Is FinCEN’s AML/CFT Jewelry Rule Non-Compliant with International Standards?

In this column, we have lamented more than once that the anti-money laundering rules applicable to the diamond and jewelry industries are not harmonized. Every government interprets the basic 40 and 9 Recommendations of the Financial Action Task Force (FATF) of the OECD in a different way. True, the FATF’s recommendations are not the law of the land, but its 35 members, which include, above all, the United States are generally committed to their implementation.

            This week, the Paris-headquartered FATF published a 309-page report, single space, plus a number of annexes and summaries called “Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism in the United States of America.” It gives a rating on the U.S. implementation of the FATF Recommendations, and it also includes an evaluation of the so-called Designated Non-Financial Businesses and Professions (DNFBP’s) of which the diamond industry is a part.

            The verdict of the FATF is unequivocal: in this category, the United States is Non Compliant! Non-compliant is defined as having “major shortcomings, with a large majority of the essential criteria not being met.”  

            The evaluation report is fair, and it does point out that the Jewelry Rule only went into effect on January 1, 2006, and therefore it cannot assess its effectiveness. But the FATF has problems with some of the provisions of the Jewelry Rule per se, and it could be a fair guess that, at some point, the FATF will pressure the U.S. Treasury and FinCEN to change some of the rules.

             One of the things the FATF doesn’t like is that the very basic and elementary requirement to report “suspicious activities” is voluntary rather than obligatory. As the Jewelry Rule stands now, “dealers are strongly encouraged to file ‘suspicious activity’ reports.” (If a report is filed voluntarily, the dealer cannot inform the customer concerned.)

            This is very much against the trend in the rest of the world and runs counter to the spirit of the FATF Recommendations. Imagine that a lady called Evelyn bin Laden walks into a diamond office in New York and wants to buy diamonds for $10 million. Let’s say she doesn’t understand anything about diamonds and wants to pay from several off-shore bank accounts. A responsible dealer would ask some questions. Evelyn bin Laden may tell the dealer that she is a sister of “the other guy, Osama.” She might even add that she got the money from her brother.

            According to the U.S. Diamond Jewelry Rule, it is totally up to the dealer to decide whether to proceed with the transaction and whether to file a Suspicious Activity report.  The U.S. Jewelry Rule says that “a dealer that identifies 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.” The final determination whether to refuse to enter into or terminate a transaction lies with the dealer. The FATF doesn’t like it.

            The report acknowledges the enormous efforts made by the Jewelers Vigilance Committee (JVC). “The obligation on dealers in precious metals and stones to implement AML Programs is very recent,” says the Report. “Consequently, the obligation is in the early stages of being implemented. Additionally, industry associations such as the Jewelers’ Vigilance Committee (JVC) and Manufacturing and Jewelers Suppliers of America (MJSA), who reach a combined membership of over 12,000 members, are working with their members to make them aware of their obligations. This includes providing them AML packages and templates that will assist them in developing effective internal controls. However, these efforts are challenged by the diverse characteristics of the sector and the fact that many participants do not belong to any industry association. The situation is further complicated because most of these businesses have never been subject to regulation before.”

            The JVC, MJSA and others are said to reach 12,000 members. The FATF notes that “FinCEN estimates that there are approximately 20,000 dealers in precious metals, stones, or jewels in the U.S. that are subject to BSA [Banking Secrecy Act] requirements [which as the Act that was amended through the Patriot Act creating the obligations for an AML/CFT program for diamond dealers]. The size of businesses in each segment of the industry varies substantially from a single artisan goldsmith to publicly traded commercial manufacturers employing hundreds of people and producing millions of finished pieces every year. The sources of supply and business models vary as well, from large-scale producers of fabricated precious metals materials to small dealers selling unique and rare gemstones on an individualized basis. There is also an active secondary market for jewelry, loose gemstones and precious metals.”

            The FATF’s message to the U.S. government is: “Continued work is needed to ensure that dealers in precious metals and stones are aware of their obligation to establish AML Programs and are implementing them effectively.”

            Interestingly, the FATF had other concerns about diamonds. In the context of general laws, which “refers to cross borders transfers of ‘proceeds’ of illegal activities, the current laws concentrate on monetary instruments and don’t include precious stones or other high value items.” The FATF is basically telling you that its government ought to consider making changes.

            The report is drafted with great care to avoid offending the government. It acknowledges that the U.S. may be different from other places: it has a “compliance culture.” Says the Report: Transparency, good corporate governance and strong AML Programs are further encouraged as a result of a social stigma against doing business with entities that are associated with criminal activity. The culture of the U.S. is one in which individuals expect that the businesses they interact with will not have criminal ties, will protect themselves from abuse by money launderers and terrorist financiers, and will sever ties with any entity that is abusing their business relationships. Institutions with vulnerabilities associated with money laundering (ML) or terrorist financing (FT), significantly increase their potential risk for loss of income and loss of reputation, in addition to civil and/or criminal penalties.”

            If this is the culture – and let’s assume the FATF sees it right – the deficiencies it has noted in FinCEN’s rules on the Designated Non Financial Businesses and Professions shouldn’t bother the FATF too much.

            Let’s see what will happen with this report. The last thing we want is “surprises” – if there are going to be changes, we want to report about these long before they happen.

            Have a nice weekend.