Some coin, jewelry & antique dealers are in for a rude awakening come New Year’s Day. New regulations associated with the Patriot Act specifically pertain to "dealers" who buy and sell $50,000 worth of “covered” goods. According to the Department of the Treasury, “The characteristics of jewels, precious metals, and precious stones that make them valuable also make them potentially vulnerable to those seeking to launder money.”
   Under the interim final rule implementing section 352 of the Patriot Act, specific dealers in precious metals, stones or jewels are required to establish anti-money laundering programs.
   As we went to press with this issue, there was the possibility of some minor changes to this new regulation. Specifically, silver may be removed from the definition of a “precious metal” and “precious stones and jewels” may be defined more specifically by a minimum price per carat, but the dealers with whom we spoke felt compliance with the new regulations would put a burden on their business. Many of them were confused on whether or not they fell within the guidelines of a “dealer” as specified by the new regulations. And some dealers were equating the regulations with the existing obligation requiring businesses to report cash receipts in excess of $10,000 in one transaction on Form 8300. According to the Treasury Department, “businesses excluded from the interim final rule are NOT relieved of their existing obligation to file Form 8300.”
   One coin dealer who asked to remain anonymous scoffed at FinCEN’s definition of a “dealer”. He also said, “since when am I a financial institution?” Yet, the Bank Secrecy Act (BSA), a provision of the Patriot Act, clearly defines all dealers in jewels, precious metals, or precious stones as a “financial institution.” So what does that mean?
   According to FinCEN (the Financial Crimes Enforcement Network), the new interim final rule which takes effect January 1, 2006 is to “better protect those who deal in jewels, precious metals, and precious stones from potential abuse by criminals and terrorists, thereby enhancing the protection of the U.S. financial system generally, and the precious metals, jewels, and precious stones industry in particular.
   According to the Department of the Treasury, "Although a dealer in "precious metals, stones, or jewels" ("dealer") has long been listed as a financial institution under the BSA, 31 U.S.C. 5312(a)(2)(N), FinCEN has not previously defined the term or issued regulations regarding dealers.  On April 29, 2002, FinCEN deferred the anti-money laundering program requirement contained in 31 U.S.C. 5318(h) that would have applied to a number of new industries, including dealers.  The purpose of the deferral was to provide FinCEN with time to study the industries and to consider how anti-money laundering controls could best be applied to them. This rule defines the term dealer and describes the required elements of a dealer’s anti-money laundering program."
   The language of the new rule is quite clear and precise. "Covered goods" include jewels, precious metals, and precious stones and finished goods (including but not limited to jewelry, numismatic items, and antiques) that derive 50% or more of their value from jewels, precious metals, or precious stones contained in or attached to such finished goods."
   A "dealer" according to FinCEN is "A person who both purchases and sells covered goods." Such a person must have purchased at least $50,000, AND sold at least $50,000 worth of covered goods during the preceding year."
   Significantly, the rule distinguishes between a dealer and a "retailer", stating a retailer is a person engaged within the U.S. selling covered goods primarily to the "public". FinCEN believes retailers, as defined, do not pose the same level of risk for money laundering as do "dealers". As long as the retailer purchases their goods from U.S.-based dealers and other retailers, they are not required to establish anti-money laundering programs.
   However, if the retailer in the prior tax or calendar year purchased $50,000 or more in covered goods from non-U.S. dealers OR "the general public" and sold $50,000 or more in covered goods , the retailer is re-defined as a "dealer" and must be in compliance, at least in regards to their "purchases".
   Jewelry dealers, in particular, may find it difficult to determine the 50% value of their merchandise based on the value of the stones and jewels. According to FinCEN, the $50,000 threshold is based solely on the value of the jewels, precious metals (such as gold and platinum) and stones contained in the jewelry, not on the overall value of the jewelry. So, if you bought $50,000 worth of jewelry from people walking into your store in 2005, and sold $120,000 worth of jewelry to the general public and determine that $50,000 or more of the value of the jewelry you sold in 2005 was based on the value of the "stones" and "precious metal" content such as platinum (as opposed to value based on design, provenance, maker’s name, etc.), then you need to have exercise due diligence and have an anti-money laundering program.
