Financial Crimes Enforcement Network; Anti-Money Laundering Programs for Dealers in Precious Metals, Stones, or Jewels, 33702-33718 [05-11431]
Download as PDF
33702
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
implications. No rights, property or
compensation has been, or will be
taken. A takings implication assessment
is not required.
6. Federalism (E.O. 13132). In
accordane with Executive Order 13132,
this rule does not have federalism
implications that warrant the
preparation of a federalism assessment.
7. Civil Justice Reform (E.O. 12988). In
accordance with Executive Order 12988,
the Office of the Solicitor has
determined that this rule does not
unduly burden the judicial system and
meets the requirements of sections 3(a)
and 3(b)(2) of the Order.
8. Consultation with Indian tribes
(E.O. 13175). In accordance with
Executive Order 13175, we have
evaluated this rule and determined that
it has no potential negative effects on
federally recognized Indian tribes. In
drafting the No Child Left Behind rule
published today, we consulted
extensively with tribes; tribal members
of the negotiated rulemaking committee
participated in the writing of the rule.
These conforming amendments make
only changes necessary to ensure that
the remainder of 25 CFR is consistent
with the provisions of the No Child Left
Behind rule.
9. Paperwork Reduction Act. This
regulation does not require an
information collection from 10 or more
parties and a submission under the
Paperwork Reduction Act is not
required. An OMB form 83–I is not
required.
10. National Environmental Policy
Act. This rule does not constitute a
major Federal action significantly
affecting the quality of the human
environment.
11. Justification for Issuing a Direct
Final Rule. The Department has
determined that the public notice and
comment provisions of the
Administrative Procedure Act, 5 U.S.C.
553(b), do not apply to this rule because
of the good cause exception under 5
U.S.C. 553(b)(3)(B). This exception
allows the agency to suspend the notice
and public procedure requirements
when the agency finds for good cause
that those requirements are
impracticable, unnecessary, or contrary
to the public interest. This rule
renumbers (redesignates) certain
sections of 25 CFR part 39 in order to
conform to the amendments published
on April 28, it makes no substantive
changes. Failure to immediately make
these redesignations would lead to
confusion and cause errors in vital
educational programs. For these
reasons, public comments are
unnecessary and would be
impracticable.
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
Similarly, failure to immediately
make the redesignations in this rule
would result in a serious disruption of
the Bureau of Indian Affairs’ ability to
provide necessary educational services,
with accompanying confusion to
employees and the public. This
disruption and confusion would be
contrary to public and tribal interests.
For these reasons, the Department has
determined it appropriate to waive the
requirement of publication 30 days in
advance of the effective date. As
allowed by 5 U.S.C. 553(d)(3), this rule
is effective immediately because it is in
the public interest not to delay
implementation of this amendment.
List of Subjects in 25 CFR Part 39
Indians—education, Schools,
Elementary and secondary education
programs, Government programs—
education.
Dated: May 23, 2005.
Michael D. Olsen,
Acting Principal Deputy Assistant Secretary—
Indian Affairs.
For the reasons given in the preamble,
part 39 of title 25 of the Code of Federal
Regulations is amended as set forth
below.
I
PART 39—THE INDIAN SCHOOL
EQUALIZATION PROGRAM
1. The authority for part 39 continues
to read as follows:
I
Authority: 25 U.S.C. 13; 25 U.S.C. 2008;
Pub. L. 107–110.
2. In Subparts I through L, §§ 39.110
through 39.143 are redesignated as
shown in the following table:
I
Current section number
39.110
39.111
39.112
39.113
39.114
39.120
39.121
39.122
39.123
39.130
39.131
39.140
39.141
39.142
39.143
Redesignated
section number
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
§ 39.1100
39.900
39.901
39.902
39.903
39.904
39.1000
39.1001
39.1002
39.1003
39.1100
39.1101
39.1200
39.1201
39.1202
39.1203
[Amended]
3. In newly redesignated § 39.1100, in
the last sentence, the words ‘‘detailed in
§ 39.19’’ are removed.
I
PO 00000
Frm 00014
Fmt 4700
Sfmt 4700
I 4. In newly redesignated § 39.1202(c),
the words ‘‘as set forth in § 39.19’’ are
removed.
[FR Doc. 05–11445 Filed 6–8–05; 8:45 am]
BILLING CODE 4310–02–M
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506–AA58
Financial Crimes Enforcement
Network; Anti-Money Laundering
Programs for Dealers in Precious
Metals, Stones, or Jewels
Financial Crimes Enforcement
Network (‘‘FinCEN’’), Treasury.
ACTION: Interim final rule; request for
comments.
AGENCY:
SUMMARY: FinCEN is issuing this interim
final rule to prescribe minimum
standards applicable to dealers in
jewels, precious metals, or precious
stones, pursuant to the provisions in the
USA PATRIOT Act of 2001 that require
financial institutions to establish antimoney laundering programs. This rule
is being issued as an interim final rule
because FinCEN is seeking additional
public comment on several aspects of
the interim final rule. These issues are
addressed in the SUPPLEMENTARY
INFORMATION section under the heading
‘‘Request for Comments.’’ We also are
providing questions and answers to
assist businesses in understanding how
the interim final rule operates, and in
determining whether and when a
business’s operations are covered by the
interim final rule. These questions and
answers appear in the SUPPLEMENTARY
INFORMATION section under the heading
‘‘Frequently Asked Questions.’’
DATES: Effective Date: This interim final
rule is effective July 11, 2005.
Applicability Date: The requirement
that dealers develop and implement an
anti-money laundering program applies
as provided in 31 CFR 103.140(d).
Submission of Comments: Comments
on the issues raised in the ‘‘Request for
Comments’’ portion of this document
must be received before July 25, 2005.
ADDRESSES: You may submit comments,
identified by RIN 1506–AA58, by any of
the following methods:
• Federal e-rulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regcomments@fincen.treas.gov. Include
RIN 1506–AA58 in the subject line of
the message.
• Mail: FinCEN, P.O. Box 39, Vienna,
VA 22183. Include RIN 1506–AA58 in
the body of the text.
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
Instructions: It is preferable for
comments to be submitted by electronic
mail because paper mail in the
Washington, DC, area may be delayed.
Please submit comments by one method
only. All submissions received must
include the agency name and the
Regulatory Information Number (RIN)
for this rulemaking. All comments
received will be posted without change
to https://www.fincen.gov, including any
personal information provided.
Comments may be inspected at FinCEN
between 10 a.m. and 4 p.m., in the
FinCEN reading room in Washington,
DC. Persons wishing to inspect the
comments submitted must request an
appointment by telephoning (202) 354–
6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT:
Regulatory Policy and Programs
Division (FinCEN), (800) 949–2732 (tollfree).
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Provisions
The Bank Secrecy Act (BSA), Public
Law 91–508, as amended, codified at 12
U.S.C. 1829b, 12 U.S.C. 1951–1959, and
31 U.S.C. 5311–5314, 5316–5332,
authorizes the Secretary of the Treasury
to issue regulations requiring financial
institutions to keep records and file
reports that are determined to have a
high degree of usefulness in criminal,
tax, and regulatory matters, or in the
conduct of intelligence or counterintelligence activities to protect against
international terrorism, and to
implement counter-money laundering
programs and compliance procedures.1
Regulations implementing Title II of the
BSA (codified at 31 U.S.C. 5311 et seq.)
appear at 31 CFR part 103. The
authority of the Secretary to administer
the BSA has been delegated to the
Director of FinCEN.
The provisions of 31 U.S.C. 5318(h),
added to the BSA in 1992 by section
1517 of the Annunzio-Wylie AntiMoney Laundering Act, authorize the
Secretary of the Treasury ‘‘[i]n order to
guard against money laundering through
financial institutions * * * [to] require
financial institutions to carry out antimoney laundering programs.’’ 31 U.S.C.
5318(h)(1). Those programs may include
‘‘the development of internal policies,
procedures, and controls;’’ ‘‘the
1 Language expanding the scope of the BSA to
intelligence or counter-intelligence activities to
protect against international terrorism was added by
section 358 of the Uniting and Strengthening
America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism (USA
PATRIOT) Act of 2001 (the USA Patriot Act), Public
Law 107–56.
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
33703
The statutory mandate that financial
institutions establish an anti-money
laundering program is a key element in
the national effort to prevent and detect
money laundering and the financing of
terrorism, and recognizes that financial
institutions other than depository
institutions (which have long been
subject to BSA requirements) are
vulnerable to money laundering.
Precious metals, precious stones, and
jewels are easily transportable, highly
concentrated forms of wealth and can be
highly attractive to money launderers
and other criminals, including those
involved in the financing of terrorism.
Recent cases demonstrate various ways
in which precious metals, precious
stones, and jewels can be used for illicit
purposes. In particular, these cases
demonstrate the risks involved in
accepting third-party payments, and the
importance of conducting reasonable
inquiries when a customer’s requests
seem unusual.
Although the following two examples
involve dealers who were acting in
complicity with the illegal activity of
their customers, they demonstrate
money laundering methodologies that
also could be conducted through
unwary dealers. First, a Federal grand
jury indictment illustrates the money
laundering risks associated with the use
of third-party payments.3 A jewelry
wholesaler pled guilty to laundering
money by accepting third-party
payments in drug proceeds for
merchandise purchased by its retailer
clients. A review of the wholesaler’s
records revealed several unusual
patterns, including:
• Many instances in which the
wholesaler received payment for
merchandise from a party other than the
purchaser (third-party payments); and
• Numerous examples of unusual
check activity including payment in the
form of sequentially numbered checks,
multiple checks from the same account
drawn on the same date, checks with no
identified payor, payments drawn on a
bank located in a county different from
the country in which the purchaser
lived, and checks paid through foreign
countries.
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.4
A review of suspicious activity
reports filed with FinCEN by depository
institutions also reveals instances in
which banks and others suspected the
involvement of dealers in unusual
transactions. Several suspicious activity
reports describe the use of bulk amounts
of sequentially numbered U.S. money
orders and traveler’s checks deposited
abroad. The money orders and traveler’s
checks were purchased for the
maximum face value, and then were
used to purchase diamonds and gems at
2 See 31 CFR 103.170, as codified by interim final
rule published at 67 FR 21110 (April 29, 2002), as
amended at 67 FR 67547 (November 6, 2002) and
corrected at 67 FR 68935 (November 14, 2002).
3 U.S. v. Speed Joyeros, S.A., 204 F. Supp. 2d 412
(E.D.N.Y. 2002).
4 U.S. v. Ramerez, 313 F. Supp. 2d 276 (S.D.N.Y.
2004).
designation of a compliance officer;’’
‘‘an ongoing employee training
program;’’ and ‘‘an independent audit
function to test programs.’’ 31 U.S.C.
5318(h)(1)(A–D).
On October 26, 2001, the President
signed into law the USA Patriot Act.
Section 352 of the USA Patriot Act,
which became effective April 24, 2002,
amended 31 U.S.C. 5318(h) of the BSA
to require, and not merely authorize,
anti-money laundering programs for all
financial institutions defined in the
BSA. Section 352(c) of the USA Patriot
Act directs the Secretary to prescribe
regulations for anti-money laundering
programs that are ‘‘commensurate with
the size, location, and activities’’ of the
financial institutions to which such
regulations apply.
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 antimoney 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 antimoney laundering controls could best
be applied to them.2 This rule defines
the term dealer and describes the
required elements of a dealer’s antimoney laundering program.
B. Money Laundering Cases Involving
Dealers
PO 00000
Frm 00015
Fmt 4700
Sfmt 4700
E:\FR\FM\09JNR1.SGM
09JNR1
33704
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
dealers located in foreign countries. One
suspicious activity report was filed by a
U.S. bank that became suspicious about
a series of checks payable to U.S.
suppliers and issued on behalf of a
foreign gold and gem company from a
correspondent account at the bank. The
bank contacted the correspondent for
additional details about the
transactions, and found that the invoice
amounts did not correspond with the
check amounts. Although there can be
legitimate reasons for both making
payments that do not match invoices
and using sequentially numbered
money orders or traveler’s checks (such
as limitations on the maximum face
amount of these instruments), their use
can be indicia of money laundering.
The Guidance for Financial
Institutions in Detecting Terrorist
Financing issued by the Financial
Action Task Force on Money
Laundering (the ‘‘FATF’’) 5 identifying
vulnerabilities in financial industries on
the financing of terrorism, includes an
example involving a dealer. In this case,
suspicious activity reports filed by
several banks on two individuals and a
diamond trading company identified
high-volume unusual funds transfer
activity to and from foreign countries,
and the deposit of several large-value
checks denominated in U.S. dollars. The
financial intelligence unit of the country
in which the filing banks are located
learned from the police that, through
these transactions, funds had been
wired to a person suspected of buying
diamonds on behalf of a terrorist
organization.6
The vulnerabilities described above
help demonstrate the need for an antimoney laundering program requirement
for dealers to minimize the opportunity
for abuse in this industry.
II. Notice of Proposed Rulemaking
This interim final rule is based on the
notice of proposed rulemaking
published February 21, 2003 (the
‘‘NPRM’’) (68 FR 8480). The NPRM
sought to require dealers in jewels,
5 The FATF is an inter-governmental body whose
purpose is the development and promotion of
policies to combat money laundering. Originally
created by the G–7 nations, its membership now
includes Argentina, Australia, Austria, Belgium,
Brazil, Canada, China, Denmark, Finland, France,
Germany, Greece, Hong Kong, Iceland, Ireland,
Italy, Japan, Luxembourg, Mexico, the Kingdom of
the Netherlands, New Zealand, Norway, Portugal,
Russia, Singapore, South Africa, Spain, Sweden,
Switzerland, Turkey, the United Kingdom, and the
United States, as well as the European Commission
and the Gulf Cooperation Council.
6 Financial Action Task Force on Money
Laundering, Guidance for Financial Institutions in
Detecting Terrorist Financing, April 24, 2002, at
page 4 (see https://www.faft-gafi.org/pdf/
GuidFITFOI_en.pdf).
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
precious metals, and precious stones to
develop and implement written antimoney laundering programs
appropriately tailored to the risk of
money laundering or terrorism
financing presented by their businesses.
The NPRM focused on dealers, that is,
businesses that both buy and sell these
items, given FinCEN’s conclusion that
the most significant risks of money
laundering or the financing of terrorism
lie within those businesses that do both.
Furthermore, the NPRM excluded most
retailers from the scope of the
regulation, based on the conclusion that
retailers simply do not face the same
level of risk. The elements of the antimoney laundering program outlined in
the NPRM mirror those found in
FinCEN’s regulations for other types of
financial institutions. The NPRM
contained proposed definitions for the
terms ‘‘dealer,’’ ‘‘jewel,’’ ‘‘precious
metal,’’ and ‘‘precious stone.’’
The comment period for the NPRM
ended on April 22, 2003. FinCEN
received a total of 29 comment letters.
Of these, 16 were submitted by dealer
and pawnbroker trade associations, five
by law firms, four by individuals, three
by pawnbrokers, and one by a
manufacturer.
III. Summary of Comments and
Revisions
A. Introduction
The format of this interim final rule
is generally consistent with the format
of the rule proposed in the NPRM. The
terms of the rule, however, differ from
the terms of the NPRM in the following
significant respects:
• The definitional threshold for a
dealer has been revised from persons
engaged in the purchase or sale, to
persons engaged in the purchase and
sale, of more than $50,000 in covered
goods.
• The interim final rule contains a
new defined term, ‘‘covered goods,’’
which includes jewels, precious metals,
and precious stones, and finished goods
(including 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
finished goods. The references to
‘‘jewelry containing jewels, precious
metals, or precious stones’’ have been
removed because such items are more
specifically addressed within the new
‘‘covered goods’’ definition.
• Language has been added to clarify
that the interim final rule only applies
to U.S. dealers, i.e., dealers with a
physical presence in the U.S.
PO 00000
Frm 00016
Fmt 4700
Sfmt 4700
• An explicit exception for
pawnbrokers has been added to the
interim final rule.
• 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.
• The exception relating to the
fabrication of finished goods containing
minor amounts of jewels, precious
metals, or precious stones is no longer
necessary (and therefore has been
removed) as a result of (1) the new
‘‘covered goods’’ definition, and (2) a
new exception from the definition of
‘‘dealer’’ and the anti-money laundering
program requirement for the purchase of
jewels, precious metals, and precious
stones that are incorporated into
equipment and machinery to be used for
industrial purposes, and the purchase
and sale of such equipment and
machinery.
• The definition of ‘‘retailer’’ appears
as a separate definition, and clarifies
that the term applies only to a U.S.
person who sells covered goods
primarily to the public.
• The $50,000 thresholds in the rule
to determine whether a person is a
dealer and whether a retailer is eligible
for the retailer exemption have been
clarified to provide that, with respect to
finished goods, only the value of the
jewels, precious metals, or precious
stones contained in or attached to such
finished goods needs to be taken into
account.
• The rule has been revised to
provide that the anti-money laundering
program of a retailer that does not
qualify for the retailer exception due to
purchases from persons other than
dealers or other retailers need only
cover such purchases.
• Language has been added to require
a dealer, when making the risk
assessment required by the rule, to take
into account the extent to which it
engages in transactions with persons
other than dealers subject to the rule.
• The definition of ‘‘precious stone’’
has been revised to include tanzanite.
• 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.
• The applicability date of the interim
final rule has been extended to January
1, 2006, or not later than six months
after the date a person becomes a dealer
for purposes of the interim final rule.
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
B. Public Comments on the NPRM—
Overview and General Issues
Comments on the NPRM concentrated
on three matters: (1) Application of the
retail exception to retailers that buy
from foreign-located sources; (2)
application of the rule to pawnbrokers;
and (3) application of the definition of
‘‘purchase’’ to trade-in transactions.
