gem Society, Diamond Dealers Club of New York, Stuller Settings Inc., and Sterling Jewelers Inc.
One concern is that the rules do not address purchases from dealers not subject to the jurisdiction of the U.S. Treasury Department—namely, foreign companies that may not have anti-money-laundering programs in place. “The risk for abuse of those companies by money launderers is theoretically more acute,” the letter states. The group suggested that U.S. firms dealing with foreign companies receive written assurances that these companies have taken steps to prevent and detect money laundering.
At the workshop, some attendees expressed concern that, in many cases, they have no way of knowing how foreign companies are acquiring their gems and jewelry. They wondered whether they would be held liable if it was learned that the companies they deal with are acquiring their product from unsavory people or organizations, without their knowledge.
Dawson suggested that businesses dealing with foreign companies would be responsible only for the transactions they are making with the company.
“Basically, your obligation is to ensure that the company you are dealing with is legit,” he said.
The letter suggested that foreign companies doing business in the United States should provide an IRS identification number. “The failure of a company to provide such a number when asked is an important indicator of the legitimacy of the company, and its participation in programs to prevent money laundering or terrorist financing,” the letter states. “This factor should be added.”
Gardner told JCK that an IRS identification number is something that nearly all foreign businesses should have if they do business in the United States. It’s one of many questions that U.S. businesses do ask of foreign suppliers—and if they’re not asking, they should be.
Gardner said she is concerned about rumors within the industry that the new law may bar U.S. companies from dealing with certain foreign companies. This information, she said, is absolutely untrue. The law requires only that U.S. businesses obtain basic information about foreign companies with which they do business.
“I just want to make it very, very clear that there is no bar to doing business with foreign companies,” she emphasized. “The only questions U.S. businesses should ask are those that these foreign companies should have no problems answering—the type of identification questions that establish the legitimacy of the business. They are wise questions, and companies should already know this information. Unfortunately, [the rumors] have caused a great deal of concern.”
Another possible large loophole exists in regard to 10k gold. The law provides clear definitions of gems, precious metals, and jewels, which are regulated under the law. The definition of precious metals, however, raised concern among workshop attendees. The term “precious metals” is defined as gold, silver, or platinum of greater than 500 parts per thousand, which leaves out 10k gold. Dawson’s only response to attendees’ concerns was that the definition had to be somewhat broad. He didn’t say whether the problem would be corrected in the final version.
Gardner noted that this concern was addressed in their letter to the Treasury Department. “I was confused about that myself,” she said. “Part of the comments inquired about their definition of precious metal. I think it’s a confusing provision. We did ask them to address it. I just don’t know if they will.”
In their letter, the industry leaders also expressed concern over the way “trade-ins” will be regulated under the law. This part of the law directly affects retailers who allow customers to “trade up” on stones they previously purchased from the retailer—a common practice.
For now, trade-ins will count against the $50,000 limit of purchases that retailers are allowed under the law from people other than dealers. But Gardner said that industry leaders requested that this type of transaction not be included in the $50,000 figure because it’s based on product previously purchased from the store.
“These transactions present no risk for money laundering, so what we ask for the department to do is exclude them in regard to dealing with the general public,” she said.
The letter also asked that the amount of time for the industries to comply with the rules be increased from 90 to 180 days after the final version is published.
A work in process. Dawson said he would not comment on specific concerns but said that the “input will be evident in the final rules.” He did say that the process will result in a document flexible enough to meet the diverse needs of the jewelry industry, which includes mom-and-pop jewelry stores, large manufacturers, small design firms, and large operations that buy and sell diamonds and gemstones.
“Our proposed regulations allow individual firms to tailor their anti-money-laundering programs to the specific risks they face and to the specific nature of their businesses,” Dawson said. “For example, the program for a small two-person business will generally be different from the program of a large business with thousands of employees. As another example, although it is required that you designate one or more individuals as responsible for the program, it is not required as a general matter that this person be a full-time position …You should first satisfy your money-laundering risk and then act accordingly.”
Outside of broad guidelines, the law as currently written doesn’t provide many specifics: There are no detailed formulas or numerical requirements, and there is no “do and don’t” list. Dawson said such details were left out intentionally to recognize the diversity of the industry and to limit the amount of government oversight in regard to individual businesses.
“Overly prescriptive or inflexible regulations focus attention on complying with the regulations, rather than on stopping money laundering,” Dawson said. “Bad regulation can result in honest businesses being more concerned about legal risks they face for not complying with some aspect of our regulations than about the risk that their businesses will be the victims of money launderers or terrorists’ financiers.”
He added, “The moment you start worrying more about government bureaucrats than criminals, we have got you worried about the wrong thing.”
Gardner said the general nature of compliance adheres to what industry leaders were requesting based on the diverse nature of the jewelry, gems, and precious metals industries.
“I think it’s a very basic general approach which companies can apply to their own businesses,” Gardner told JCK. “Our industry is extremely diverse, and each sector operates with different methods of doing business, so a regulatory scheme with lots of segments will be very difficult to apply. They were very pleased that it is somewhat broad.”
Staying informed. What some consider broad and flexible, others interpret as vague. One workshop attendee noted that while the law doesn’t provide specific guidelines, he is concerned that he still may face prosecution for not complying.
The amount of legal liability a business may face “depends on the circumstances,” Dawson said. “That may be frustrating to those who want overly prescriptive rules. But we chose to be flexible and to not dictate which things you must do.”
The American Civil Liberties Union (ACLU) also has expressed concerns over the general nature of compliance and enforcement of Title III of the law, says ACLU legislative counsel Charlie Mitchell. While the organization has been challenging other aspects of this very broad law, Mitchell says problems with the vagueness of Title III have sneaked up on the organization. It’s not just jewelry and gem businesses that are grappling with the requirements: Other industries, such as the casino industry, are trying to get a better handle on what the rules require from businesses, he says.
“The fact is that the rules [Title III, dealing with anti-money laundering] are vague and underdeveloped,” Mitchell says. “This is the least understood area of the PATRIOT Act.”
Gardner stressed that the law as written places no requirement on businesses to report suspicious activity. However, she also warned that failure to report what may be perceived as suspicious activity can result in being prosecuted for “willful blindness,” a legal term that means “guilt by failing to act when information regarding compliance was readily available.”
“If you are engaged in a series of transactions that look suspicious to you, you can be held liable because you tried to stay ignorant of what was clearly suspicious activity,” she said. “Businesses have to be aware of that. Other than that there are no reporting requirements in the rules.”
Gardner said that it’s important for those in the jewelry, gems, and precious metals industries to read trade magazines, other industry resources, and government literature to stay current on the law. Gardner said JVC will provide advice and test companies’ anti-money-laundering plans.
The JVC Web site (www.jvclegal.org) also has information available on the PATRIOT Act and advice on how to comply with the regulations. Once the final rules are published, Gardner said, JVC will offer a “PATRIOT Act Compliance Kit.” For more information, call JVC at (212) 997-2002.