Bank Secrecy Act Regs to Cover Precious Metals Dealers

On February 19, 2003, the U.S. Treasury's Financial Crimes Enforcement Network issued an advance notice of proposed rule making offering for comment proposed new regulations to implement the USA PATRIOT Act amendments to the Bank Secrecy Act (the "BSA").

Precious Metals Dealers are "Financial Institutions" Under the Bank Secrecy Act

The BSA, as amended, requires every "financial institution" to establish an anti- money laundering program that includes, at a minimum: (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs. The BSA includes dealers in precious metals, stones or jewels in the definition of a "financial institution." Prior to these proposed rules, the Treasury Regulations have not defined the term "dealers" or issued regulations governing them.

The following is a summary of the pertinent provisions of the proposed rules that are of interest to gold buyers and sellers.

$50,000 Threshold for "Dealers"

A person is a "dealer" under the regulations if the person is a manufacturer, refiner, wholesaler, retailer or any other entity engaged in the business of purchasing and selling jewels, precious metals, precious stones or jewelry - but only if the person meets a specific minimum dollar threshold. A person is a "dealer" only if, during the prior calendar or tax year, the person (1) purchased more than $50,000 in jewels, precious metals, precious stones, or jewelry, or (2) received more than $50,000 in gross proceeds from the sale of jewels, precious metals, precious stones, or jewelry.

There is an exception for certain retailers. A retailer is a dealer only if it purchased more than $50,000 in jewels, precious metals, precious stones, or jewelry from persons other than dealers during the prior calendar or tax year. The government feels that purchases from dealers, who are subject to the regulations, are less likely to involve money laundering. There is another low risk exception for a person buying or selling value-added fabricated goods containing minor amounts of precious metals or gemstones.

The regulators are specifically soliciting comments as to the appropriateness of the $50,000 threshold.

Anti- Money Laundering Program Requirements

The heart of the regulations is a requirement that dealers have a written anti- money laundering program "reasonably designed to detect transactions that may involve use of the dealer to facilitate money laundering or terrorist financing." The dealer is, at a minimum, required to create a system of policies, procedures and controls based on the dealer's assessment of the money laundering and terrorist financing risks associated with its line of business. The relevant factors that a dealer should take into account when making a risk assessment are to include:

    "(A) The types of products the dealer buys and sells, as well as the nature of the dealer's customers, suppliers, distribution channels, and geographic locations;

    "(B) The extent to which the dealer engages in transactions other than with established customers or sources of supply; and

    "(C) Whether the dealer engages in transactions for which payment or account reconciliation is routed to or from accounts located in jurisdictions that have been identified by the Department of State as a sponsor of international terrorism . . .; designated as non-cooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization of which the United States is a member and with which designation the United States representative or organization concurs; or designated by the Secretary of the Treasury . . . as warranting special measures due to money laundering concerns.

A program must also "incorporate policies, procedures, and internal controls to assist the dealer in identifying transactions that may involve use of the dealer to facilitate money laundering or terrorist financing, including provisions for making reasonable inquiries to determine whether a transaction involves money laundering or terrorist financing, and for refusing to consummate, withdrawing from, or terminating such transactions. Factors that may indicate a transaction is designed to involve use of the dealer to facilitate money laundering or terrorist financing include, but are not limited to:

    "(A) Unusual payment methods, such as the use of large amounts of cash, multiple or sequentially numbered money orders, traveler's checks, or cashier's checks, or payment from third-parties;

    "(B) Unwillingness by a customer or supplier to provide complete or accurate contact information, financial references, or business affiliations;

    (C) Attempts by a customer or supplier to maintain a high degree of secrecy with respect to the transaction, such as a request that normal business records not be kept;

    "(D) Purchases or sales that are unusual for the particular customer or supplier, or type of customer or supplier; and

    "(E) Purchases or sales that are not in conformity with standard industry practice."

Red Flags

In its comments to the proposed rule, the Financial Crimes Enforcement Network listed a number of factors that might indicate a transaction is designed to involve use of the dealer to facilitate money laundering or terrorist financing:

    "(1) unusual payment methods, such as the use of large amounts of cash, multiple or sequentially numbered money orders, traveler's checks, or cashier's checks, or payment from unknown third parties;

    "(2) unwillingness by a customer or supplier to provide complete or accurate contact information, financial references, or business affiliations;

    "(3) attempts by a customer or supplier to maintain a high and unusual degree of secrecy with respect to the transaction, such as a request that normal business records not be kept;

    "(4) purchases or sales that are unusual for the particular customer or supplier or type of customer or supplier; and

    "(5) purchases or sales that are not in conformity with standard industry practice.

    "For example, one money laundering scheme observed in this industry involved a customer who ordered items, paid for them in cash, cancelled the order, and then received a large refund. In one case, funds were laundered through large cash purchases of a dealer's gold at artificially inflated prices, followed by re-purchase by the dealer of the same gold at lower prices. A dealer should make reasonable inquiries when transactions appear to vary from standard industry practice, or from the standard practice of an established customer or supplier. Over- or under- invoicing, structured, complex, or multiple invoice requests, and high-dollar shipments that are over- or underinsured may all be indicia that a transaction involves money laundering or terrorist financing.

The written program must designate a compliance officer to be responsible for assuring that the program is implemented immediately, that it is updated when appropriate and that personnel training is conducted. Compliance with the program is to be independently tested.

Dealers must Report the Receipts of More than $10,000 in Cash

The procedures established must include provisions for complying with the BSA's requirement that the dealer file a report on Form 8300 of the receipt of cash or certain non cash instruments (e.g., cashier's checks) totaling more than $10,000 in one transaction or two or more related transactions.

The Financial Crimes Enforcement Network estimates that the $50,000 threshold will exempt the small dealers from regulation and that for others the impact of the new regulations will not be substantial. They estimate that only 20,000 companies will be required to keep records and that for those the burden should be no greater than that borne by other "financial institutions" such as banks.

The annual record keeping burden is estimated by the government to be one hour per record keeper.

Due Date for Comments

Comments are due within 60 days after the proposed rules are published in the Federal Register, which should occur this month. The regulations take effect 90 days after they are finally approved.

What Does this Mean?

The proposed regulations mean that in addition to developing a complying program, prudent coin and bullion dealers will keep careful records so that they are not accused of money laundering or facilitating money laundering. If a purchase is for more than $10,000, they will accept no payment that does not identify the purchaser. Cautious dealers will refuse cash for large purchases less than $10,000. They may ask for verifiable contact information and references for all significant purchases and they may refuse to sell to secretive or suspicious customers.

Legitimate businessmen try to stay as far away from drug dealing, mob activity and terrorism as possible. Gold dealers by the nature of their business may be more subject to approach by these groups than other legitimate businesses, or at least that is the conventional wisdom in the Treasury Department. In view of this, many dealers will assume the burden of proof to avoid trouble. Although the regulations do not require dealers to keep records of transactions including the identity of purchasers and sellers, prudent dealers will attempt to create customer data bases and transaction records that can establish that they do not deal with terrorists or banned entities. When the dust settles, it is likely that from 2003 onward the Treasury Department will be able to identify through dealer records most of those who purchase gold.

Eugene C. Holloway
[email protected]