1. Application of Retailer Exception to
Retailers that Purchase from ForeignLocated Sources
The focus of a dealer’s anti-money
laundering program must be twofold:
prevention and detection of money
laundering and terrorist financing
through the dealer by its customers, and
prevention and detection of money
laundering and terrorist financing
through the dealer by its sources of
supply. As explained in the NPRM,
however, FinCEN has concluded that
the risks of money laundering or
terrorist financing are less significant in
those businesses that engage primarily
in retail sales of such products. As a
result, the NPRM proposed to exclude
certain retailers from the rule. To
qualify for the proposed exception
under the NPRM, a retailer would have
had to purchase its products
predominantly from other dealers
subject to the NPRM. Specifically, under
proposed section 103.140(a)(1)(ii)(A),
the anti-money laundering program
requirement would not apply to a
retailer unless that retailer purchased
annually more than $50,000 in jewels,
precious metals, precious stones, or
jewelry from persons that are not
dealers. Persons that are not dealers
subject to the rule would include
members of the public, other U.S.
persons not subject to the rule, and—for
reasons of jurisdiction—foreign (nonU.S.) dealers in precious metals,
precious stones, or jewels.
Several commenters asserted that
FinCEN did not provide proper notice
required under the Administrative
Procedure Act with respect to whether
purchases by a retailer from non-U.S.
sources would be included within the
$50,000 threshold which, if exceeded,
would disqualify a dealer from utilizing
the retailer exception. FinCEN
disagrees. The preamble to the NPRM
stated that ‘‘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.’’ See 68
FR 8482 (emphasis supplied). Although
the NPRM did not explicitly state that
the rule would only apply to dealers
located in the United States, such
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
dealers are the only persons that could
have been the subject of the NPRM.
Several commenters urged FinCEN to
revise the retailer exception so that it
would apply to retailers that purchase
jewels, precious metals, precious stones,
or jewelry, predominately from foreignlocated sources. However, this approach
would ignore the risk of money
laundering and terrorist financing
through a dealer’s international source
of supply.7 One commenter suggested
extending the exception to retailers that
purchase from foreign sources that are
located in countries that are members of
the FATF. The application of antimoney laundering measures to dealers
has been emphasized by the
international community as a key
element in combating money laundering
and terrorist financing.8 However, the
fact that a country is a member of the
FATF does not mean that the country
requires dealers located within its
borders to implement an anti-money
laundering program, much less an antimoney laundering program that is
similar to that contained in this interim
final rule.9 Thus, to extend the
exception in the manner suggested
would be contrary to the rationale
underlying the exception. Finally,
several commenters suggested
permitting retailers that buy from
foreign sources to be excepted from the
anti-money laundering requirement to
the extent that they receive written
assurances that their foreign sources of
supply have taken steps to prevent and
7 See discussion of money laundering cases
involving dealers, supra part I.B.
8 In June 2003, FATF revised its Forty
Recommendations to extend counter-money
laundering and terrorist financing principles to
dealers in precious metals and stones. Among the
recommendations now applicable to dealers in
precious metals and stones to the extent of
transactions equal to or above $15,000 are those
requiring customer due diligence, suspicious
activity reporting, and record-keeping requirements.
In addition, Recommendation 16 extends the
development of anti-money laundering and terrorist
financing programs to dealers in precious metals
and stones.
9 Although several FATF member countries have
enacted anti-money laundering legislation that
applies to dealers, the applicable requirements
operate differently than those contained in this
interim final rule. Directive 2001/97/EC of the
European Parliament and of the Council Amending
Council Directive 91/308/EEC on Prevention of the
Use of the Financial System for the Purpose of
Money Laundering (December 4, 2001) requires
dealers in high-value goods such as precious stones
or metals (when transactions involve cash payments
of 15,000 euro or more) to establish internal control
and communication procedures for the purposes of
detecting and preventing money laundering,
including employee training. Many European
Union members have enacted legislation consistent
with this Directive. See, e.g., United Kingdom
Statutory Instrument 2003 No. 3075 Financial
Services, Money Laundering Regulations 2003
(November 28, 2003).
PO 00000
Frm 00017
Fmt 4700
Sfmt 4700
33705
detect money laundering. Given the
importance of the anti-money
laundering requirement, FinCEN has
determined that written assurances from
a source of supply that is not subject to
the requirements of this rule does not
justify a complete exception from the
rule. Such assurances, however, could
be a factor in assessing the degree of risk
inherent in a particular relationship and
the degree of scrutiny that accordingly
should be brought to bear on it.
For all of the foregoing reasons, the
interim final rule continues to provide
that a retailer that sold more than
$50,000 in covered goods during the
prior year is not required to implement
an anti-money laundering program
unless it purchased during the prior
year more than $50,000 in covered
goods from persons other than dealers
as defined in the interim final rule. In
addition, language has been added to
the retailer exception to ensure that a
retailer’s purchases from other retailers
as defined in the interim final rule will
not prohibit a retailer from taking
advantage of the retailer exception. This
change is intended to recognize the fact
that retailers often purchase covered
goods from other retailers, and that such
purchases should not result in requiring
a retailer to be covered by the rule.
However, FinCEN recognizes that a
retailer that would otherwise be
completely exempt from the rule
because of its lack of significant
purchases from persons other than
dealers or retailers should not have to
implement a program directed at
customer risk merely because it exceeds
the $50,000 threshold in purchases from
persons other than dealers and/or other
retailers. Rather, an appropriate program
for such a retailer would be limited to
guarding against the risks presented by
its sources of supply other than dealers
and other retailers. FinCEN believes that
this targeted approach presents the right
balance between the money laundering
risks of such businesses and the intent
of the statute. Therefore, language has
been added to section 103.140(b) of the
interim final rule to provide that, to the
extent that a retailer’s purchases from
persons other than dealers subject to the
rule and other retailers exceeds the
$50,000 threshold contained in the
retailer exception, the anti-money
laundering compliance program
required of the dealer need address only
such purchases; such a program would
not be required to address sales, or other
types of purchases.
2. Application of the Rule to
Pawnbrokers
Several commenters requested
clarification on whether the rule is
E:\FR\FM\09JNR1.SGM
09JNR1
33706
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
intended to apply to pawnbrokers.
Although pawnbrokers take in covered
goods from the public in return for
funds, they do so in the context of
extending short-term, non-recourse
collateralized loans. Most often, such
loans are repaid and the collateral is
returned to the borrower. However, if
the borrower fails to repay the loan, the
pawnbroker forecloses on the collateral,
subsequently selling the collateral to the
general public. FinCEN has determined
not to treat this type of transaction as
the purchase and sale of covered goods
for purposes of this rule.
Pawnbrokers are defined as financial
institutions for BSA purposes (see 31
U.S.C. 5312(a)(2)(O)), and are therefore
subject to the statutory requirement to
implement an anti-money laundering
program requirement. As noted above,
FinCEN deferred the anti-money
laundering program requirement
contained in 31 U.S.C. 5318(h) that
would have applied to many entities
that are financial institutions in 31
U.S.C. 5312, including pawnbrokers.
FinCEN intends to address at a later
time the applicability of the anti-money
laundering program requirements of 31
U.S.C. 5318(h) to pawnbrokers, but at
this time, such a requirement for
pawnbrokers remains deferred. For this
reason, the interim final rule contains
an explicit exception, found at new
section 103.140(a)(2)(ii)(B), providing
that the term dealer does not include a
person licensed or authorized under the
laws of any State (or local government)
to do business as a pawnbroker, but
only to the extent such person is
engaged in pawn transactions, including
the sale of pawn loan collateral.
3. Trade-in Transactions
As explained above, section
103.140(a)(1)(ii)(A) of the NPRM
provided an exception from the antimoney laundering program requirement
for retailers that do not purchase from
persons other than dealers more than
$50,000 in jewels, precious metals,
precious stones, or jewelry during the
prior year. Commenters indicated that
many retailers, rather than purchasing
jewels, precious metals, precious stones,
or jewelry containing such items from
retail customers for cash or cash
equivalents, often accept such an item
from the customer, a ‘‘trade-in,’’ and
credit the value of the trade-in toward
a new purchase by the customer at the
retailer. Several commenters asserted
that a trade-in transaction should not be
deemed a ‘‘purchase’’ for purposes of
the retailer exception because the
money laundering risks involved in
trade-in transactions are low. According
to commenters, the average value of a
VerDate jul<14>2003
15:22 Jun 08, 2005
Jkt 205001
trade-in is under $1,000. Many retailers
limit the use of trade-ins to transactions
in which the price of the item to be
purchased is at least twice the value of
the trade-in item, and do not permit a
customer to obtain cash or cash
equivalents in the course of a trade-in
transaction. Moreover, some retailers
will only accept a trade-in that was
originally purchased from the retailer
itself. Even if trade-ins were to be
considered a ‘‘purchase’’ in the context
of the retailer exception, commenters
argued that certain types of trade-ins, for
example trade-ins of low value (under
$10,000), or trade-ins of jewelry worth
50 percent or less of the total purchase,
should be exempted. According to
commenters, if the rule were to treat all
trade-in transactions as purchases, a
large percentage of retailers would be
unable to take advantage of the retailer
exception.
In response to comments, and in order
to balance the risks posed by trade-in
transactions against the burdens
imposed by the requirement to
implement an anti-money laundering
program, the interim final rule has been
revised to specifically exempt certain
trade-in transactions for purposes of the
definition of ‘‘dealer,’’ including the
retailer exception that appears in that
definition. New section
103.140(a)(2)(iii) provides that for
purposes of meeting the definition of a
‘‘dealer,’’ the ‘‘purchase’’ and ‘‘sale’’ of
covered goods does not include retail
transactions in which a dealer or retailer
accepts from a customer covered goods,
the value of which the dealer or retailer
credits to the account of the customer,
or to another purchase by the customer,
and the retailer or dealer does not
provide funds to the customer in
exchange for such covered goods (the
‘‘trade-in exception’’). As a result of this
exception, a person is not required to
count a trade-in transaction toward the
$50,000 threshold for the purchase and
sale of covered goods for purposes of
determining that person’s status as a
dealer under the rule.10 It should be
noted that the trade-in exception is only
an exception from the ‘‘dealer’’
definition, and not an exception to the
scope of the anti-money laundering
program required of a person other than
a retailer who otherwise meets the
definition of ‘‘dealer.’’
IV. Section-by-Section Analysis
10 Similarly, a person is not required to count a
trade-in transaction toward the $50,000 threshold
for the purchase of covered goods from persons
other than dealers and other retailers, for purposes
of excluding a ‘‘retailer’’ from the ‘‘dealer’’
definition.
PO 00000
Frm 00018
Fmt 4700
Sfmt 4700
A. 103.140(a)—Definitions 11
1. 31 CFR 103.140(a)(1)—Definition of
‘‘Covered Goods’’
Section 103.140(a) continues to define
the key terms used in the rule. Section
103.140(a)(1) contains a new defined
term, ‘‘covered goods,’’ which includes
jewels, precious metals, and precious
stones (as each is defined in paragraphs
(3), (4), and (5), respectively, of
subsection (a)), and finished goods that
derive 50 percent or more of their value
from jewels, precious metals, and
precious stones contained in or attached
to such finished goods. Such finished
goods include, but are not limited to,
jewelry, numismatic items, and
antiques. The new defined term was
added to replace the undefined term
‘‘jewelry’’ that was used in the NPRM
and to clarify and broaden the scope of
an exception in the NPRM for
transactions in jewels, precious metals,
and precious stones for purposes of
fabricating finished goods, to the extent
that the finished goods contain ‘‘minor
amounts of,’’ or the value of the goods
is ‘‘not significantly attributable to,’’
jewels, precious metals, or precious
stones.12 Commenters suggested that the
rule provide more specificity on what is
meant by the phrases ‘‘minor amounts’’
and ‘‘not significantly attributable to.’’
One commenter suggested that the
exception apply to the extent that
finished goods contain gems, precious
metals, or precious stones worth not
more than 10 percent of the product
value, and two commenters suggested
using a threshold of 50 percent of the
product value. FinCEN believes that 50
percent constitutes a threshold that is
consistent with the rule’s definition of
‘‘precious metal,’’ which adopts a
minimum purity level of at least 500
parts per 1000. Thus, the defined term
‘‘covered goods’’ adopts the 50 percent
threshold for determining whether
finished goods containing jewels,
precious metals, or precious stones are
products subject to the interim final
rule.
2. 31 CFR 103.140(a)(2)—Definition of
‘‘Dealer’’
Section 103.140(a)(2)(i) defines
‘‘dealer’’ as any person who is engaged
‘‘as a business in the purchase and sale
of covered goods’’ in excess of the dollar
11 FinCEN notes that these definitions apply only
with respect to the interim final rule and not with
respect to any other law or regulation.
12 See also the discussion in the following part of
the preamble regarding a new exception in section
103.140(a)(2)(iii)(B) of the interim final rule for
purchases and sales of jewels, precious metals, and
precious stones used in industrial products.
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
thresholds. This language differs
slightly from the language contained in
the NPRM, which had defined a dealer
as a person engaged ‘‘in the business of
purchasing and selling’’ jewels, precious
metals, precious stones, or jewelry
composed of jewels, precious metals, or
precious stones. The change was made
for purposes of consistency of terms
and, except for the use of the new term
‘‘covered goods,’’ is not a substantive
change. The terms ‘‘purchase’’ and
‘‘sale’’ are used throughout the rule, and
as discussed below, new sections have
been added to the rule excepting certain
transactions from the meaning of
‘‘purchase’’ or ‘‘sale.’’
The rule applies only to persons that
both purchase items that meet the
definition of covered goods, and sell
items that meet the same definition, in
sufficient quantity to meet the $50,000
definitional thresholds. Therefore, a
person that engages only in the sale of
such products, for example a mining
company that only sells precious metals
that it mines, would not be covered by
the definition. Similarly, a person who
only engages in the purchase of such
products, for example a person who
purchases gold coins for gifts to family
members, would not be covered by the
rule.13 Additionally, a manufacturer of
jewelry that in one year purchases over
$50,000 worth of gold of sufficient
purity (for example, 14 carat gold) to
meet the definition of ‘‘precious metal,’’
but that does not sell jewelry composed
of gold of sufficient purity (for example,
10 carat gold after manufacturing) to be
deemed ‘‘covered goods,’’ would not be
a dealer for purposes of this rule.
Finally, the rule would not generally
apply to persons who merely facilitate
the purchase and sale of covered goods.
For example, persons who facilitate
estate sales or conduct auctions,
bankruptcy trustees, school districts that
sponsor class ring sales, and persons
who host in-home sales of a company’s
jewelry would not be ‘‘dealers’’ for
purposes of the rule based on such
activity.
The interim final rule contains
language clarifying that the anti-money
laundering program requirement applies
only to a person engaged within the
United States as a business in the
purchase and sale of covered goods.
This would include, for example, a
person with a U.S. office, a person who
comes to the United States to make
purchases and sales of covered goods
13 In contrast, a person who buys and sells coins
containing metals of a sufficient purity to meet the
definition of ‘‘precious metal’’ would be treated as
a dealer for purposes of this rule assuming the
$50,000 purchase and sale thresholds were met and
the person is not a retailer as defined in the rule.
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
above the threshold amount at U.S.
trade shows, and a foreign-located
person who maintains sales staff
engaged in such purchases and sales
within the United States. However, it
would not include, for example, a
foreign dealer who ships products into
the United States without conducting
further business activity within the
United States, or a foreign dealer that
merely advertises in the United States or
attends a trade-show in the United
States at which it does not purchase and
sell covered goods above the threshold
amounts. This is consistent with the
general applicability of BSA regulatory
requirements to U.S. persons.14 It
should be noted that, under FinCEN’s
regulations, the status of a person’s
corporate parent, subsidiary, or affiliate
does not affect the determination
whether the person is itself a financial
institution for BSA purposes. Thus, a
person that does not engage in the
business of dealing in covered goods
would not be deemed a dealer solely by
virtue of the fact that it is the parent,
subsidiary, or affiliate of a dealer.
The interim final rule retains the
minimum dollar threshold that was
proposed in the NPRM, but has been
modified to apply the threshold to both
purchases and sales. Thus, sections
103.140(a)(2)(i)(A) and (B) provide that
a person is a ‘‘dealer’’ only if, during the
prior calendar or tax year, the person
both (1) purchased more than $50,000 in
covered goods, and (2) received more
than $50,000 in gross proceeds from the
sale of covered goods.15 This change
reflects FinCEN’s determination that a
person that does not reach the $50,000
threshold for both purchases and sales
is not of sufficient size or risk to be
required to implement an anti-money
laundering program. A few commenters
suggested that, instead of a yearly dollar
volume threshold, the rule should
contain a threshold based on a single
transaction amount. These commenters
argued in favor of a $10,000 transaction
level, in light of the requirement that
dealers, as non-financial trades or
14 See, e.g., the definition of financial institution
in 31 CFR 103.11(n), which includes ‘‘each agent,
agency, branch or office within the United States of
any person doing business, whether or not on a
regular basis or as an organized business concern.
* * *’’
15 The reference to ‘‘calendar or tax year’’ is
intended to provide flexibility for dealers in
determining whether they have reached the $50,000
thresholds. In the case of a dealer whose tax year
is not the calendar year, this language is intended
to avoid causing such dealer to keep two sets of
records in order to determine if the threshold has
been met. However, a dealer must continue to use
whatever basis it initially chooses for determining
whether it has reached the $50,000 thresholds,
whether calendar year or tax year, unless it
experiences a change in its taxable year.
PO 00000
Frm 00019
Fmt 4700
Sfmt 4700
33707
businesses, must report transactions
involving currency in excess of $10,000
pursuant to 26 U.S.C. 6050I and 31 CFR
103.30.
This suggestion is not adopted in the
interim final rule because it is not
consistent with the risk-based approach
that is taken in the rule. Imposition of
a high-dollar transaction threshold
would exempt dealers that conduct
large volumes of business on an annual
basis, even dealers engaging in
numerous transactions at the $5,000 to
$10,000 level, while covering a dealer
that conducts a far lower annual volume
of business that engages in as little as
one transaction over $10,000. Although
ensuring compliance with the currency
reporting requirement found at 31 CFR
103.30 is an important part of a dealer’s
anti-money laundering program, the
requirement to implement an antimoney laundering program is intended
to accomplish the broader purpose of
requiring a dealer to assess money
laundering risks posed by its business
model, and to take reasonable steps to
lessen such risks. For these reasons,
FinCEN believes that the $50,000
annual volume threshold for both sales
and purchases best ensures that those
dealers whose businesses pose the most
significant risk of abuse for money
laundering and terrorist financing
(whether through transaction size or
volume) are covered by the rule.