   Do NOT assume because your particular business didn’t meet the "scenario" outlined in the previous paragraph that you needn’t be concerned. This was a scenario that we developed as a "example"…it is NOT the only example. Jewelry and coin dealers need to obtain a copy of the FAQ from the Department of the Treasury (it can be downloaded as a PDF from their website-see end of this article), and read the "interim final rule" to determine if they fall within the guidelines of section 352 of the Patriot Act.
   If this all seems preposterous, the Department of the Treasury cited an actual example where a jewelry wholesaler pled guilty to laundering money by accepting third-party payments in drug proceeds for merchandise purchased by its retailer clients.
   Moreover, a department memo stated, "Second, the results of the recently conducted Operation Meltdown demonstrate the importance of conducting reasonable inquiries when a customer’s requests seem unusual.  This money laundering scheme involved the use of couriers to deliver cash to gold dealers.  The dealers exchanged the cash for gold and other precious commodities, which were then smuggled out of the United States.  To make the gold less easily detected by inspectors, the gold dealers sometimes molded the gold into common items, such as tools, belt buckles, or light switches, or painted it."
   In our opinion, the biggest confusion in the interim final rule lies not in the "definitions" but in what isn’t defined. Where do group shops fall and what are their responsibilities? Is it up to individual dealers to report or the group shop itself?
  The rule clearly states what the requirements are for covered dealers. These include:
Section 103.140(b) of the interim final rule requires that each dealer develop and implement an anti-money laundering program reasonably designed to prevent the dealer from being used to facilitate money laundering or the financing of terrorist activities, and clarifies that the program is to apply to the dealer’s purchases and sales of covered goods.  The program must be in writing and should set forth clearly the details of the program, including the responsibilities of the individuals and/or departments involved. In addition, a dealer’s program must be approved by its senior management.  A dealer must make its anti-money laundering program available to the Treasury or its designee upon request.  While it is permissible for a dealer to delegate certain functions relating to its anti-money laundering program to a third party, the dealer remains responsible for ensuring compliance with these requirements.
Some other language from the interim rule includes:
o  An explicit exception for pawnbrokers.
o  An exception from the meaning of the terms "purchase" and "sale" for purposes of the definition of "dealer" has been created for certain trade-in transactions, as a result of which such transactions would not count toward the $50,000 definitional thresholds.
o  The definition of "precious stone" has been revised to include tanzanite.
o  A risk factor has been revised to apply to attempts by a customer to maintain an "unusual," rather then a "high," degree of secrecy with respect to a transaction.
   According to the Department of the Treasury, "Although ensuring compliance with the requirement to report transactions involving currency in excess of $10,000 pursuant to Section 26 U.S.C. 6050I and 31 CFR 103.30 should be an element of a dealer’s anti-money laundering program, it should not be the sole focus.  Rather, as noted above, a dealer’s program must be reasonably designed to prevent the dealer from being used to facilitate money laundering or the financing of terrorist activities.
    Several dealers expressed concern about the standard to which they would be held under the "reasonably designed" language.  The dealers argued that there is little information available to dealers to consult when evaluating whether a transaction may involve money laundering or terrorist financing, and suggested that FinCEN provide specific sources of reference for dealers to use when determining whether a particular transaction may potentially involve money laundering or the financing of terrorism.
  If a dealer was able to demonstrate that they have checked these sources of information, they should be deemed in compliance with the anti-money laundering program requirement, was the argument.  In addition, dealers expressed concern that, while money laundering is a concept that can be understood in terms of objective criteria, terrorist financing is more subjective, making it more difficult for dealers to implement a program designed to prevent it.  Dealers suggested that FinCEN provide more information on the methods by which people attempt to finance terrorism through transactions with dealers.  Some dealers suggested that FinCEN develop a written program that could be used by dealers.
   The Department of the Treasury responded by stating, "The use of the phrase "reasonably designed" in paragraph (b) is intended to provide dealers with the flexibility to tailor their programs to their specific circumstances so long as the minimum requirements are met. The interim final rule applies to many different types of dealers that engage in purchase and sale transactions involving a variety of products and different types of customers and sources of supply. Dealers must use the expertise that they possess about their industry, their particular business, and their particular customers and suppliers to develop a program that meets the requirements of the rule.
   “However, FinCEN recognizes the importance of providing guidance to assist dealers in assessing the risks related to their businesses, and in identifying transactions that may be indicative of money laundering or terrorist financing. The examples of transactional behavior that may indicate money laundering or terrorist financing contained in the text of the rule, as well as the information about recent cases contained in this preamble, are intended to be the starting point. Going forward, FinCEN is committed to providing dealers with additional guidance, including analysis of relevant trends and patterns of money laundering and terrorist financing, whenever possible.
