GT Alert

USA PATRIOT Act - Interim Regulation Requiring Jewelry Dealers to Establish Anti-Money Laundering Programs

June 2005

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On June 3, 2005, the United States Department of the Treasury and the Financial Crimes Enforcement Network (“FinCEN”) announced a USA PATRIOT Act interim regulation that requires certain dealers in precious metals, precious stones or jewels to establish anti-money laundering (“AML”) programs to detect money laundering and the financing of terrorism.

The interim regulation will take effect on July 11, 2005. The interim regulation will be final and binding. It is being issued as an interim regulation in order to solicit additional public comment and provide FinCEN the flexibility to further tailor the regulation to money laundering risks in the industry, if appropriate. Comments on the interim regulation are due on or before July 25, 2005.

Interim Regulation

The interim regulation marks the Treasury Department’s latest effort at implementing Section 352 of the USA PATRIOT Act, a provision that requires all “financial institutions” to establish AML programs. Although a dealer “in precious metals, stones or jewels” is a “financial institution” under the Bank Secrecy Act,1 FinCEN has not previously defined the term or issued regulations regarding such dealers.

The interim regulation defines a “dealer” as any person within the United States who has purchased and sold at least $50,000 worth of “covered goods” during the preceding year. “Covered goods” include jewels,2 precious metals,3 precious stones,4 or finished goods.5 The interim regulation covers entities including manufacturers, refiners, wholesalers, retailers, and any other entity engaged in the business of purchasing and selling jewels, precious metals, precious stones, or jewelry.

To exclude small businesses from the AML program requirement, the interim regulation contains a 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; and (2) received more than $50,000 in gross proceeds from the sale of jewels, precious metals, precious stones, or jewelry.

Exceptions

In addition to the minimum dollar threshold, the definition of “dealer” contains two exceptions. Under the first exception, a “retailer” (i.e., a person engaged within the U.S. in sales of covered goods primarily to the public) is a dealer only if it purchased more than $50,000 in covered goods from persons other than from other “dealers” or other retailers (such as members of the general public or foreign sources of supply) during the prior calendar or tax year. Therefore, a retailer that purchases jewels from a dealer would not be deemed a “dealer” – and therefore not be subject to the AML program requirement – even if its gross sales of jewels exceeded $50,000 in the prior calendar or tax year.

Under the second exception, businesses licensed or registered as pawnbrokers under state or municipal law are specifically exempted from the definition of “dealer.” Therefore, pawnbrokers are not required to establish anti-money laundering programs under this exception as long as they are properly licensed or registered with the appropriate state or local government and engaged in pawn transactions.

Anti-Money Laundering Program

A person that meets the definitions of “dealer” in the proposed regulation and does not fall under one of the exceptions would be required to establish an AML program by January 1, 2006. The AML program, at a minimum, must include:

1. written policies, procedures, and controls;
2. the designation of a compliance officer;
3. an ongoing employee training program; and
4. an independent audit function to test the AML program.

A link to the proposed rule may be found on FinCEN’s Web site at: www.fincen.gov/wn_main.html.

Footnotes

1 31 U.S.C. § 5312 (a)(2)(N)

2 “Jewel” means organic substances that have a market-recognized gem level of quality, beauty and rarity. 31 C.F.R. §103.140(a)(2).

3 “Precious metal” means gold, silver, and the platinum group of metals, when it is at a level of purity of 0.500 (50 percent) or greater, singly or in any combination. 31 C.F.R. §103.140(a)(3).

4 “Precious stone” means inorganic substances that have a market-recognized gem level of quality, beauty and rarity. 31 C.F.R. §103.140(a)(4).

5 “Finished goods” means goods (including, but not limited to, jewelry, numismatic items, and antiques) that derive 50 percent or more of their value from jewels, precious metals or precious stones contained in or attached to such goods. 31 C.F.R. §103.140(a)(1)(i).

This Alert was authored by Carl Fornaris and Ramon Rasco in the Miami office. Please contact Mr. Fornaris at 305-579-0626, Mr. Rasco at 305-579-0813 or your Greenberg Traurig liaison if you have any questions regarding the subject matter of this Alert.

© 2005 Greenberg Traurig

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