The NPRM contained two exceptions
from the definition of dealer. The first
exception applied to retailers, other
than retailers that during the prior
calendar or tax year, purchased more
than $50,000 in jewels, precious metals,
precious stones, or jewelry from persons
other than dealers. The second
exception applied to a person who
engages in transactions in jewels,
precious metals, or precious stones for
purposes of fabricating finished goods
that contain minor amounts of, or the
value of which is not significantly
attributable to, such precious metals,
precious stones, or jewels. The
substance of these exceptions has been
retained in the interim final rule, but the
exceptions have been re-structured and
additional exceptions have been added.
The interim final rule contains four
exceptions, two relating to the
definition of ‘‘dealer,’’ and two relating
to the meaning of the terms ‘‘purchase’’
and ‘‘sale.’’
Section 103.140(a)(2)(ii) provides two
exceptions from the definition of
‘‘dealer.’’ As described in Part III.B.1,
above, the first exception provides that
a retailer is a dealer only if it purchased
more than $50,000 in covered goods
from persons other than dealers or other
retailers (e.g., from the general public or
E:\FR\FM\09JNR1.SGM
09JNR1
33708
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
from foreign persons not subject to the
interim final rule) during the prior
calendar or tax year. A retailer that is a
dealer pursuant to this provision,
however, would only have to address in
its anti-money laundering program
purchases from persons other than
dealers and other retailers. As discussed
further below, the definition of
‘‘retailer’’ has been taken out of the
exception itself, and a separate
definition of ‘‘retailer’’ has been added
to the interim final rule.
The second exception from the
definition of ‘‘dealer,’’ found at section
103.140(a)(2)(ii)(B) has been added to
the rule to clarify that a person licensed
or authorized under the laws of any
State (or local government) to do
business as a pawnbroker is not a dealer
for purposes of the rule with respect to
pawn transactions, including the sale of
pawn loan collateral.
As discussed in part III.B.3. above,
section 103.140(a)(2)(iii) provides an
exception from the meaning of the terms
‘‘purchase’’ and ‘‘sale’’ as used in
section 103.140(a)(2)(i) of the interim
final rule for trade-in transactions.
Section 103.140(a)(2)(iv) provides an
exception from the definitions of
‘‘purchase’’ and ‘‘sale’’ for purposes of
both the definition of ‘‘dealer’’ in
section 103.140(a)(2)(i) and the antimoney laundering program requirement
in section 103.140(b), for transactions
relating to industrial equipment
containing covered goods. As discussed
in Part IV.A.1. above, section
103.140(a)(1)(ii)(B) of the NPRM
provided that a person engaged in
transactions in jewels, precious metals,
or precious stones for purposes of
fabricating finished goods containing
minor amounts of, or the value of which
is not significantly attributable to, the
precious metals, precious stones, or
jewels, was not a ‘‘dealer.’’ The
exception was intended to exempt the
purchase and sale of precious metals,
precious stones, or jewels in the context
of buying, selling, and fabricating
finished goods, including industrial
products, that contain small amounts of
jewels, precious metals, or precious
stones, in order to ensure that the antimoney laundering program requirement
is imposed on those sectors of the
industry that pose the most significant
risk of money laundering and terrorist
financing.
FinCEN has concluded that the
purchase of jewels, precious metals, and
precious stones for use in industrial
products, and the purchase or sale of
such products, appears to be less
susceptible to money laundering and
terrorist financing risks, due to the fact
that precious metals, precious stones,
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
and jewels typically do not constitute a
significant component of the value of an
industrial product. Accordingly, the
interim final rule contains a new
exception from the terms ‘‘purchase’’
and ‘‘sale’’ (section 103.140(a)(2)(iv)) for
the purchase of precious metals,
precious stones, or jewels that are
incorporated into machinery or
equipment used for industrial purposes,
and the purchase or sale of such
machinery or equipment.
Commenters requested clarification as
to whether ‘‘toll-refining’’ constitutes
the purchase and sale of precious metals
for purposes of the definition. As
described by commenters, toll-refining
is a transaction in which a company that
uses precious metal in a process that
results in scrap metal sends the scrap
metal to a refiner that, for a fee, extracts
the precious metal from the scrap and
returns the precious metal to the
company.
Commenters argued that because this
type of transaction is not the exchange
of metal for cash or other monetary
consideration, but rather the payment of
a fee in exchange for the performance of
the process of extracting precious metal
from scrap metal, it should not be
deemed the purchase and sale’’ of
precious metals. FinCEN agrees.
Although we believe it is unnecessary
for the interim final rule to include a
specific exemption for toll-refining, we
clarify that toll-refining, as described
above, does not constitute a purchase or
sale of precious metals for purposes of
this interim final rule.
Finally, a few commenters requested
exemptive or other relief for specific
types of businesses that fall within the
definition of dealer, arguing that these
businesses pose a low risk of money
laundering and terrorist financing.
Although it is not appropriate to resolve
such fact-specific individualized
situations in the context of a general
rulemaking, persons wishing to obtain
an administrative ruling relating to their
specific situation may submit a request
pursuant to 31 CFR 103.81. In addition,
FinCEN has the authority to make
exceptions to, or grant exemptions from,
the requirements of 31 CFR part 103
pursuant to 31 U.S.C. 5318(a)(6) and 31
CFR 103.55.
Section 103.140(a)(2)(v) provides that,
for purposes of applying the $50,000
definitional thresholds contained in the
rule to the purchase and sale of finished
goods, only the value of the jewels,
precious metals, or precious stones
contained in, or attached to, such goods
must be taken into account.
PO 00000
Frm 00020
Fmt 4700
Sfmt 4700
3. 31 CFR 103.140(a)(3)—Definition of
‘‘Jewel’’
Section 103.140(a)(3) defines the term
‘‘jewel’’ to include organic substances
that have a market-recognized gem level
of quality, beauty, and rarity. FinCEN
did not receive comments on the
definition of ‘‘jewel’’ contained in the
NPRM, and has retained the definition
in the interim final rule.
4. 31 CFR 103.140(a)(4)—Definition of
‘‘Precious Metal’’
Section 103.140 (a)(4) defines
‘‘precious metal’’ to include gold, silver,
and the platinum group of metals, at a
level of purity of 500 parts per 1000 (50
percent) or greater, singly or in any
combination. The definition is
unchanged from the NPRM. Although
one commenter suggested that the
purity threshold should be lowered so
that the rule would apply to dealers in
10 carat gold, another commented
favorably on the purity threshold
because it provides an approach that is
tailored to cover higher-risk products. In
order to balance the burdens associated
with the rule against the lower risk of
money laundering and terrorist
financing with products of a lower
purity threshold, the interim final rule
retains the 50 percent purity threshold.
However, FinCEN will continue to
review whether it is appropriate to
extend the anti-money laundering
program to dealers that purchase and
sell lower grade metals.
5. 31 CFR 103.140(a)(5)—Definition of
‘‘Precious Stone’’
The term ‘‘precious stone’’ is defined
in section 103.140(a)(5) to include
substances that have a marketrecognized gem level of quality, beauty,
and rarity. Therefore, precious stones of
industrial quality are not included in
the definition of precious stones. In
response to a comment, the word
‘‘inorganic’’ has been removed from the
definition. However, this change is not
intended to alter the substantive effect
of the definition. In addition, tanzanite
has been added to the list of substances
that will be treated as precious stones.
Because it shares the characteristics of
market-recognized, gem level quality,
beauty, and rarity with other minerals in
that category, and because of its
significant market value, tanzanite can
be used for money laundering and
terrorist financing. Therefore, a person
engaged as a business in the purchase
and sale of tanzanite is covered by the
anti-money laundering program
requirement, to the extent that all of the
other thresholds of the rule are met.
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
6. 31 CFR 103.140(a)(6)—Definition of
‘‘Person’’
Section 103.140(a)(6) provides that for
purposes of the interim final rule, the
term ‘‘person’’ has the same meaning as
provided in 31 CFR 103.11(z).
7. 31 CFR 103.140(a)(7)—Definition of
‘‘Retailer’’
The retailer exception proposed in
section 103.140(a)(1)(ii)(A) of the NPRM
defined a retailer as ‘‘a person engaged
in the business of sales to the public of
jewels, precious metals, or precious
stones, or jewelry composed thereof.’’ In
the interim final rule, a separate section
containing the definition of ‘‘retailer’’
has been created, and language has been
added to the definition to clarify the
scope of the definition. New section
103.140(a)(7) provides that a retailer is
a U.S. person engaged in the business of
sales primarily to the public of covered
goods. The purpose of this revision is to
clarify that the retailer exception found
at section 103.140(a)(1)(ii)(A) of the
interim final rule applies to those
dealers whose sales are made primarily
to the public, so that the rule does not
apply to a dealer whose sales to persons
other than members of the public
constitute a minimal portion of the
dealer’s overall sales. Thus, a dealer
whose business is primarily with the
public would not be disqualified from
the retailer exception solely because of
occasional sales to a dealer or retailer.
However, a dealer whose business is not
primarily with the public, but with
other persons such as dealers, would
not be treated as a retailer under the
interim final rule.
B. 103.140(b)—Anti-Money Laundering
Program Requirement
Section 103.140(b) of the interim final
rule continues to require that each
dealer develop and implement an antimoney 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
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
remains responsible for ensuring
compliance with these requirements. To
the extent that a retailer’s purchases
from persons other than dealers and
other retailers exceeds the $50,000
threshold contained in paragraph
(a)(2)(ii)(A), the anti-money laundering
compliance program required of the
retailer need only address such
purchases.
Although ensuring compliance with
the requirement to report transactions
involving currency in excess of $10,000
pursuant to 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
commenters expressed concern about
the standard to which they would be
held under the ‘‘reasonably designed’’
language. These commenters 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. Dealers able to
demonstrate that they have checked
these sources of information,
commenters asserted, should be deemed
in compliance with the anti-money
laundering program requirement. In
addition, commenters 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.
Commenters suggested that FinCEN
provide more information on the
methods by which people attempt to
finance terrorism through transactions
with dealers. Finally, some commenters
suggested that FinCEN develop a
written program that could be used by
dealers.
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
PO 00000
Frm 00021
Fmt 4700
Sfmt 4700
33709
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.
Finally, in response to comments,
FinCEN wishes to clarify that a dealer’s
anti-money laundering program need
not be made available for inspection at
each of the dealer’s locations. It is
sufficient that a dealer maintain a copy
of its written program at one location
within the United States, for example
the dealer’s headquarters or the location
of the person designated as the dealer’s
compliance officer.
C. 103.140(c)—Minimum Requirements
Section 103.140(c) continues to set
forth the minimum requirements of a
dealer’s anti-money laundering
program.
1. 31 CFR 103.41(c)(1)—Policies,
Procedures and Internal Controls
Section 103.140(c)(1) provides that a
dealer’s anti-money laundering program
must incorporate policies, procedures,
and internal controls based upon the
dealer’s assessment of the money
laundering and terrorist financing risks
associated with its line(s) of business.
Policies, procedures, and internal
controls must also include provisions
for complying with applicable BSA
requirements. Thus, a dealer’s program
must address its obligation to report on
Form 8300 the receipt of cash or certain
non-cash instruments totaling more than
$10,000 in one transaction or in two or
more related transactions. If dealers
E:\FR\FM\09JNR1.SGM
09JNR1
33710
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
become subject to additional BSA
requirements, their anti-money
laundering programs will need to be
updated accordingly.
Section 103.140(c)(1)(i) provides that,
for purposes of making the risk
assessment required under section
103.140(c)(1), a dealer must consider all
relevant factors, including the specific
factors contained in the rule. The
specific risk factors listed in the rule
require a dealer to (1) assess the money
laundering and terrorist financing risks
associated with its products, customers,
suppliers, distribution channels, and
geographic locations, (2) take into
consideration the extent to which the
dealer engages in transactions other
than with established customers, or
sources of supply, or other dealers
subject to this rule, and (3) analyze the
extent to which it engages in
transactions for which payment or
account reconciliation is routed to or
from accounts located in jurisdictions
that have been identified as vulnerable
to terrorism or money laundering.16 The
rule is intended to give a dealer the
flexibility to design its program to meet
the specific money laundering and
terrorist financing risks presented by the
dealer’s business, based on the dealer’s
assessment of those risks. Language has
been added to the second risk
assessment factor to require dealers to
take into account the potential risks
involved in engaging in transactions
with persons who are not subject to this
rule.
Section 103.140(c)(1)(ii) provides that
a dealer’s policies, procedures, and
internal controls must be reasonably
designed to detect transactions that may
involve use of the dealer to facilitate
money laundering or terrorist financing.
In addition, a dealer’s program must
incorporate procedures for making
reasonable inquiries to determine
whether a transaction may involve
money laundering or terrorist financing.
A dealer that identifies indicators that a
transaction may involve money
laundering or terrorist financing should
take reasonable steps to determine
whether its suspicions are justified and
respond accordingly, including refusing
to enter into, or complete, a transaction
that appears designed to further illegal
16 Examples of designations to this effect include
the Department of State’s designation of a
jurisdiction as a sponsor of international terrorism
under 22 U.S.C. 2371 (see https://www.state.gov/s/
ct/rls/pgtrpt/), the FATF’s designation of
jurisdictions that are non-cooperative with
international anti-money laundering principles (see
https://www.fatf-gafi.org/NCCT_en.htm), or the
Secretary of the Treasury’s designation, pursuant to
31 U.S.C. 5318A of jurisdictions warranting special
measures due to money laundering concerns
(https://www.fincen.gov).
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
activity.17 The interim final rule
continues to list several examples of
factors that may indicate that a
transaction is designed to involve use of
the dealer to facilitate money laundering
or terrorist financing.
The rule provides flexibility to dealers
in developing procedures for making
reasonable inquiries under section
103.140(c)(1)(ii). For example, a dealer
may appropriately determine that
reasonable inquiry with respect to a
transaction conducted by a new
customer or supplier involves
considerable scrutiny, including
verification of customer identity, or the
purpose of a transaction. In contrast,
reasonable inquiry with respect to an
established customer may not involve
additional steps beyond those normally
required to complete the transaction,
unless the transaction appears
suspicious or unusual to the dealer. As
explained further below, the
determination whether to refuse to enter
into, or to terminate, a transaction lies
with the dealer. In addition, dealers are
encouraged to adopt procedures for
voluntarily filing Suspicious Activity
Reports with FinCEN and for reporting
suspected terrorist activities to FinCEN
using its Financial Institutions Hotline
(1–866–556–3974).
FinCEN has not at this time proposed
a suspicious activity reporting rule for
dealers. However, given the importance
of ensuring that information relevant to
the use of covered products for financial
crime or the financing of terrorism is
provided to law enforcement, we are
considering proposing a suspicious
activity reporting rule in the future. We
will work closely with law enforcement
and the industry as we consider
whether such a rule is appropriate.
The list of factors contained in the
rule is intended to provide examples of
what may indicate illegal activity, and
is by no means exhaustive.
Determinations as to whether a
transaction should be refused or
terminated must be based on the facts
and circumstances relating to the
transaction and the dealer’s knowledge
17 18 U.S.C. 1956 and 1957 make it a crime for
any person, including an individual or company, to
engage knowingly in a financial transaction with
the proceeds from any of a long list of crimes or
types of ‘‘specific unlawful activity.’’ Although the
standard of knowledge required is ‘‘actual
knowledge,’’ actual knowledge includes ‘‘willful
blindness.’’ Thus, a person could be deemed to
have knowledge that proceeds were derived from
illegal activity if he or she demonstrated ‘‘willful
blindness’’ to ‘‘red flags’’ that indicated illegality.
See, e.g., U.S. v. Finkelstein, 229 F.3d 90 (2nd Cir.
2000) (owner of jewelry/precious metals business
convicted for participation in money laundering
scheme; sentence enhancement based on willful
blindness regarding receipt of funds derived from
narcotics trafficking).
PO 00000
Frm 00022
Fmt 4700
Sfmt 4700
of the customer or supplier in question.
It is not intended that dealers
automatically refuse to engage in or
terminate transactions simply because
such transactions involve one or more of
the factors listed in the rule. Rather, it
is intended that dealers will develop
procedures for identifying transactions
involving potentially illegal activity,
and procedures setting forth the actions
that a dealer will take in response to
such transactions.
The factors in the interim final rule
are identical to those contained in the
proposed rule, with one exception. One
commenter suggested that the factor
contained in section 103.140(c)(1)(ii)(C),
relating to an attempt by a customer to
maintain a high degree of secrecy with
respect to a transaction, should be
eliminated because in an industry with
security concerns stemming from the
high dollar value of jewels, precious
metals, and precious stones,
transactions are typically characterized
by secrecy. FinCEN wishes to clarify
that this factor is not intended to apply
to the level of concern for personal
security or the security of valuable
merchandise that is customary in the
normal course of business for this
industry. Rather, it is intended to apply
to transactions in which a customer
attempts to maintain a level of secrecy
that is unusual in light of the level of
secrecy that is normal and customary for
the industry, or the business of the
particular dealer, or the type of
transaction. In response to this
comment, section 103.140(c)(1)(ii)(C)
has been revised to apply to attempts by
a customer or supplier to maintain ‘‘an
unusual degree of secrecy’’ with respect
to the transaction.
2. 31 CFR 103.41(c)(2)—Compliance
Officer
Section 103.140(c)(2) continues to
require that a dealer designate a
compliance officer to be responsible for
administering the anti-money
laundering program. The person (or
group of persons) should be competent
and knowledgeable regarding BSA
requirements and money laundering
issues and risks, and should be
empowered with full responsibility and
authority to develop and enforce
appropriate policies and procedures
throughout the dealer’s business. The
role of the compliance officer is to
ensure that (1) the program is being
implemented effectively, (2) the
program is updated as necessary, and (3)
appropriate persons are trained in
accordance with the rule. The
compliance officer also provides an
available resource for employees with
questions regarding BSA requirements.