    “The interim final rule requires that each dealer develop and implement a program reasonably designed to prevent money laundering. Accordingly, when evaluating a dealer’s compliance with the requirements of this rule, the focus will be on the design and implementation of the program. The Treasury and FinCEN recognize that even the best of anti-money laundering programs cannot guarantee that a dealer will not be used by a money launderer.”

Provisions for Antique Dealers

    According to a FAQ from the Treasury Department, if you are not a retailer, you must establish an anti-money laundering program if, during the prior tax or calendar year:
(1) You purchased more than $50,000 in jewels, precious stones, and precious metals from any source of supply; and
(2) The value of the jewels, precious stones and precious metals contained in the goods you sold was more than $50,000, and the value of the jewels, precious stones, and precious metals comprised 50 percent or more of the selling price of those goods.
3(i) QUESTION: I am an antiques dealer who purchases and sells items that contain jewels, precious metals or precious stones. Am I required to have an anti-money laundering program?
ANSWER: If you sell your antiques primarily to the public, you are a retailer and do not have to establish an anti-money laundering program, unless during 2005:
(1) The value of the jewels, precious stones and precious metals contained in the antiques you sold was more than $50,000, and the value of the jewels, precious stones, and precious metals comprised 50 percent or more of the selling price of those antiques; and
(2) You purchased antiques from foreign sources or the general public that contained more than $50,000 in jewels, precious stones, and precious metals, and the value of the jewels, precious stones, and precious metals comprised 50 percent or more of the purchase price of those antiques; in which case your program need address only those sources of supply.
   If you are not a retailer because, for example, you sell your antiques equally to other antiques dealers as well as the general public, you must establish an anti-money laundering program if, during 2005:
(1) The value of the jewels, precious stones and precious metals contained in the antiques you purchased was more than $50,000, and the value of the jewels, precious stones, and precious metals accounted for 50 percent or more of the purchase price of those antiques; and
(2) You sold antiques that contained more than $50,000 in jewels, precious stones, or precious metals, and the value of the jewels, precious stones, and precious metals comprised 50 percent or more of the selling price of those antiques.
   In all cases, it is only the value of the jewels, precious metals, and precious stones in the antiques that matters, not the value of the antiques themselves.
  Because of price "mark-ups" it is possible that the precious metals in an antique you purchased accounted for more than 50 percent of its purchase price, but less than 50 percent of its selling price when you sold it. If this is the case, you would need to count the purchase toward your $50,000 "purchases" threshold, but the sale would not count toward your "sales" threshold.
   You should learn what the BSA requirements are for your business. For most dealers, the requirements are (1) to establish an anti-money laundering program, (2) to file IRS/FinCEN Form 8300 (3) to file FinCEN Form TD F 90-22.1 and (4) to file FinCEN Form 105.   All of these forms and their instructions are available at http://www.fincen.gov
   Additionally, FinCEN operates a regulatory helpline, 1-800-949-2732, to provide answers to specific compliance questions.  Finally, FinCEN will continue to work with the IRS, which has been delegated the authority to examine dealers for compliance with the interim final rule, to provide outreach and training about anti-money laundering issues. Any of the forms mentioned in this article can be read and downloaded at
http://www.fincen.gov/reg_bsaforms.html
For the FAQ, go to
http://www.fincen.gov/faq060305.pdf

   According to Raymond Gregson, Jr. of  the National Association for Compliance and Security, Inc. which writes compliance plans for small and large businesses, “Basically, if a dealer purchases and sells more than $50,000 in covered goods to the public in a year, they are considered a dealer and required to comply. The regulations did not specify whether if you were a one man show or a 100 man show. If you meet the thresholds, you are a dealer and must comply.
   “These regulations will not change anything about how they do business. It will be business as usual, except that your policies and procedures for identifying customers and other items will be in writing and required to be implemented into your business. I may make recommendations to them for IRS purposes, but the final decision will be theirs. Also, each plan must be tailored to the individual business. It is against the regulations to use someone else's plan. No business is exactly alike.”
 Formerly an IRS Senior Special Agent handling money laundering cases out of the New Orleans Field Office, Ray can be reached at nacs_aml@cox.net or call  him at (504)737-1375.