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
Whether the compliance officer is
dedicated full time to BSA compliance
would depend upon the size and
complexity of the dealer’s business and
the risks posed. In all cases, the person
responsible for the supervision of the
overall program must be an officer or
employee of the dealer.
3. 31 CFR 103.41(c)(3)—Education and
Training
Section 103.140(c)(3) continues to
require that a dealer provide for training
of appropriate persons. Employees of
the dealer must be trained in BSA
requirements relevant to their functions,
including recognizing possible signs of
money laundering and terrorist
financing. The level, frequency, and
focus of the training should be
determined by the responsibilities of the
employees, and any factors the dealer
has identified in its risk assessment.18
Employees should receive periodic
updates and refreshers regarding the
anti-money laundering program.
4. 31 CFR 103.41(c)(4)—Independent
Testing
Section 103.140(c)(4) continues to
require that a dealer conduct periodic
testing of its program, to ensure that the
program is functioning as designed.
Such testing should be accomplished by
personnel knowledgeable regarding BSA
requirements. The frequency of such a
review will vary by dealer, depending
upon factors such as the size and
complexity of the dealer, the nature of
its business, and any relevant factors
identified by the dealer in the course of
conducting its risk assessment.
Testing may be accomplished either
by dealer employees or unaffiliated
service providers so long as those same
individuals are not involved in the
operation or oversight of the program.
One commenter expressed concern that
the independent testing requirement
would place an unfair burden on
smaller businesses, requiring them to
bear the cost of hiring an outside auditor
because their entire staff would be
directly involved in the operation or
oversight of the program. Under the
terms of the rule, however, the required
independent review may be performed
by an employee of the dealer (or a coowner), so long as the reviewer is not
the designated compliance officer or
18 Appropriate topics for an anti-money
laundering program include, but are not limited to:
BSA requirements, a description of money
laundering, how money laundering is carried out,
what types of activities and transactions should
raise concerns, what steps should be followed when
suspicions arise, and the need to review OFAC and
other government lists.
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
involved in the operation of the
program.
D. 103.41(d)—Effective Date
The NPRM proposed that a dealer
must develop and implement an antimoney laundering program within 90
days after publication of the interim
final rule, or not later than 90 days after
the date a person becomes a dealer for
purposes of the rule. Several
commenters requested an extension of
the effective date to at least 180 days
after issuance of the final rule. In view
of the diversity of the businesses that
constitute dealers in covered goods,
coupled with the fact that dealers are
not currently regulated as financial
institutions, FinCEN agrees that a longer
delayed applicability date is warranted.
The interim final rule (section
103.140(d)) provides that the a dealer is
required to develop and implement an
anti-money laundering program not
later than January 1, 2006, or six months
after the date a dealer becomes subject
to the provisions of the interim final
rule.
V. Frequently Asked Questions
FinCEN is providing the following
questions and answers to assist dealers
in precious metals, precious stones, and
jewels in understanding the scope of
this interim final rule.
1. Why is FinCEN issuing a regulation
requiring dealers in precious metals,
stones, and jewels to establish an antimoney laundering program?
As with all of FinCEN’s regulations
requiring the establishment of an antimoney laundering program, FinCEN is
issuing this regulation 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. The characteristics of jewels,
precious metals, and precious stones
that make them valuable also make
them potentially vulnerable to those
seeking to launder money. This
regulation is a key step in ensuring that
the Bank Secrecy Act (BSA) is applied
appropriately to these businesses.
Recognizing the need for a more
comprehensive anti-money laundering
regime, Congress passed, and the
President signed into the law, the USA
Patriot Act, which, among other things,
requires that all persons defined as
financial institutions for BSA purposes
establish anti-money laundering
programs. The Act further directs the
Secretary of the Treasury to prescribe
through regulation minimum standards
PO 00000
Frm 00023
Fmt 4700
Sfmt 4700
33711
for such programs. A dealer in jewels,
precious metals, or precious stones is
defined as a ‘‘financial institution’’
under the BSA, and this regulation
fulfills that mandate of the USA Patriot
Act.
2. Why is this being issued as an
‘‘Interim Final’’ rule? Will it change?
FinCEN is issuing this rule as an
interim final rule to give us the
flexibility to more narrowly tailor
certain aspects of the rule in response to
our request within this rule for
additional public comment on four
discrete issues, while still ensuring that
dealers immediately begin to develop
anti-money laundering programs.
Through the course of the rulemaking
process and in developing a final rule,
FinCEN has identified several important
issues that would affect the scope of the
regulation but on which it received little
or no public comment. Thus, to ensure
an effective and appropriately focused
regulation, FinCEN seeks public
comment regarding the following issues
(which are discussed more fully under
the heading ‘‘Request for Comments’’):
(1) Should silver be removed from the
definition of a ‘‘precious metal?’’
(2) Should ‘‘precious stones’’ and
‘‘jewels’’ be defined more specifically,
for example, by reference to a minimum
price per carat, and if so, how?
(3) 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?
(4) In addition, FinCEN is again
requesting comments on the potential
impact of the rule on small businesses
(including manufacturers, dealers,
wholesalers, distributors, and retailers)
that may be ‘‘dealers’’ subject to the
provisions of the rule.
FinCEN is soliciting comments until
July 25, 2005. After the end of the
comment period, FinCEN will review all
comments received and determine
whether any further changes should be
made in the final rule. At this time,
FinCEN will only consider comments
addressing the issues outlined above,
and FinCEN anticipates that changes, if
any, will be made before January 1,
2006, the date that dealers are required
to implement their anti-money
laundering programs.
Dealers covered by the interim final
rule are expected to begin developing
anti-money laundering programs in
accordance with the terms of this
interim final rule. Any changes that
FinCEN makes to the rule would likely
reduce compliance burdens on dealers.
3. Who is covered by this regulation?
E:\FR\FM\09JNR1.SGM
09JNR1
33712
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
The interim final rule applies to
‘‘dealers’’ in ‘‘covered goods.’’ ‘‘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 percent or more of their value
from jewels, precious metals, or
precious stones contained in or attached
to such finished goods.
FinCEN has defined the term ‘‘dealer’’
as it is commonly understood: A person
who both purchases and sells covered
goods. Additionally, FinCEN has
included dollar thresholds in the
definition of dealer: A person must have
purchased at least $50,000, and sold at
least $50,000, worth of covered goods
during the preceding year. The dollar
threshold is intended to ensure that the
rule only applies to persons engaged in
the business of buying and selling a
significant amount of these items, rather
than to small businesses, occasional
‘‘dealers,’’ and persons dealing in such
items for hobby purposes.
Significantly, the interim rule
distinguishes between a dealer and
‘‘retailer’’ of covered goods. FinCEN has
defined the term retailer as a person
engaged within the U.S. in sales of
covered goods, primarily to the public.
FinCEN believes that retailers, as
defined, do not pose the same level of
risk for money laundering as do dealers.
Thus, most retailers will not be required
to establish anti-money laundering
programs.
So long as retailers generally purchase
their covered goods from U.S.-based
dealers and other retailers, the retailers
will not be required to establish antimoney laundering programs. Thus,
retailers that, for example, purchase
excess inventory from other retailers
from time to time would still be covered
by the retailer exemption.
Under the interim final rule, a retailer
that purchases up to $50,000 of covered
goods from persons other than U.S.based dealers or retailers is covered by
the retailer exemption. However, if
during the prior tax or calendar year a
retailer both purchased more than
$50,000 of covered goods from persons
other than U.S. dealers or retailers (such
as non-U.S. dealers and members of the
general public), and sold more than
$50,000 of covered goods, then the
retailer would be deemed to be a
‘‘dealer’’ and would have to develop
and implement an anti-money
laundering program. Under such
circumstances, the anti-money
laundering program would only be
required to address purchases from nonU.S. dealers (including members of the
general public) for the following year;
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
the program would not be required to
address sales.
Finally, businesses licensed or
registered as pawnbrokers under State
or municipal law are specifically
exempted from the definition of
‘‘dealer’’ for purposes of the interim
final rule. Thus, a pawnbroker is not
required to establish an anti-money
laundering program under this rule as
long as the pawnbroker is properly
licensed or registered with the
appropriate State or local government
and is engaged in pawn transactions.
3(a) Is the purchase and sale of
jewelry and other finished goods
containing jewels, precious metals, or
precious stones subject to the rule as
well?
The purchase and sale of jewelry and
other finished goods containing jewels,
precious metals or precious stones
would subject a person to the rule, only
if such jewelry or other finished goods
derive at least 50 percent of their value
from the jewels, precious metals or
precious stones they contain. The
purpose of this distinction is to ensure
that FinCEN does not regulate a wide
variety of goods whose value is not
primarily derived from the jewels,
precious metals or precious stones they
contain.
3(b) How do I determine whether I
have purchased and sold $50,000 worth
of jewels, precious metals or precious
stones?
The $50,000 threshold is based solely
on the value of jewels, precious metals,
and precious stones that were
purchased and sold during the prior
year. For example, if a business
purchases and sells jewelry, at least 50
percent of the value of which is derived
from jewels, precious metals, or
precious stones, the $50,000 threshold
is calculated based on the value of the
jewels, precious metals, and precious
stones contained in such jewelry, not on
the overall value of the jewelry. This
distinction ensures that the focus of the
rule remains on jewels, precious metals,
and precious stones, not on value due
to other reasons.
3(c) How do I determine whether the
businesses from which I purchase my
covered goods are ‘‘dealers’’ or other
‘‘retailers’’ for purposes of the interim
final rule?
FinCEN expects persons engaged in
the business of buying and selling
covered goods to take reasonable steps
to determine whether a supplier is
covered by this interim final rule or
whether the supplier is eligible for the
retailer exemption. Reasonable steps
will depend on the nature of the
relationship between the supplier and
the person purchasing the items.
PO 00000
Frm 00024
Fmt 4700
Sfmt 4700
FinCEN understands that the jewel,
precious metal, and precious stone
industry is one often characterized by
personal relationships. Accordingly, in
most cases, FinCEN anticipates that the
verbal or written representations of the
supplier will be sufficient. However, in
other cases, additional due diligence
will be required.
3(d) In 2005, I will purchase more
than $50,000 in jewels, precious metals,
and precious stones that I use to
manufacture inexpensive jewelry that I
sell to retail stores. Will I be required to
have an anti-money laundering program
in 2006?
If the jewels, precious metals, and
precious stones in your jewelry account
for 50 percent or more of the selling
price of the jewelry, and the value of the
jewels, precious metals and precious
stones contained in the jewelry you sell
exceeds $50,000, you will be required to
have an anti-money laundering
program.
If only some of your jewelry derives
50 percent or more of its selling price
(the price at which you sell it to the
retail stores, not the price that the retail
stores will charge their customers) from
jewels, precious metals, or precious
stones, you only need to count the value
of the jewels, precious metals, or
precious stones in that jewelry towards
your $50,000 ‘‘sales’’ threshold.
The focus of this rule is on the jewels,
precious metals, and precious stones—
not on the jewelry or other finished
items. Therefore, only jewelry (and
other finished goods) that derive at least
50 percent of their value from the
jewels, precious metals, and precious
stones are subject to this rule.
The anti-money laundering program
should focus on realistic moneylaundering risks, based on the
experience of the industry and
government. FinCEN believes that these
thresholds help to better focus the rule
on those risks, and will be periodically
issuing information to the industry
regarding its knowledge and experience
with money laundering risks to this
industry.
3(e) I sell precious stones primarily to
the public, but my supplier is a foreign
company. Am I required to establish an
anti-money laundering program?
If, during 2005, you purchase more
than $50,000 in precious stones from
your foreign supplier, and sell more
than $50,000 in precious stones, you
must develop and implement an antimoney laundering program by January
1, 2006. But, because you are a retailer,
your anti-money laundering program
would only need to address the money
laundering risks associated with the
purchases from your foreign supplier.
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
3(f) Are trade-in transactions
‘‘purchases’’ under this rule?
Not for the purpose of defining who
is a dealer subject to the rule.19 FinCEN
has learned that it is quite common for
dealers and retailers in covered goods to
allow retail customers to trade-in
existing items for credit against the
purchase of a new item. Therefore, so
long as the value of the trade-in is
credited to the account of the customer,
and so long as a dealer or a retailer does
not provide funds to the customer in
exchange for the trade-in, these
transactions need not be taken into
account in determining the dollar value
of covered goods purchased.
The trade-in exception only applies
for purposes of determining who is a
‘‘dealer,’’ and not to the scope of the
anti-money laundering program
required of a dealer. Therefore, a dealer
that is not a retailer would be required
to evaluate the risks posed by trade-in
transactions in determining the
appropriate program requirements, as it
would with other transactions in
covered goods.
3(g) I am a retail jeweler who
sometimes buys jewelry from the
general public, which I re-sell in my
store. Am I required to have an antimoney laundering program?
You would be required to establish an
anti-money laundering program only if,
during the prior calendar or tax year:
(1) You sold jewelry containing more
than $50,000 in jewels, precious metals,
and precious stones, and the value of
the jewels, precious metals, and
precious stones comprised 50 percent or
more of the selling price of the jewelry;
and
(2) You purchased from the general
public jewelry containing more than
$50,000 in jewels, precious metals, and
precious stones, and the value of the
jewels, precious metals, and precious
stones comprised 50 percent or more of
the purchase price of the jewelry.
If you are required to have an antimoney laundering program, it would
only need to address the risks associated
with purchases from the public of
jewelry that derives 50 percent or more
of its value from jewels, precious stones,
or precious metals. It would not need to
address your sale of covered goods.
3(h) I purchase jewels, precious
stones, and precious metals for the
purpose of making and selling
decorative consumer goods. Do I have to
establish an anti-money laundering
program?
19 Trade-in transactions also are not considered
‘‘purchases’’ for purposes of determining whether a
retailer qualifies for the retailer exception to the
definition of ‘‘dealer.’’
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
If you sell your goods primarily to the
public, you are a retailer and do not
have to establish an anti-money
laundering program, unless during the
prior tax or calendar year:
(1) 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; and
(2) You purchased more than $50,000
in jewels, precious stones, and precious
metals from either foreign sources or the
general public, in which case your
program need address only those
sources of supply.
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) I am an antiques dealer who
purchases and sells items that contain
jewels, precious metals or precious
stones. Am I required to have an antimoney laundering program?
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
PO 00000
Frm 00025
Fmt 4700
Sfmt 4700
33713
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.
3(j) What about the purchase of
jewels, precious stones, or precious
metals for use in machinery or
equipment to be used for industrial
purposes? If a business manufactures
such equipment and sells it, is that
business subject to this rule?
No. The purchase of jewels, precious
metals, and precious stones for use in
industrial products, and the purchase or
sale of such products, appears to be less
susceptible to money laundering and
terrorist financing risks, due to the fact
that precious metals, precious stones,
and jewels typically do not constitute a
significant component of the value of an
industrial product. Therefore, persons
who engage in these activities are not
dealers to the extent of such activities
for purposes of the interim final rule.
4(a) What are the requirements for the
anti-money laundering program?
At a minimum, dealers must establish
an anti-money laundering program that
comprises the four elements set forth
below. FinCEN offers the following
guidance to assist dealers in the
development of their program. However,
this guidance does not supplant the
terms of the interim final rule, and the
steps required in any one particular case
will depend on the unique
circumstances of each business:
(1) Policies, procedures, and internal
controls, based on the dealer’s
assessment of the money laundering and
terrorist financing risk associated with
its business, that are reasonably
designed to enable the dealer to comply
with the applicable requirements of the
Bank Secrecy Act and to prevent the
dealer from being used for money
laundering or terrorist financing.
E:\FR\FM\09JNR1.SGM
09JNR1
33714
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
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
8300,20 (3) to file FinCEN Form TD F
90–22.1 21, and (4) to file FinCEN Form
105.22 All of these forms and their
instructions are available at https://
www.fincen.gov.
As the preamble to the rule describes,
you should assess the extent to which
your particular business is susceptible
to money laundering and terrorist
financing. For example, business you
conduct with other U.S. dealers subject
to the rule, and established customers or
suppliers, presents a relatively low level
of risk. On the other hand, business
conducted with parties located in, or
transactions for which payment or
account reconciliation is routed through
accounts located in, jurisdictions that
have been identified as particularly
vulnerable to money laundering or
terrorist financing, present a
significantly higher risk, and therefore
require greater diligence for detecting
transactions that may involve money
laundering or terrorist financing.
You should look at the FinCEN Web
site for information and updates on
money laundering and terrorist
financing risks, as they apply to your
industry.
You should talk with colleagues in
your industry and consult industry
trade associations to learn what the best
practices are among dealers.
Finally, you should consider all of the
things that you learn in the context of
your own business. FinCEN does not
expect that this program can prevent all
potential money laundering. What is
expected is that your business will take
prudent steps, with the same kind of
thought and care that you take to guard
against other crimes, such as theft or
fraud.
(2) A compliance officer who is
responsible for ensuring that the
program is implemented effectively.
The compliance officer is an
employee or group of employees who
will be responsible for the day-to-day
operation of your anti-money
laundering and counter-terrorist
financing program. This person will be
responsible on a day-to-day basis for
ensuring that the steps within your own
program are fully implemented. As
20 Reports relating to currency in excess of
$10,000 received in a trade or business, see 31 CFR
103.30.
21 Report of Foreign Bank and Financial
Accounts, see 31 CFR 103.24.
22 Report of International Transportation of
Currency or Monetary Instruments, see 31 CFR
103.23.
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
such, this person should be someone
with enough authority to achieve this
important task. The amount of time
devoted to these duties will depend on
the level of risk. A dealer is not required
to designate a person to serve on a fulltime basis as a compliance officer for
purposes of the interim final rule,
unless the level of risk or volume of
transactions warrants that. If your
business faces very high level of risk for
money laundering or terrorist financing,
then much will be required of this
person. If your exposure to these risks
is more moderate, then the level of effort
will be commensurate with that risk.
In all cases, however, the compliance
officer should be thoroughly familiar
with the operations of the business itself
and with all aspects of your anti-money
laundering program, as well as with the
requirements of the BSA and applicable
FinCEN forms, and should have read
carefully all applicable documents
issued by FinCEN or on FinCEN’s Web
page.
(3) Ongoing training of appropriate
persons concerning their
responsibilities under the program.
You should first consider what
training is appropriate for each
individual employee. Some employees
may require no training on the program,
because of their duties. Others may
require a great deal of training. The
training should be clearly understood by
your employees, and the compliance
officer should be available to answer all
questions posed by employees.
Remember that you should periodically
retrain your employees on your program
as may be necessary to ensure that they
understand and can fully implement
your program.
(4) Independent testing to monitor
and maintain an adequate program.
Some person or group of people who
are not working specifically for the
compliance officer on the anti-money
laundering program should be selected
to determine whether the program has
been appropriately implemented and is
working. For example, if the program
requires that a particular employee be
trained once every six months, then the
independent testing should determine
whether the training occurred and
whether the training was adequate.
Independent testing does not mean that
an outside party must be hired, although
outside parties may be utilized to
conduct the independent review. It does
mean, though, that the testing should be
a fair and unbiased appraisal of the
success in implementing the anti-money
laundering program, and the results of
the independent testing should be put
into writing, including any
recommendations for improvement.
PO 00000
Frm 00026
Fmt 4700
Sfmt 4700
Independent testers should carefully
consider all the decisions made by the
compliance officer, such as the level of
risk faced by the dealer for money
laundering and terrorist financing, the
frequency of training, etc. However, the
decision as to how best to establish and
operate the program is not a task for the
independent tester. The independent
testing is intended to confirm that the
program operates properly.
4(b) What resources are available to
help me establish an adequate program?
The preamble to the interim final rule,
including these FAQs, provides the
foundation for dealers to begin the
process of establishing their own antimoney laundering program. Going
forward, FinCEN will be issuing
additional guidance to this industry. All
such guidance will be posted in
FinCEN’s Web site, https://
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.
5(a) When do I have to implement my
anti-money laundering program?
As explained above, you first need to
determine whether, based on your
business activities during calendar year
2005, you are required to have an antimoney laundering program for 2006. (If
the calendar year is not the same as your
tax year, you may use your tax year
instead.) If you are required to have an
anti-money laundering program for
2006, it has to be implemented by
January 1, 2006, or six months after that
date you become subject to the antimoney laundering program requirement.
You should start developing your
program as soon as you can to be sure
you have it in place by that date.
5(b) I am not required to have an antimoney laundering program for 2006.
Will I need to have one in 2007?
If you are not required to establish an
anti-money laundering program based
on your 2005 business activities, you
will need to assess your 2006 business
activities to see if you have to establish
an anti-money laundering program in
2007, which would have to be in place
beginning six months after the date you
become subject to the anti-money
laundering program requirement. The
same assessment needs to be made
every year to determine if you will be
required to have an anti-money
laundering program the following year.
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
5(c) I am required to have an antimoney laundering program for 2006.
How long must it continue?
If you are required to establish an
anti-money laundering program for
2006, you must maintain it as long as
you continue to be a ‘‘dealer’’ under the
rule. If, based on your business
activities for 2006, you no longer satisfy
the criteria for being a dealer, you do
not need to continue your anti-money
laundering program in 2007. But you
will need to assess your business
activities in 2007 to see if you need to
re-implement your program in 2008.
6. Am I required to file Suspicious
Activity Reports as part of my antimoney laundering program?
This interim final rule requires
dealers to establish anti-money
laundering programs but does not
require a dealer to file reports of
suspicious activity with FinCEN.
However, dealers are strongly
encouraged to file suspicious activity
reports when they suspect the
transaction or the funds involved has/
have an illegal source or purpose or
when the transaction has no apparent
business or lawful purpose. Where
appropriate, dealers should immediately
contact law enforcement or FinCEN
through its hotline.
An integral part of the dealer’s antimoney laundering program is to assess
the risks and vulnerabilities of the
business and to develop policies,
procedures and internal controls to
address those risks. This should include
procedures and controls for identifying
‘‘suspicious’’ activities and dealing with
them accordingly. Procedures for
dealing with suspicious activities may
include guidance for when it is
appropriate in the context of the
business and the activity to (1) contact
local or Federal law enforcement
authorities, (2) file a suspicious activity
report with FinCEN (FinCEN
recommends using the Money Services
Business SAR Form TD F 90–22.56,
available at https://www.fincen.gov/
reg_bsaforms.html), (3) check the
‘‘suspicious activity’’ box on a Form
8300 filed on a particular transaction, or
(4) report suspected terrorist activities to
FinCEN using its Financial Institutions
Hotline (1–866–556–3974). Any dealer,
or any of its officers, directors,
employees or agents, that makes a
voluntary SAR filing shall not be liable
to any person under Federal, state or
local law, or under an arbitration
contract, for such a filing or for failing
to provide notice of the filing to the
subject of the filing.23 We also caution,
however, that a dealer, or any of its
23 31
officers, directors, employees, or agents,
that makes a voluntary SAR filing may
not notify any person involved in the
reported transaction that a SAR has
been filed.24
7. Do I still need to report cash
receipts of in excess of $10,000 on Form
8300?
Yes. Nothing in this interim final rule
affects the existing obligation of a
business to report cash receipts in
excess of $10,000 in one transaction, or
two or more related transactions, on
Form 8300. 31 CFR 103.30. In
particular, businesses excluded from
this interim final rule are not relieved of
their existing obligation to file Form
8300. To the contrary, FinCEN regards
the filing of Form 8300 as an essential
reporting component of the Bank
Secrecy Act, especially for this industry
that does not presently have a
suspicious activity reporting obligation.
VI. Request for Comments
FinCEN is issuing this rule as an
interim final rule in order to obtain
further public comment on the specific
issues addressed below. FinCEN
encourages comments on any or all of
these issues from all interested persons,
and particularly persons engaged in
commerce in finished goods containing
jewels, precious metals or precious
stones. Comments received on or before
July 25, 2005, will be carefully
considered in the development of the
final rule that will supercede this
interim final rule. The final rule will be
identical to the interim final rule, except
for any changes made in response to
comments received on the following
issues. Please refer to the instructions
under ADDRESSES for information on
how to submit comments.
A. Silver
Section 103.140(a)(4) of the interim
final rule defines the term ‘‘precious
metal’’ to include silver as proposed in
the NPRM. FinCEN did not receive any
comments on the inclusion of silver
within this definition. Nonetheless, we
are soliciting comments on whether the
proposed provision should be included
in a final rule. Although silver has
historically been considered to be a
precious metal, silver recently has been
trading at approximately $7.00 per
ounce. In contrast, platinum recently
has been trading at approximately
$860.00 per ounce, gold at
approximately $420.00 per ounce, and
palladium at approximately $185.00 per
ounce. Comments are specifically
requested on the following issues:
U.S.C. 5318(g)(3).
VerDate jul<14>2003
14:57 Jun 08, 2005
24 31
Jkt 205001
PO 00000
U.S.C. 5318(g)(2)(A).
Frm 00027
Fmt 4700
Sfmt 4700
33715
1. Should silver continue to be
defined as a ‘‘precious metal’’ for
purposes of the final rule?
2. The inclusion of silver in the
interim final rule, taken together with
the applicability of the interim final rule
to dealers in finished goods that derive
50 percent or more of their value from
silver (see below), requires dealers in
silver to develop and implement antimoney laundering programs (assuming
that the applicable purchase and sale
thresholds are satisfied). Should
finished goods containing silver be
covered by the final rule? What types of
finished goods containing silver are
likely to be covered by the final rule in
light of the definitional thresholds for
precious metal and finished goods
contained in the interim final rule?
What types of finished goods (for
example, brazing alloys and medical
products) should not be covered by a
final rule? What percentage of the sales
price of various types of finished goods
containing silver is attributable to the
silver contained in the good?
Commenters are specifically requested
to consider the potential impact of the
interim final rule on persons and
businesses that manufacture
‘‘inexpensive’’ jewelry and other items
containing silver intended for retail sale
to the public, as well as the impact on
wholesalers and distributors of such
goods that purchase and sell them in the
course of commerce, and on dealers in
silver alloys used for medical purposes.
Comments are also specifically
requested on the extent to which
wholesalers, distributors, and retailers
of such goods will know, in the ordinary
course of business, whether they are
dealing in goods that derive 50 percent
or more of their value from silver.
3. Should a final rule include an
overall minimum price-per-ounce level
at which silver (or any other metal)
would be deemed a ‘‘precious metal’’ for
purposes of the rule? Commenters
answering in the affirmative are
requested to recommend an appropriate
minimum price-per-ounce level and a
basis for that recommendation.
B. Jewels and Precious Stones
The definition of ‘‘precious metal’’
contains a finite list of metals and
incorporates an objective purity
threshold of 500 parts per 1000. In
contrast, the definitions of ‘‘jewel’’
(section 103.140(a)(2)) and ‘‘precious
stone’’ (section 103.140(a)(4)), while
listing commonly recognized jewels and
precious stones, also extend to any
substance that is of ‘‘gem quality
market-recognized beauty, rarity, and
value.’’ Would it be appropriate to add
to these definitions an overall minimum
E:\FR\FM\09JNR1.SGM
09JNR1
33716
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
price-per-carat or other objective
threshold indicating at which point the
jewel or stone would be deemed a
‘‘jewel’’ or ‘‘precious stone’’ for
purposes of a final rule? If so, what
would be an appropriate threshold and
why?
In view of the issues raised above,
FinCEN again solicits comments on the
potential impacts of the rule on small
businesses (including manufacturers,
dealers, wholesalers, distributors, and
retailers) that may be ‘‘dealers’’ subject
to the provisions of the rule.
C. Finished Goods
VII. Regulatory Flexibility Act
FinCEN certifies pursuant to the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), that this interim final rule will
not have a significant economic impact
on a substantial number of small
entities. Because the requirements of the
rule closely parallel the requirements
for anti-money laundering programs for
all financial institutions mandated by
section 352 of the USA Patriot Act, the
costs associated with the establishment
and implementation of anti-money
laundering programs are attributable to
the statute and not the rule. Moreover,
FinCEN believes that the definition of
‘‘dealer’’ in section 103.140(a)(2), which
excludes dealers who have less than
$50,000 in gross proceeds derived from
covered goods in a year, will exclude
most small dealers from the
requirements of the rule.
Furthermore, the rule provides for
substantial flexibility in how each
dealer may meet its requirements. This
flexibility is designed to account for
differences among dealers, including
size. In this regard, the costs associated
with developing and implementing an
anti-money laundering program will be
commensurate with the size of a dealer.
If a dealer is small, the burden to
comply with section 352 and the rule
should be similarly small.
In the NPRM, FinCEN requested
comments on the impact of the
proposed rule on small dealers. No
comments on this issue were received.
Section 103.140(a)(1)(iv) of the
interim final rule includes within the
definition of ‘‘covered goods,’’ finished
goods including, but not limited to,
jewelry, numismatic items, and
antiques, that derive 50 percent or more
of their value from the jewels, precious
metals, or precious stones contained or
attached to such finished goods. The 50
percent value threshold for finished
goods in these provisions is, in
principle, consistent with the 500 parts
per 1000 purity threshold for precious
metals in section 103.140(a)(4).
1. Is the 50 percent value threshold
described above an appropriate
threshold for finished goods containing
jewels, precious metals, or precious
stones, or to which jewels, precious
metals, or precious stones are attached?
If not, what would be an appropriate
threshold and why? Should jewelry be
subject to a threshold different from that
of other finished goods? If so, why, and
what would constitute an appropriate
definition of ‘‘jewelry’’?
2. Comments are also specifically
requested on whether, in the ordinary
course of business, wholesalers,
distributors, and retailers of finished
goods (including persons such as
antique dealers) will know, and if so
how (e.g., pursuant to Federal Trade
Commission requirements 25), whether
the goods they are dealing in derive 50
percent or more of their value from
jewels, precious metals, or precious
stones, and thereby cause them to be a
‘‘dealer’’ required to have an anti-money
laundering program under the terms of
the interim final rule.
D. Effects on Small Businesses
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.), FinCEN
certified that the preceding notice of
proposed rulemaking would not have a
significant economic impact on a
substantial number of small businesses
or other small entitites. Although
FinCEN specifically requested public
comments on the impact of the rule on
small dealers, no such comments were
received, and this interim rule repeats
that certification.
25 See ‘‘Guides for the Jewelry, Precious Metals,
and Pewter Industries’’ https://www.ftc.gov/bcp/
guides/jewel-gd.htm, effective April 10, 2001.
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
VIII. Paperwork Reduction Act
The collection of information
contained in the interim final rule has
been approved by the Office of
Management and Budget (OMB) in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)), and assigned OMB Control
Number 1506–0030. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a valid
control number assigned by OMB.
The collection of information is the
recordkeeping requirement in section
103.140(b). The information will be
used by Federal agencies to verify
compliance by dealers with the
provisions of sections 103.140. The
collection of information is mandatory.
Estimated Number of Recordkeepers:
20,000.
PO 00000
Frm 00028
Fmt 4700
Sfmt 4700
Estimated Average Annual Burden
Per Recordkeeper: The estimated
average burden associated with the
recordkeeping requirement in section
103.140(b) rule is 1 hour per
recordkeeper.
Estimated Total Annual
Recordkeeping Burden: 20,000 hours.
Comments concerning the accuracy of
this burden estimate should be directed
to the Financial Crimes Enforcement
Network, Department of the Treasury,
Post Office Box 39, Vienna, VA 22183,
and to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Office of Management and Budget, New
Executive Office Building, Room 3208,
Washington, DC 20503.
IX. Executive Order 12866
It has been determined that this rule
is not a significant regulatory action for
purposes of Executive Order 12866.
Accordingly, a regulatory impact
analysis is not required.
List of Subjects in 31 CFR Part 103
Administrative practice and
procedure, Authority delegations
(Government agencies), Banks and
banking, Currency, Investigations, Law
enforcement, Reporting and
recordkeeping requirements.
Authority and Issuance
For the reasons set forth in the
preamble, part 103 of title 31 of the Code
of Federal Regulations is amended as
follows:
I
PART 103—FINANCIAL
RECORDKEEPING AND REPORTING
OF CURRENCY AND FINANCIAL
TRANSACTIONS
1. The authority citation for part 103
continues to read as follows:
I
Authority: 12 U.S.C. 1829b and 1951–1959;
31 U.S.C. 5311–5314 and 5316–5332; title III,
secs. 311, 312, 313, 314, 326, 352, Pub. L.
107–56, 115 Stat. 307.
2. Subpart I of part 103 is amended by
adding new § 103.140 to read as follows:
I
§ 103.140 Anti-money laundering
programs for dealers in precious metals,
precious stones, or jewels.
(a) Definitions. For purposes of this
section:
(1) Covered goods means:
(i) Jewels (as defined in paragraph
(a)(3) of this section);
(ii) Precious metals (as defined in
paragraph (a)(4) of this section);
(iii) Precious stones (as defined in
paragraph (a)(5) of this section); and
(iv) Finished goods (including, but
not limited to, jewelry, numismatic
E:\FR\FM\09JNR1.SGM
09JNR1
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
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
finished goods;
(2) Dealer. (i) Except as provided in
paragraphs (a)(2)(ii) and (a)(2)(iii) of this
section, the term ‘‘dealer’’ means a
person engaged within the United States
as a business in the purchase and sale
of covered goods and who, during the
prior calendar or tax year:
(A) Purchased more than $50,000 in
covered goods; and
(B) Received more than $50,000 in
gross proceeds from the sale of covered
goods.
(ii) For purposes of this section, the
term ‘‘dealer’’ does not include:
(A) A retailer (as defined in paragraph
(a)(7) of this section), unless the retailer,
during the prior calendar or tax year,
purchased more than $50,000 in
covered goods from persons other than
dealers or other retailers (such as
members of the general public or foreign
sources of supply); or
(B) A person licensed or authorized
under the laws of any State (or political
subdivision thereof) to conduct business
as a pawnbroker, but only to the extent
such person is engaged in pawn
transactions (including the sale of pawn
loan collateral).
(iii) For purposes of paragraph (a)(2)
of this section, the terms ‘‘purchase’’
and ‘‘sale’’ do not include a retail
transaction in which a retailer or a
dealer accepts from a customer covered
goods, the value of which the retailer or
dealer credits to the account of the
customer, and the retailer or dealer does
not provide funds to the customer in
exchange for such covered goods.
(iv) For purposes of paragraphs (a)(2)
and (b) of this section, the terms
‘‘purchase’’ and ‘‘sale’’ 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, and the
purchase and sale of such machinery or
equipment.
(v) For purposes of applying the
$50,000 thresholds in paragraphs
(a)(2)(i) and (a)(2)(ii)(A) of this section
to finished goods defined in paragraph
(a)(1)(iv) of this section, only the value
of jewels, precious metals, or precious
stones contained in, or attached to, such
goods shall be taken into account.
(3) Jewel means an organic substance
with gem quality market-recognized
beauty, rarity, and value, and includes
pearl, amber, and coral.
(4) Precious metal means:
(i) Gold, iridium, osmium, palladium,
platinum, rhodium, ruthenium, or
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
silver, having a level of purity of 500 or
more parts per thousand; and
(ii) An alloy containing 500 or more
parts per thousand, in the aggregate, of
two or more of the metals listed in
paragraph (a)(3)(i) of this section.
(5) 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.
(6) Person shall have the same
meaning as provided in § 103.11(z).
(7) Retailer means a person engaged
within the United States in the business
of sales primarily to the public of
covered goods.
(b) Anti-money laundering program
requirement. (1) Each dealer shall
develop and implement a written antimoney laundering program reasonably
designed to prevent the dealer from
being used to facilitate money
laundering and the financing of terrorist
activities through the purchase and sale
of covered goods. The program must be
approved by senior management. A
dealer shall make its anti-money
laundering program available to the
Department of Treasury through FinCEN
or its designee upon request.
(2) To the extent that a retailer’s
purchases from persons other than
dealers and other retailers exceeds the
$50,000 threshold contained in
paragraph (a)(2)(ii)(A), the anti-money
laundering compliance program
required of the retailer under this
paragraph need only address such
purchases.
(c) Minimum requirements. At a
minimum, the anti-money laundering
program shall:
(1) Incorporate policies, procedures,
and internal controls based upon the
dealer’s assessment of the money
laundering and terrorist financing risks
associated with its line(s) of business.
Policies, procedures, and internal
controls developed and implemented by
a dealer under this section shall include
provisions for complying with the
applicable requirements of the Bank
Secrecy Act (31 U.S.C. 5311 et seq.), and
this part.
(i) For purposes of making the risk
assessment required by paragraph (c)(1)
of this section, a dealer shall take into
account all relevant factors including,
but not limited to:
(A) The type(s) of products the dealer
buys and sells, as well as the nature of
PO 00000
Frm 00029
Fmt 4700
Sfmt 4700
33717
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, or other dealers subject to this
rule; 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 under 22 U.S.C.
2371; 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 pursuant to 31 U.S.C. 5318A as
warranting special measures due to
money laundering concerns.
(ii) A dealer’s program shall
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 an unusual 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.
(2) Designate a compliance officer
who will be responsible for ensuring
that:
E:\FR\FM\09JNR1.SGM
09JNR1
33718
Federal Register / Vol. 70, No. 110 / Thursday, June 9, 2005 / Rules and Regulations
(i) The anti-money laundering
program is implemented effectively;
(ii) The anti-money laundering
program is updated as necessary to
reflect changes in the risk assessment,
requirements of this part, and further
guidance issued by the Department of
the Treasury; and
(iii) Appropriate personnel are trained
in accordance with paragraph (c)(3) of
this section.
(3) Provide for on-going education
and training of appropriate persons
concerning their responsibilities under
the program.
(4) Provide for independent testing to
monitor and maintain an adequate
program. The scope and frequency of
the testing shall be commensurate with
the risk assessment conducted by the
dealer in accordance with paragraph
(c)(1) of this section. Such testing may
be conducted by an officer or employee
of the dealer, so long as the tester is not
the person designated in paragraph
(c)(2) of this section or a person
involved in the operation of the
program.
(d) Effective date. A dealer must
develop and implement an anti-money
laundering program that complies with
the requirements of this section on or
before the later of January 1, 2006, or six
months after the date a dealer becomes
subject to the requirements of this
section.
Dated: June 3, 2005.
William J. Fox,
Director, Financial Crimes Enforcement
Network.
[FR Doc. 05–11431 Filed 6–8–05; 8:45 am]
BILLING CODE 4810–02–P
DEPARTMENT OF HOMELAND
SECURITY
Virginia. These special local regulations
are necessary to control vessel traffic
due to the confined nature of the
waterway and to provide for the safety
of life on navigable waters during the
event. The effect will be to restrict
general navigation in the regulated area
for the safety of spectators and vessels
transiting the event area.
ENFORCEMENT DATES: 33 CFR 100.519 is
effective from 5 a.m. July 27 to 4:30 p.m.
on July 29, 2005.
FOR FURTHER INFORMATION CONTACT:
Marine Events Coordinator,
Commander, Coast Guard Group Eastern
Shore, 3823 Main Street, Chincoteague,
VA 23336–1809, and (757) 336–2891.
SUPPLEMENTARY INFORMATION: The
Chincoteague Volunteer Fire Company,
Inc., will sponsor the Annual Pony
Swim on the waters of the Assateague
Channel, near Chincoteague, Virginia
from 5 a.m. to 4:30 p.m on 27 and 29
July, 2005. Approximately 75 ponies
will cross Assateague Channel from
Assateague Island to Chincoteague, VA.
In order to ensure the safety of
participants, spectators and transiting
vessels, 33 CFR 100.519 will be
enforced for the duration of the event.
Under provisions of 33 CFR 100.519,
vessels may not enter the regulated area
without permission from the Coast
Guard Patrol Commander. Because these
restrictions will be in effect for a limited
period, they should not result in a
significant disruption of maritime
traffic.
In addition to this notice, the
maritime community will be provided
extensive advance notification via the
Local Notice to Mariners, and marine
information broadcasts so mariners can
adjust their plans accordingly.
Dated: June 1, 2005.
Sally Brice-O’Hara,
Rear Admiral, U.S. Coast Guard, Commander,
Fifth Coast Guard District.
[FR Doc. 05–11443 Filed 6–8–05; 8:45 am]
Coast Guard
33 CFR Part 100
BILLING CODE 4910–15–P
[CGD05–05–060]
RIN 1625–AA08
Special Local Regulations for Marine
Events; Assateague Channel,
Chincoteague, VA
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
Coast Guard, DHS.
Notice of enforcement of
regulation.
33 CFR Part 100
The Coast Guard is
implementing the special local
regulations at 33 CFR 100.519 for the
2005 Annual Chincoteague Pony Swim,
a marine event to be held July 27 and
July 29, 2005, on the waters of
Assateague Channel at Chincoteague,
RIN 1625–AA08
AGENCY:
ACTION:
SUMMARY:
VerDate jul<14>2003
14:57 Jun 08, 2005
Jkt 205001
[CGD05–05–058]
Special Local Regulations for Marine
Events; Harborfest 2005, Norfolk
Harbor, Elizabeth River, Norfolk and
Portsmouth, VA
AGENCY:
PO 00000
Coast Guard, DHS.
Frm 00030
Fmt 4700
Sfmt 4700
Notice of enforcement of
regulation.
ACTION:
SUMMARY: The Coast Guard is
implementing the special local
regulations at 33 CFR 100.501 during
the ‘‘Harborfest 2005’’ to be held on
June 10, 11 and 12, 2005, on the waters
of the Elizabeth River between Norfolk
and Portsmouth, Virginia. These special
local regulations are necessary to
control vessel traffic due to the confined
nature of the waterway and expected
vessel congestion during the marine
event. This action is necessary to
provide for the safety of life on
navigable waters before, during and
after the event. The effect will be to
restrict general navigation in the
regulated area for the safety of event
participants, spectators and other
vessels transiting the event area.
ENFORCEMENT DATES: 33 CFR 100.501
will be effective from 2 p.m. on June 10,
2005 to 4 p.m. on June 12, 2005.
FOR FURTHER INFORMATION CONTACT:
Senior Chief Michael Bowling, Marine
Events Coordinator, Commander, Coast
Guard Group Hampton Roads, 4000
Coast Guard Blvd., Portsmouth, VA
23703–2199, and (757) 483–8567.
SUPPLEMENTARY INFORMATION: The
Norfolk Festevents ltd., will sponsor
‘‘Harborfest 2005’’ on the waters of the
Elizabeth River in Norfolk Harbor
between Portsmouth and Norfolk,
Virginia. This annual celebration of the
waterfront consists of a variety of on the
water activities. Harborfest activities
include an Opening Ceremony—Parade
of Sail, Crawford Bay Crew Classic,
Chesapeake Bay Workboat Parade of
Sail, Chesapeake Bay Workboat Docking
Competition, Chesapeake Bay Workboat
Race, Watersports Ski Demonstration,
and Quick and Dirty Boat Race. A large
fleet of spectator vessels is anticipated
to view the Harborfest activities.
Therefore, to ensure the safety of
participants, spectators and transiting
vessels, 33 CFR 100.501 will be
enforced for the duration of the event.
Under provisions of 33 CFR 100.501,
from 2 p.m. June 10, 2005 to 4 p.m. on
June 12, 2005, any vessel may not enter
the regulated area unless it receives
permission from the Coast Guard Patrol
Commander. Vessel traffic will be
allowed to transit the regulated area
between on the water events, when the
Patrol Commander determines it is safe
to do so.
In addition to this notice, the
maritime community will be provided
extensive advance notification via the
Local Notice to Mariners, and marine
information broadcasts so mariners can
adjust their plans accordingly.
E:\FR\FM\09JNR1.SGM
09JNR1
Agencies
[Federal Register Volume 70, Number 110 (Thursday, June 9, 2005)]
[Rules and Regulations]
[Pages 33702-33718]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-11431]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
31 CFR Part 103
RIN 1506-AA58
Financial Crimes Enforcement Network; Anti-Money Laundering
Programs for Dealers in Precious Metals, Stones, or Jewels
AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.
ACTION: Interim final rule; request for comments.
-----------------------------------------------------------------------
SUMMARY: FinCEN is issuing this interim final rule to prescribe minimum
standards applicable to dealers in jewels, precious metals, or precious
stones, pursuant to the provisions in the USA PATRIOT Act of 2001 that
require financial institutions to establish anti-money laundering
programs. This rule is being issued as an interim final rule because
FinCEN is seeking additional public comment on several aspects of the
interim final rule. These issues are addressed in the SUPPLEMENTARY
INFORMATION section under the heading ``Request for Comments.'' We also
are providing questions and answers to assist businesses in
understanding how the interim final rule operates, and in determining
whether and when a business's operations are covered by the interim
final rule. These questions and answers appear in the SUPPLEMENTARY
INFORMATION section under the heading ``Frequently Asked Questions.''
DATES: Effective Date: This interim final rule is effective July 11,
2005.
Applicability Date: The requirement that dealers develop and
implement an anti-money laundering program applies as provided in 31
CFR 103.140(d).
Submission of Comments: Comments on the issues raised in the
``Request for Comments'' portion of this document must be received
before July 25, 2005.
ADDRESSES: You may submit comments, identified by RIN 1506-AA58, by any
of the following methods:
Federal e-rulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regcomments@fincen.treas.gov. Include RIN 1506-
AA58 in the subject line of the message.
Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include RIN
1506-AA58 in the body of the text.
[[Page 33703]]
Instructions: It is preferable for comments to be submitted by
electronic mail because paper mail in the Washington, DC, area may be
delayed. Please submit comments by one method only. All submissions
received must include the agency name and the Regulatory Information
Number (RIN) for this rulemaking. All comments received will be posted
without change to https://www.fincen.gov, including any personal
information provided. Comments may be inspected at FinCEN between 10
a.m. and 4 p.m., in the FinCEN reading room in Washington, DC. Persons
wishing to inspect the comments submitted must request an appointment
by telephoning (202) 354-6400 (not a toll-free number).
FOR FURTHER INFORMATION CONTACT: Regulatory Policy and Programs
Division (FinCEN), (800) 949-2732 (toll-free).
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory Provisions
The Bank Secrecy Act (BSA), Public Law 91-508, as amended, codified
at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5314, 5316-
5332, authorizes the Secretary of the Treasury to issue regulations
requiring financial institutions to keep records and file reports that
are determined to have a high degree of usefulness in criminal, tax,
and regulatory matters, or in the conduct of intelligence or counter-
intelligence activities to protect against international terrorism, and
to implement counter-money laundering programs and compliance
procedures.\1\ Regulations implementing Title II of the BSA (codified
at 31 U.S.C. 5311 et seq.) appear at 31 CFR part 103. The authority of
the Secretary to administer the BSA has been delegated to the Director
of FinCEN.
---------------------------------------------------------------------------
\1\ Language expanding the scope of the BSA to intelligence or
counter-intelligence activities to protect against international
terrorism was added by section 358 of the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT) Act of 2001 (the USA Patriot Act),
Public Law 107-56.
---------------------------------------------------------------------------
The provisions of 31 U.S.C. 5318(h), added to the BSA in 1992 by
section 1517 of the Annunzio-Wylie Anti-Money Laundering Act, authorize
the Secretary of the Treasury ``[i]n order to guard against money
laundering through financial institutions * * * [to] require financial
institutions to carry out anti-money laundering programs.'' 31 U.S.C.
5318(h)(1). Those programs may include ``the development of internal
policies, procedures, and controls;'' ``the designation of a compliance
officer;'' ``an ongoing employee training program;'' and ``an
independent audit function to test programs.'' 31 U.S.C. 5318(h)(1)(A-
D).
On October 26, 2001, the President signed into law the USA Patriot
Act. Section 352 of the USA Patriot Act, which became effective April
24, 2002, amended 31 U.S.C. 5318(h) of the BSA to require, and not
merely authorize, anti-money laundering programs for all financial
institutions defined in the BSA. Section 352(c) of the USA Patriot Act
directs the Secretary to prescribe regulations for anti-money
laundering programs that are ``commensurate with the size, location,
and activities'' of the financial institutions to which such
regulations apply.
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.\2\ This rule defines
the term dealer and describes the required elements of a dealer's anti-
money laundering program.
---------------------------------------------------------------------------
\2\ See 31 CFR 103.170, as codified by interim final rule
published at 67 FR 21110 (April 29, 2002), as amended at 67 FR 67547
(November 6, 2002) and corrected at 67 FR 68935 (November 14, 2002).
---------------------------------------------------------------------------
B. Money Laundering Cases Involving Dealers
The statutory mandate that financial institutions establish an
anti-money laundering program is a key element in the national effort
to prevent and detect money laundering and the financing of terrorism,
and recognizes that financial institutions other than depository
institutions (which have long been subject to BSA requirements) are
vulnerable to money laundering. Precious metals, precious stones, and
jewels are easily transportable, highly concentrated forms of wealth
and can be highly attractive to money launderers and other criminals,
including those involved in the financing of terrorism. Recent cases
demonstrate various ways in which precious metals, precious stones, and
jewels can be used for illicit purposes. In particular, these cases
demonstrate the risks involved in accepting third-party payments, and
the importance of conducting reasonable inquiries when a customer's
requests seem unusual.
Although the following two examples involve dealers who were acting
in complicity with the illegal activity of their customers, they
demonstrate money laundering methodologies that also could be conducted
through unwary dealers. First, a Federal grand jury indictment
illustrates the money laundering risks associated with the use of
third-party payments.\3\ A jewelry wholesaler pled guilty to laundering
money by accepting third-party payments in drug proceeds for
merchandise purchased by its retailer clients. A review of the
wholesaler's records revealed several unusual patterns, including:
---------------------------------------------------------------------------
\3\ U.S. v. Speed Joyeros, S.A., 204 F. Supp. 2d 412 (E.D.N.Y.
2002).
---------------------------------------------------------------------------
Many instances in which the wholesaler received payment
for merchandise from a party other than the purchaser (third-party
payments); and
Numerous examples of unusual check activity including
payment in the form of sequentially numbered checks, multiple checks
from the same account drawn on the same date, checks with no identified
payor, payments drawn on a bank located in a county different from the
country in which the purchaser lived, and checks paid through foreign
countries.
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.\4\
---------------------------------------------------------------------------
\4\ U.S. v. Ramerez, 313 F. Supp. 2d 276 (S.D.N.Y. 2004).
---------------------------------------------------------------------------
A review of suspicious activity reports filed with FinCEN by
depository institutions also reveals instances in which banks and
others suspected the involvement of dealers in unusual transactions.
Several suspicious activity reports describe the use of bulk amounts of
sequentially numbered U.S. money orders and traveler's checks deposited
abroad. The money orders and traveler's checks were purchased for the
maximum face value, and then were used to purchase diamonds and gems at
[[Page 33704]]
dealers located in foreign countries. One suspicious activity report
was filed by a U.S. bank that became suspicious about a series of
checks payable to U.S. suppliers and issued on behalf of a foreign gold
and gem company from a correspondent account at the bank. The bank
contacted the correspondent for additional details about the
transactions, and found that the invoice amounts did not correspond
with the check amounts. Although there can be legitimate reasons for
both making payments that do not match invoices and using sequentially
numbered money orders or traveler's checks (such as limitations on the
maximum face amount of these instruments), their use can be indicia of
money laundering.
The Guidance for Financial Institutions in Detecting Terrorist
Financing issued by the Financial Action Task Force on Money Laundering
(the ``FATF'') \5\ identifying vulnerabilities in financial industries
on the financing of terrorism, includes an example involving a dealer.
In this case, suspicious activity reports filed by several banks on two
individuals and a diamond trading company identified high-volume
unusual funds transfer activity to and from foreign countries, and the
deposit of several large-value checks denominated in U.S. dollars. The
financial intelligence unit of the country in which the filing banks
are located learned from the police that, through these transactions,
funds had been wired to a person suspected of buying diamonds on behalf
of a terrorist organization.\6\
---------------------------------------------------------------------------
\5\ The FATF is an inter-governmental body whose purpose is the
development and promotion of policies to combat money laundering.
Originally created by the G-7 nations, its membership now includes
Argentina, Australia, Austria, Belgium, Brazil, Canada, China,
Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland,
Ireland, Italy, Japan, Luxembourg, Mexico, the Kingdom of the
Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, South
Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and
the United States, as well as the European Commission and the Gulf
Cooperation Council.
\6\ Financial Action Task Force on Money Laundering, Guidance
for Financial Institutions in Detecting Terrorist Financing, April
24, 2002, at page 4 (see https://www.faft-gafi.org/pdf/GuidFITFOI_
en.pdf).
---------------------------------------------------------------------------
The vulnerabilities described above help demonstrate the need for
an anti-money laundering program requirement for dealers to minimize
the opportunity for abuse in this industry.
II. Notice of Proposed Rulemaking
This interim final rule is based on the notice of proposed
rulemaking published February 21, 2003 (the ``NPRM'') (68 FR 8480). The
NPRM sought to require dealers in jewels, precious metals, and precious
stones to develop and implement written anti-money laundering programs
appropriately tailored to the risk of money laundering or terrorism
financing presented by their businesses. The NPRM focused on dealers,
that is, businesses that both buy and sell these items, given FinCEN's
conclusion that the most significant risks of money laundering or the
financing of terrorism lie within those businesses that do both.
Furthermore, the NPRM excluded most retailers from the scope of the
regulation, based on the conclusion that retailers simply do not face
the same level of risk. The elements of the anti-money laundering
program outlined in the NPRM mirror those found in FinCEN's regulations
for other types of financial institutions. The NPRM contained proposed
definitions for the terms ``dealer,'' ``jewel,'' ``precious metal,''
and ``precious stone.''
The comment period for the NPRM ended on April 22, 2003. FinCEN
received a total of 29 comment letters. Of these, 16 were submitted by
dealer and pawnbroker trade associations, five by law firms, four by
individuals, three by pawnbrokers, and one by a manufacturer.
III. Summary of Comments and Revisions
A. Introduction
The format of this interim final rule is generally consistent with
the format of the rule proposed in the NPRM. The terms of the rule,
however, differ from the terms of the NPRM in the following significant
respects:
The definitional threshold for a dealer has been revised
from persons engaged in the purchase or sale, to persons engaged in the
purchase and sale, of more than $50,000 in covered goods.
The interim final rule contains a new defined term,
``covered goods,'' which includes jewels, precious metals, and precious
stones, and finished goods (including 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
finished goods. The references to ``jewelry containing jewels, precious
metals, or precious stones'' have been removed because such items are
more specifically addressed within the new ``covered goods''
definition.
Language has been added to clarify that the interim final
rule only applies to U.S. dealers, i.e., dealers with a physical
presence in the U.S.
An explicit exception for pawnbrokers has been added to
the interim final rule.
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.
The exception relating to the fabrication of finished
goods containing minor amounts of jewels, precious metals, or precious
stones is no longer necessary (and therefore has been removed) as a
result of (1) the new ``covered goods'' definition, and (2) a new
exception from the definition of ``dealer'' and the anti-money
laundering program requirement for the purchase of jewels, precious
metals, and precious stones that are incorporated into equipment and
machinery to be used for industrial purposes, and the purchase and sale
of such equipment and machinery.
The definition of ``retailer'' appears as a separate
definition, and clarifies that the term applies only to a U.S. person
who sells covered goods primarily to the public.
The $50,000 thresholds in the rule to determine whether a
person is a dealer and whether a retailer is eligible for the retailer
exemption have been clarified to provide that, with respect to finished
goods, only the value of the jewels, precious metals, or precious
stones contained in or attached to such finished goods needs to be
taken into account.
The rule has been revised to provide that the anti-money
laundering program of a retailer that does not qualify for the retailer
exception due to purchases from persons other than dealers or other
retailers need only cover such purchases.
Language has been added to require a dealer, when making
the risk assessment required by the rule, to take into account the
extent to which it engages in transactions with persons other than
dealers subject to the rule.
The definition of ``precious stone'' has been revised to
include tanzanite.
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.
The applicability date of the interim final rule has been
extended to January 1, 2006, or not later than six months after the
date a person becomes a dealer for purposes of the interim final rule.
[[Page 33705]]
B. Public Comments on the NPRM--Overview and General Issues
Comments on the NPRM concentrated on three matters: (1) Application
of the retail exception to retailers that buy from foreign-located
sources; (2) application of the rule to pawnbrokers; and (3)
application of the definition of ``purchase'' to trade-in transactions.
1. Application of Retailer Exception to Retailers that Purchase from
Foreign-Located Sources
The focus of a dealer's anti-money laundering program must be
twofold: prevention and detection of money laundering and terrorist
financing through the dealer by its customers, and prevention and
detection of money laundering and terrorist financing through the
dealer by its sources of supply. As explained in the NPRM, however,
FinCEN has concluded that the risks of money laundering or terrorist
financing are less significant in those businesses that engage
primarily in retail sales of such products. As a result, the NPRM
proposed to exclude certain retailers from the rule. To qualify for the
proposed exception under the NPRM, a retailer would have had to
purchase its products predominantly from other dealers subject to the
NPRM. Specifically, under proposed section 103.140(a)(1)(ii)(A), the
anti-money laundering program requirement would not apply to a retailer
unless that retailer purchased annually more than $50,000 in jewels,
precious metals, precious stones, or jewelry from persons that are not
dealers. Persons that are not dealers subject to the rule would include
members of the public, other U.S. persons not subject to the rule,
and--for reasons of jurisdiction--foreign (non-U.S.) dealers in
precious metals, precious stones, or jewels.
Several commenters asserted that FinCEN did not provide proper
notice required under the Administrative Procedure Act with respect to
whether purchases by a retailer from non-U.S. sources would be included
within the $50,000 threshold which, if exceeded, would disqualify a
dealer from utilizing the retailer exception. FinCEN disagrees. The
preamble to the NPRM stated that ``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.'' See 68 FR 8482 (emphasis supplied). Although the NPRM did
not explicitly state that the rule would only apply to dealers located
in the United States, such dealers are the only persons that could have
been the subject of the NPRM.
Several commenters urged FinCEN to revise the retailer exception so
that it would apply to retailers that purchase jewels, precious metals,
precious stones, or jewelry, predominately from foreign-located
sources. However, this approach would ignore the risk of money
laundering and terrorist financing through a dealer's international
source of supply.\7\ One commenter suggested extending the exception to
retailers that purchase from foreign sources that are located in
countries that are members of the FATF. The application of anti-money
laundering measures to dealers has been emphasized by the international
community as a key element in combating money laundering and terrorist
financing.\8\ However, the fact that a country is a member of the FATF
does not mean that the country requires dealers located within its
borders to implement an anti-money laundering program, much less an
anti-money laundering program that is similar to that contained in this
interim final rule.\9\ Thus, to extend the exception in the manner
suggested would be contrary to the rationale underlying the exception.
Finally, several commenters suggested permitting retailers that buy
from foreign sources to be excepted from the anti-money laundering
requirement to the extent that they receive written assurances that
their foreign sources of supply have taken steps to prevent and detect
money laundering. Given the importance of the anti-money laundering
requirement, FinCEN has determined that written assurances from a
source of supply that is not subject to the requirements of this rule
does not justify a complete exception from the rule. Such assurances,
however, could be a factor in assessing the degree of risk inherent in
a particular relationship and the degree of scrutiny that accordingly
should be brought to bear on it.
---------------------------------------------------------------------------
\7\ See discussion of money laundering cases involving dealers,
supra part I.B.
\8\ In June 2003, FATF revised its Forty Recommendations to
extend counter-money laundering and terrorist financing principles
to dealers in precious metals and stones. Among the recommendations
now applicable to dealers in precious metals and stones to the
extent of transactions equal to or above $15,000 are those requiring
customer due diligence, suspicious activity reporting, and record-
keeping requirements. In addition, Recommendation 16 extends the
development of anti-money laundering and terrorist financing
programs to dealers in precious metals and stones.
\9\ Although several FATF member countries have enacted anti-
money laundering legislation that applies to dealers, the applicable
requirements operate differently than those contained in this
interim final rule. Directive 2001/97/EC of the European Parliament
and of the Council Amending Council Directive 91/308/EEC on
Prevention of the Use of the Financial System for the Purpose of
Money Laundering (December 4, 2001) requires dealers in high-value
goods such as precious stones or metals (when transactions involve
cash payments of 15,000 euro or more) to establish internal control
and communication procedures for the purposes of detecting and
preventing money laundering, including employee training. Many
European Union members have enacted legislation consistent with this
Directive. See, e.g., United Kingdom Statutory Instrument 2003 No.
3075 Financial Services, Money Laundering Regulations 2003 (November
28, 2003).
---------------------------------------------------------------------------
For all of the foregoing reasons, the interim final rule continues
to provide that a retailer that sold more than $50,000 in covered goods
during the prior year is not required to implement an anti-money
laundering program unless it purchased during the prior year more than
$50,000 in covered goods from persons other than dealers as defined in
the interim final rule. In addition, language has been added to the
retailer exception to ensure that a retailer's purchases from other
retailers as defined in the interim final rule will not prohibit a
retailer from taking advantage of the retailer exception. This change
is intended to recognize the fact that retailers often purchase covered
goods from other retailers, and that such purchases should not result
in requiring a retailer to be covered by the rule. However, FinCEN
recognizes that a retailer that would otherwise be completely exempt
from the rule because of its lack of significant purchases from persons
other than dealers or retailers should not have to implement a program
directed at customer risk merely because it exceeds the $50,000
threshold in purchases from persons other than dealers and/or other
retailers. Rather, an appropriate program for such a retailer would be
limited to guarding against the risks presented by its sources of
supply other than dealers and other retailers. FinCEN believes that
this targeted approach presents the right balance between the money
laundering risks of such businesses and the intent of the statute.
Therefore, language has been added to section 103.140(b) of the interim
final rule to provide that, to the extent that a retailer's purchases
from persons other than dealers subject to the rule and other retailers
exceeds the $50,000 threshold contained in the retailer exception, the
anti-money laundering compliance program required of the dealer need
address only such purchases; such a program would not be required to
address sales, or other types of purchases.
2. Application of the Rule to Pawnbrokers
Several commenters requested clarification on whether the rule is
[[Page 33706]]
intended to apply to pawnbrokers. Although pawnbrokers take in covered
goods from the public in return for funds, they do so in the context of
extending short-term, non-recourse collateralized loans. Most often,
such loans are repaid and the collateral is returned to the borrower.
However, if the borrower fails to repay the loan, the pawnbroker
forecloses on the collateral, subsequently selling the collateral to
the general public. FinCEN has determined not to treat this type of
transaction as the purchase and sale of covered goods for purposes of
this rule.
Pawnbrokers are defined as financial institutions for BSA purposes
(see 31 U.S.C. 5312(a)(2)(O)), and are therefore subject to the
statutory requirement to implement an anti-money laundering program
requirement. As noted above, FinCEN deferred the anti-money laundering
program requirement contained in 31 U.S.C. 5318(h) that would have
applied to many entities that are financial institutions in 31 U.S.C.
5312, including pawnbrokers. FinCEN intends to address at a later time
the applicability of the anti-money laundering program requirements of
31 U.S.C. 5318(h) to pawnbrokers, but at this time, such a requirement
for pawnbrokers remains deferred. For this reason, the interim final
rule contains an explicit exception, found at new section
103.140(a)(2)(ii)(B), providing that the term dealer does not include a
person licensed or authorized under the laws of any State (or local
government) to do business as a pawnbroker, but only to the extent such
person is engaged in pawn transactions, including the sale of pawn loan
collateral.
3. Trade-in Transactions
As explained above, section 103.140(a)(1)(ii)(A) of the NPRM
provided an exception from the anti-money laundering program
requirement for retailers that do not purchase from persons other than
dealers more than $50,000 in jewels, precious metals, precious stones,
or jewelry during the prior year. Commenters indicated that many
retailers, rather than purchasing jewels, precious metals, precious
stones, or jewelry containing such items from retail customers for cash
or cash equivalents, often accept such an item from the customer, a
``trade-in,'' and credit the value of the trade-in toward a new
purchase by the customer at the retailer. Several commenters asserted
that a trade-in transaction should not be deemed a ``purchase'' for
purposes of the retailer exception because the money laundering risks
involved in trade-in transactions are low. According to commenters, the
average value of a trade-in is under $1,000. Many retailers limit the
use of trade-ins to transactions in which the price of the item to be
purchased is at least twice the value of the trade-in item, and do not
permit a customer to obtain cash or cash equivalents in the course of a
trade-in transaction. Moreover, some retailers will only accept a
trade-in that was originally purchased from the retailer itself. Even
if trade-ins were to be considered a ``purchase'' in the context of the
retailer exception, commenters argued that certain types of trade-ins,
for example trade-ins of low value (under $10,000), or trade-ins of
jewelry worth 50 percent or less of the total purchase, should be
exempted. According to commenters, if the rule were to treat all trade-
in transactions as purchases, a large percentage of retailers would be
unable to take advantage of the retailer exception.
In response to comments, and in order to balance the risks posed by
trade-in transactions against the burdens imposed by the requirement to
implement an anti-money laundering program, the interim final rule has
been revised to specifically exempt certain trade-in transactions for
purposes of the definition of ``dealer,'' including the retailer
exception that appears in that definition. New section
103.140(a)(2)(iii) provides that for purposes of meeting the definition
of a ``dealer,'' the ``purchase'' and ``sale'' of covered goods does
not include retail transactions in which a dealer or retailer accepts
from a customer covered goods, the value of which the dealer or
retailer credits to the account of the customer, or to another purchase
by the customer, and the retailer or dealer does not provide funds to
the customer in exchange for such covered goods (the ``trade-in
exception''). As a result of this exception, a person is not required
to count a trade-in transaction toward the $50,000 threshold for the
purchase and sale of covered goods for purposes of determining that
person's status as a dealer under the rule.\10\ It should be noted that
the trade-in exception is only an exception from the ``dealer''
definition, and not an exception to the scope of the anti-money
laundering program required of a person other than a retailer who
otherwise meets the definition of ``dealer.''
---------------------------------------------------------------------------
\10\ Similarly, a person is not required to count a trade-in
transaction toward the $50,000 threshold for the purchase of covered
goods from persons other than dealers and other retailers, for
purposes of excluding a ``retailer'' from the ``dealer'' definition.
---------------------------------------------------------------------------
IV. Section-by-Section Analysis
A. 103.140(a)--Definitions 11
---------------------------------------------------------------------------
\11\ FinCEN notes that these definitions apply only with respect
to the interim final rule and not with respect to any other law or
regulation.
---------------------------------------------------------------------------
1. 31 CFR 103.140(a)(1)--Definition of ``Covered Goods''
Section 103.140(a) continues to define the key terms used in the
rule. Section 103.140(a)(1) contains a new defined term, ``covered
goods,'' which includes jewels, precious metals, and precious stones
(as each is defined in paragraphs (3), (4), and (5), respectively, of
subsection (a)), and finished goods that derive 50 percent or more of
their value from jewels, precious metals, and precious stones contained
in or attached to such finished goods. Such finished goods include, but
are not limited to, jewelry, numismatic items, and antiques. The new
defined term was added to replace the undefined term ``jewelry'' that
was used in the NPRM and to clarify and broaden the scope of an
exception in the NPRM for transactions in jewels, precious metals, and
precious stones for purposes of fabricating finished goods, to the
extent that the finished goods contain ``minor amounts of,'' or the
value of the goods is ``not significantly attributable to,'' jewels,
precious metals, or precious stones.\12\ Commenters suggested that the
rule provide more specificity on what is meant by the phrases ``minor
amounts'' and ``not significantly attributable to.'' One commenter
suggested that the exception apply to the extent that finished goods
contain gems, precious metals, or precious stones worth not more than
10 percent of the product value, and two commenters suggested using a
threshold of 50 percent of the product value. FinCEN believes that 50
percent constitutes a threshold that is consistent with the rule's
definition of ``precious metal,'' which adopts a minimum purity level
of at least 500 parts per 1000. Thus, the defined term ``covered
goods'' adopts the 50 percent threshold for determining whether
finished goods containing jewels, precious metals, or precious stones
are products subject to the interim final rule.
---------------------------------------------------------------------------
\12\ See also the discussion in the following part of the
preamble regarding a new exception in section 103.140(a)(2)(iii)(B)
of the interim final rule for purchases and sales of jewels,
precious metals, and precious stones used in industrial products.
---------------------------------------------------------------------------
2. 31 CFR 103.140(a)(2)--Definition of ``Dealer''
Section 103.140(a)(2)(i) defines ``dealer'' as any person who is
engaged ``as a business in the purchase and sale of covered goods'' in
excess of the dollar
[[Page 33707]]
thresholds. This language differs slightly from the language contained
in the NPRM, which had defined a dealer as a person engaged ``in the
business of purchasing and selling'' jewels, precious metals, precious
stones, or jewelry composed of jewels, precious metals, or precious
stones. The change was made for purposes of consistency of terms and,
except for the use of the new term ``covered goods,'' is not a
substantive change. The terms ``purchase'' and ``sale'' are used
throughout the rule, and as discussed below, new sections have been
added to the rule excepting certain transactions from the meaning of
``purchase'' or ``sale.''
The rule applies only to persons that both purchase items that meet
the definition of covered goods, and sell items that meet the same
definition, in sufficient quantity to meet the $50,000 definitional
thresholds. Therefore, a person that engages only in the sale of such
products, for example a mining company that only sells precious metals
that it mines, would not be covered by the definition. Similarly, a
person who only engages in the purchase of such products, for example a
person who purchases gold coins for gifts to family members, would not
be covered by the rule.\13\ Additionally, a manufacturer of jewelry
that in one year purchases over $50,000 worth of gold of sufficient
purity (for example, 14 carat gold) to meet the definition of
``precious metal,'' but that does not sell jewelry composed of gold of
sufficient purity (for example, 10 carat gold after manufacturing) to
be deemed ``covered goods,'' would not be a dealer for purposes of this
rule. Finally, the rule would not generally apply to persons who merely
facilitate the purchase and sale of covered goods. For example, persons
who facilitate estate sales or conduct auctions, bankruptcy trustees,
school districts that sponsor class ring sales, and persons who host
in-home sales of a company's jewelry would not be ``dealers'' for
purposes of the rule based on such activity.
---------------------------------------------------------------------------
\13\ In contrast, a person who buys and sells coins containing
metals of a sufficient purity to meet the definition of ``precious
metal'' would be treated as a dealer for purposes of this rule
assuming the $50,000 purchase and sale thresholds were met and the
person is not a retailer as defined in the rule.
---------------------------------------------------------------------------
The interim final rule contains language clarifying that the anti-
money laundering program requirement applies only to a person engaged
within the United States as a business in the purchase and sale of
covered goods. This would include, for example, a person with a U.S.
office, a person who comes to the United States to make purchases and
sales of covered goods above the threshold amount at U.S. trade shows,
and a foreign-located person who maintains sales staff engaged in such
purchases and sales within the United States. However, it would not
include, for example, a foreign dealer who ships products into the
United States without conducting further business activity within the
United States, or a foreign dealer that merely advertises in the United
States or attends a trade-show in the United States at which it does
not purchase and sell covered goods above the threshold amounts. This
is consistent with the general applicability of BSA regulatory
requirements to U.S. persons.\14\ It should be noted that, under
FinCEN's regulations, the status of a person's corporate parent,
subsidiary, or affiliate does not affect the determination whether the
person is itself a financial institution for BSA purposes. Thus, a
person that does not engage in the business of dealing in covered goods
would not be deemed a dealer solely by virtue of the fact that it is
the parent, subsidiary, or affiliate of a dealer.
---------------------------------------------------------------------------
\14\ See, e.g., the definition of financial institution in 31
CFR 103.11(n), which includes ``each agent, agency, branch or office
within the United States of any person doing business, whether or
not on a regular basis or as an organized business concern. * * *''
---------------------------------------------------------------------------
The interim final rule retains the minimum dollar threshold that
was proposed in the NPRM, but has been modified to apply the threshold
to both purchases and sales. Thus, sections 103.140(a)(2)(i)(A) and (B)
provide that a person is a ``dealer'' only if, during the prior
calendar or tax year, the person both (1) purchased more than $50,000
in covered goods, and (2) received more than $50,000 in gross proceeds
from the sale of covered goods.\15\ This change reflects FinCEN's
determination that a person that does not reach the $50,000 threshold
for both purchases and sales is not of sufficient size or risk to be
required to implement an anti-money laundering program. A few
commenters suggested that, instead of a yearly dollar volume threshold,
the rule should contain a threshold based on a single transaction
amount. These commenters argued in favor of a $10,000 transaction
level, in light of the requirement that dealers, as non-financial
trades or businesses, must report transactions involving currency in
excess of $10,000 pursuant to 26 U.S.C. 6050I and 31 CFR 103.30.
---------------------------------------------------------------------------
\15\ The reference to ``calendar or tax year'' is intended to
provide flexibility for dealers in determining whether they have
reached the $50,000 thresholds. In the case of a dealer whose tax
year is not the calendar year, this language is intended to avoid
causing such dealer to keep two sets of records in order to
determine if the threshold has been met. However, a dealer must
continue to use whatever basis it initially chooses for determining
whether it has reached the $50,000 thresholds, whether calendar year
or tax year, unless it experiences a change in its taxable year.
---------------------------------------------------------------------------
This suggestion is not adopted in the interim final rule because it
is not consistent with the risk-based approach that is taken in the
rule. Imposition of a high-dollar transaction threshold would exempt
dealers that conduct large volumes of business on an annual basis, even
dealers engaging in numerous transactions at the $5,000 to $10,000
level, while covering a dealer that conducts a far lower annual volume
of business that engages in as little as one transaction over $10,000.
Although ensuring compliance with the currency reporting requirement
found at 31 CFR 103.30 is an important part of a dealer's anti-money
laundering program, the requirement to implement an anti-money
laundering program is intended to accomplish the broader purpose of
requiring a dealer to assess money laundering risks posed by its
business model, and to take reasonable steps to lessen such risks. For
these reasons, FinCEN believes that the $50,000 annual volume threshold
for both sales and purchases best ensures that those dealers whose
businesses pose the most significant risk of abuse for money laundering
and terrorist financing (whether through transaction size or volume)
are covered by the rule.
The NPRM contained two exceptions from the definition of dealer.
The first exception applied to retailers, other than retailers that
during the prior calendar or tax year, purchased more than $50,000 in
jewels, precious metals, precious stones, or jewelry from persons other
than dealers. The second exception applied to a person who engages in
transactions in jewels, precious metals, or precious stones for
purposes of fabricating finished goods that contain minor amounts of,
or the value of which is not significantly attributable to, such
precious metals, precious stones, or jewels. The substance of these
exceptions has been retained in the interim final rule, but the
exceptions have been re-structured and additional exceptions have been
added. The interim final rule contains four exceptions, two relating to
the definition of ``dealer,'' and two relating to the meaning of the
terms ``purchase'' and ``sale.''
Section 103.140(a)(2)(ii) provides two exceptions from the
definition of ``dealer.'' As described in Part III.B.1, above, the
first exception provides that a retailer is a dealer only if it
purchased more than $50,000 in covered goods from persons other than
dealers or other retailers (e.g., from the general public or
[[Page 33708]]
from foreign persons not subject to the interim final rule) during the
prior calendar or tax year. A retailer that is a dealer pursuant to
this provision, however, would only have to address in its anti-money
laundering program purchases from persons other than dealers and other
retailers. As discussed further below, the definition of ``retailer''
has been taken out of the exception itself, and a separate definition
of ``retailer'' has been added to the interim final rule.
The second exception from the definition of ``dealer,'' found at
section 103.140(a)(2)(ii)(B) has been added to the rule to clarify that
a person licensed or authorized under the laws of any State (or local
government) to do business as a pawnbroker is not a dealer for purposes
of the rule with respect to pawn transactions, including the sale of
pawn loan collateral.
As discussed in part III.B.3. above, section 103.140(a)(2)(iii)
provides an exception from the meaning of the terms ``purchase'' and
``sale'' as used in section 103.140(a)(2)(i) of the interim final rule
for trade-in transactions.
Section 103.140(a)(2)(iv) provides an exception from the
definitions of ``purchase'' and ``sale'' for purposes of both the
definition of ``dealer'' in section 103.140(a)(2)(i) and the anti-money
laundering program requirement in section 103.140(b), for transactions
relating to industrial equipment containing covered goods. As discussed
in Part IV.A.1. above, section 103.140(a)(1)(ii)(B) of the NPRM
provided that a person engaged in transactions in jewels, precious
metals, or precious stones for purposes of fabricating finished goods
containing minor amounts of, or the value of which is not significantly
attributable to, the precious metals, precious stones, or jewels, was
not a ``dealer.'' The exception was intended to exempt the purchase and
sale of precious metals, precious stones, or jewels in the context of
buying, selling, and fabricating finished goods, including industrial
products, that contain small amounts of jewels, precious metals, or
precious stones, in order to ensure that the anti-money laundering
program requirement is imposed on those sectors of the industry that
pose the most significant risk of money laundering and terrorist
financing.
FinCEN has concluded that the purchase of jewels, precious metals,
and precious stones for use in industrial products, and the purchase or
sale of such products, appears to be less susceptible to money
laundering and terrorist financing risks, due to the fact that precious
metals, precious stones, and jewels typically do not constitute a
significant component of the value of an industrial product.
Accordingly, the interim final rule contains a new exception from the
terms ``purchase'' and ``sale'' (section 103.140(a)(2)(iv)) for the
purchase of precious metals, precious stones, or jewels that are
incorporated into machinery or equipment used for industrial purposes,
and the purchase or sale of such machinery or equipment.
Commenters requested clarification as to whether ``toll-refining''
constitutes the purchase and sale of precious metals for purposes of
the definition. As described by commenters, toll-refining is a
transaction in which a company that uses precious metal in a process
that results in scrap metal sends the scrap metal to a refiner that,
for a fee, extracts the precious metal from the scrap and returns the
precious metal to the company.
Commenters argued that because this type of transaction is not the
exchange of metal for cash or other monetary consideration, but rather
the payment of a fee in exchange for the performance of the process of
extracting precious metal from scrap metal, it should not be deemed the
purchase and sale'' of precious metals. FinCEN agrees. Although we
believe it is unnecessary for the interim final rule to include a
specific exemption for toll-refining, we clarify that toll-refining, as
described above, does not constitute a purchase or sale of precious
metals for purposes of this interim final rule.
Finally, a few commenters requested exemptive or other relief for
specific types of businesses that fall within the definition of dealer,
arguing that these businesses pose a low risk of money laundering and
terrorist financing. Although it is not appropriate to resolve such
fact-specific individualized situations in the context of a general
rulemaking, persons wishing to obtain an administrative ruling relating
to their specific situation may submit a request pursuant to 31 CFR
103.81. In addition, FinCEN has the authority to make exceptions to, or
grant exemptions from, the requirements of 31 CFR part 103 pursuant to
31 U.S.C. 5318(a)(6) and 31 CFR 103.55.
Section 103.140(a)(2)(v) provides that, for purposes of applying
the $50,000 definitional thresholds contained in the rule to the
purchase and sale of finished goods, only the value of the jewels,
precious metals, or precious stones contained in, or attached to, such
goods must be taken into account.
3. 31 CFR 103.140(a)(3)--Definition of ``Jewel''
Section 103.140(a)(3) defines the term ``jewel'' to include organic
substances that have a market-recognized gem level of quality, beauty,
and rarity. FinCEN did not receive comments on the definition of
``jewel'' contained in the NPRM, and has retained the definition in the
interim final rule.
4. 31 CFR 103.140(a)(4)--Definition of ``Precious Metal''
Section 103.140 (a)(4) defines ``precious metal'' to include gold,
silver, and the platinum group of metals, at a level of purity of 500
parts per 1000 (50 percent) or greater, singly or in any combination.
The definition is unchanged from the NPRM. Although one commenter
suggested that the purity threshold should be lowered so that the rule
would apply to dealers in 10 carat gold, another commented favorably on
the purity threshold because it provides an approach that is tailored
to cover higher-risk products. In order to balance the burdens
associated with the rule against the lower risk of money laundering and
terrorist financing with products of a lower purity threshold, the
interim final rule retains the 50 percent purity threshold. However,
FinCEN will continue to review whether it is appropriate to extend the
anti-money laundering program to dealers that purchase and sell lower
grade metals.
5. 31 CFR 103.140(a)(5)--Definition of ``Precious Stone''
The term ``precious stone'' is defined in section 103.140(a)(5) to
include substances that have a market-recognized gem level of quality,
beauty, and rarity. Therefore, precious stones of industrial quality
are not included in the definition of precious stones. In response to a
comment, the word ``inorganic'' has been removed from the definition.
However, this change is not intended to alter the substantive effect of
the definition. In addition, tanzanite has been added to the list of
substances that will be treated as precious stones. Because it shares
the characteristics of market-recognized, gem level quality, beauty,
and rarity with other minerals in that category, and because of its
significant market value, tanzanite can be used for money laundering
and terrorist financing. Therefore, a person engaged as a business in
the purchase and sale of tanzanite is covered by the anti-money
laundering program requirement, to the extent that all of the other
thresholds of the rule are met.
[[Page 33709]]
6. 31 CFR 103.140(a)(6)--Definition of ``Person''
Section 103.140(a)(6) provides that for purposes of the interim
final rule, the term ``person'' has the same meaning as provided in 31
CFR 103.11(z).
7. 31 CFR 103.140(a)(7)--Definition of ``Retailer''
The retailer exception proposed in section 103.140(a)(1)(ii)(A) of
the NPRM defined a retailer as ``a person engaged in the business of
sales to the public of jewels, precious metals, or precious stones, or
jewelry composed thereof.'' In the interim final rule, a separate
section containing the definition of ``retailer'' has been created, and
language has been added to the definition to clarify the scope of the
definition. New section 103.140(a)(7) provides that a retailer is a
U.S. person engaged in the business of sales primarily to the public of
covered goods. The purpose of this revision is to clarify that the
retailer exception found at section 103.140(a)(1)(ii)(A) of the interim
final rule applies to those dealers whose sales are made primarily to
the public, so that the rule does not apply to a dealer whose sales to
persons other than members of the public constitute a minimal portion
of the dealer's overall sales. Thus, a dealer whose business is
primarily with the public would not be disqualified from the retailer
exception solely because of occasional sales to a dealer or retailer.
However, a dealer whose business is not primarily with the public, but
with other persons such as dealers, would not be treated as a retailer
under the interim final rule.
B. 103.140(b)--Anti-Money Laundering Program Requirement
Section 103.140(b) of the interim final rule continues to require
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. To the extent that a
retailer's purchases from persons other than dealers and other
retailers exceeds the $50,000 threshold contained in paragraph
(a)(2)(ii)(A), the anti-money laundering compliance program required of
the retailer need only address such purchases.
Although ensuring compliance with the requirement to report
transactions involving currency in excess of $10,000 pursuant to 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 commenters expressed concern
about the standard to which they would be held under the ``reasonably
designed'' language. These commenters 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.
Dealers able to demonstrate that they have checked these sources of
information, commenters asserted, should be deemed in compliance with
the anti-money laundering program requirement. In addition, commenters
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. Commenters suggested that FinCEN provide more
information on the methods by which people attempt to finance terrorism
through transactions with dealers. Finally, some commenters suggested
that FinCEN develop a written program that could be used by dealers.
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.
Finally, in response to comments, FinCEN wishes to clarify that a
dealer's anti-money laundering program need not be made available for
inspection at each of the dealer's locations. It is sufficient that a
dealer maintain a copy of its written program at one location within
the United States, for example the dealer's headquarters or the
location of the person designated as the dealer's compliance officer.
C. 103.140(c)--Minimum Requirements
Section 103.140(c) continues to set forth the minimum requirements
of a dealer's anti-money laundering program.
1. 31 CFR 103.41(c)(1)--Policies, Procedures and Internal Controls
Section 103.140(c)(1) provides that a dealer's anti-money
laundering program must incorporate policies, procedures, and internal
controls based upon the dealer's assessment of the money laundering and
terrorist financing risks associated with its line(s) of business.
Policies, procedures, and internal controls must also include
provisions for complying with applicable BSA requirements. Thus, a
dealer's program must address its obligation to report on Form 8300 the
receipt of cash or certain non-cash instruments totaling more than
$10,000 in one transaction or in two or more related transactions. If
dealers
[[Page 33710]]
become subject to additional BSA requirements, their anti-money
laundering programs will need to be updated accordingly.
Section 103.140(c)(1)(i) provides that, for purposes of making the
risk assessment required under section 103.140(c)(1), a dealer must
consider all relevant factors, including the specific factors contained
in the rule. The specific risk factors listed in the rule require a
dealer to (1) assess the money laundering and terrorist financing risks
associated with its products, customers, suppliers, distribution
channels, and geographic locations, (2) take into consideration the
extent to which the dealer engages in transactions other than with
established customers, or sources of supply, or other dealers subject
to this rule, and (3) analyze the extent to which it engages in
transactions for which payment or account reconciliation is routed to
or from accounts located in jurisdictions that have been identified as
vulnerable to terrorism or money laundering.\16\ The rule is intended
to give a dealer the flexibility to design its program to meet the
specific money laundering and terrorist financing risks presented by
the dealer's business, based on the dealer's assessment of those risks.
Language has been added to the second risk assessment factor to require
dealers to take into account the potential risks involved in engaging
in transactions with persons who are not subject to this rule.
---------------------------------------------------------------------------
\16\ Examples of designations to this effect include the
Department of State's designation of a jurisdiction as a sponsor of
international terrorism under 22 U.S.C. 2371 (see https://
www.state.gov/s/ct/rls/pgtrpt/), the FATF's designation of
jurisdictions that are non-cooperative with international anti-money
laundering principles (see https://www.fatf-gafi.org/NCCT_en.htm),
or the Secretary of the Treasury's designation, pursuant to 31
U.S.C. 5318A of jurisdictions warranting special measures due to
money laundering concerns (https://www.fincen.gov).
---------------------------------------------------------------------------
Section 103.140(c)(1)(ii) provides that a dealer's policies,
procedures, and internal controls must be reasonably designed to detect
transactions that may involve use of the dealer to facilitate money
laundering or terrorist financing. In addition, a dealer's program must
incorporate procedures for making reasonable inquiries to determine
whether a transaction may involve money laundering or terrorist
financing. A dealer that identifies indicators that a transaction may
involve money laundering or terrorist financing should take reasonable
steps to determine whether its suspicions are justified and respond
accordingly, including refusing to enter into, or complete, a
transaction that appears designed to further illegal activity.\17\ The
interim final rule continues to list several examples of factors that
may indicate that a transaction is designed to involve use of the
dealer to facilitate money laundering or terrorist financing.
---------------------------------------------------------------------------
\17\ 18 U.S.C. 1956 and 1957 make it a crime for any person,
including an individual or company, to engage knowingly in a
financial transaction with the proceeds from any of a long list of
crimes or types of ``specific unlawful activity.'' Although the
standard of knowledge required is ``actual knowledge,'' actual
knowledge includes ``willful blindness.'' Thus, a person could be
deemed to have knowledge that proceeds were derived from illegal
activity if he or she demonstrated ``willful blindness'' to ``red
flags'' that indicated illegality. See, e.g., U.S. v. Finkelstein,
229 F.3d 90 (2nd Cir. 2000) (owner of jewelry/precious metals
business convicted for participation in money laundering scheme;
sentence enhancement based on willful blindness regarding receipt of
funds derived from narcotics trafficking).
---------------------------------------------------------------------------
The rule provides flexibility to dealers in developing procedures
for making reasonable inquiries under section 103.140(c)(1)(ii). For
example, a dealer may appropriately determine that reasonable inquiry
with respect to a transaction conducted by a new customer or supplier
involves considerable scrutiny, including verification of customer
identity, or the purpose of a transaction. In contrast, reasonable
inquiry with respect to an established customer may not involve
additional steps beyond those normally required to complete the
transaction, unless the transaction appears suspicious or unusual to
the dealer. As explained further below, the determination whether to
refuse to enter into, or to terminate, a transaction lies with the
dealer. In addition, dealers are encouraged to adopt procedures for
voluntarily filing Suspicious Activity Reports with FinCEN and for
reporting suspected terrorist activities to FinCEN using its Financial
Institutions Hotline (1-866-556-3974).
FinCEN has not at this time proposed a suspicious activity
reporting rule for dealers. However, given the importance of ensuring
that information relevant to the use of covered products for financial
crime or the financing of terrorism is provided to law enforcement, we
are considering proposing a suspicious activity reporting rule in the
future. We will work closely with law enforcement and the industry as
we consider whether such a rule is appropriate.
The list of factors contained in the rule is intended to provide
examples of what may indicate illegal activity, and is by no means
exhaustive. Determinations as to whether a transaction should be
refused or terminated must be based on the facts and circumstances
relating to the transaction and the dealer's knowledge of the customer
or supplier in question. It is not intended that dealers automatically
refuse to engage in or terminate transactions simply because such
transactions involve one or more of the factors listed in the rule.
Rather, it is intended that dealers will develop procedures for
identifying transactions involving potentially illegal activity, and
procedures setting forth the actions that