AML compliance for precious metals industry has been a topic of concern for some time. The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has proposed new rules that would require dealers of precious metals, stones, and jewels to maintain records and report certain transactions. These proposed changes aim to address the vulnerabilities in the precious metals market that have been exploited by criminal organizations. Under the proposed rules, dealers would be required to establish customer due diligence procedures, including identifying and verifying the identity of customers involved in covered transactions. In addition, dealers would be required to maintain records of covered transactions and report suspicious activities to FinCEN.
These suggested changes are intended to make it more challenging for criminals to use the precious metals market for money laundering and other illegal operations.If implemented, these changes would have a significant impact on the way businesses operate in this industry. This blog post will provide you an overview of the proposed changes and their effect on businesses operating in the precious metals market.
What are precious metals?
Precious metals are rare and valuable minerals or metals, such as gold, ,platinum,silver and palladium. These metals have been used throughout history for currency, adornment, and other purposes. In the modern economy, precious metals are often used to make jewelry and coins.
What is Money Laundering?
Money laundering is a process that criminals use to disguise the true origin and ownership of illegally obtained money. By taking “dirty” money from one financial institution and transferring it to another, criminals can make it appear as though the money was legally acquired. Money laundering is often used in connection with other crimes, such as drug trafficking or terrorism financing.
Risk Exposure in the precious metals industry
Because cash is a recognized form of payment and the items are easily transportable, this industry is an attractive avenue for money laundering. False reporting, incorrect classification of commodities, rotating transactions, or round-trips through other nations are examples of trade-based money laundering. These practices make it impossible to determine the origin of funds or the reason behind transactions. This makes it possible for the proceeds of crime and illegal activity to be laundered through these products, putting dealers at risk of fraud, bribes, or financing for terrorists.
also It is difficult to trace ownership because these high-value commodities can be traded anonymously using cash or cryptocurrencies. Other elements, such as the simplicity of illegal mining or smuggling, the movement of these goods across international borders for criminal activity, trade-based money laundering, and the lack of transparency in transaction and ownership structures, make it possible for illicit funds to enter the legitimate economy. Dealers in precious metals are prone to AML/CTF compliance due to other illegal practices including incomplete documentation or using these valuables as bribes.
Compliance Requirements
The principal regulatory agency tasked with enforcing the Bank Secrecy Act is Financial Crimes Enforcement Network (FinCEN) . In order to create money laundering programs, US regulatory authorities revised the act and added clauses pertaining to precious metals, gems, and jewelry. Gold and other precious metals dealers are required by FinCEN’s specific guidance to put in place a digital system for keeping track of all customer transactions and financial activity.
Dealers must now keep track of all transactions totaling more than $50,000 and notify the authorities if they notice any unusual behaviour. Additionally, FinCEN has committed to continue collaborating with internal revenue services to bring the precious metals industry within the tax umbrella.
Implementing Effective KYC Procedures in the Precious Metals Industry
As with all of FinCEN’s regulations requiring the development of an anti-money laundering program, FinCEN is issuing this regulation to better protect those who deal in precious metals, jewels, and precious stones from potential abuse by criminals and terrorists, strengthening the protection of the U.S. financial system generally and the precious metals, jewels, and precious stones industry in particular. Jewels, precious metals, and precious stones are valuable because of their unique qualities, which also make them potentially vulnerable to those looking to launder money. The implementation of this regulation will help to ensure that the Bank Secrecy Act is properly applied to these companies.
The compliance process starts during the onboarding process with KYC, identifying third parties’ involvement, identifying ultimate beneficial owners, doing sanctions and PEP checks, and, if necessary, verifying SDN lists. The continuing risk-based approach comprises monitoring for unusual behavior, reporting of suspicious transactions, and invoicing. It also includes monitoring of cash transactions over the specified level, high-value transactions, high-risk clients, and high-risk countries. Dealers should also have effective processes in place to review and monitor customer transactions,
What are FinCEN’s Proposed Requirements?
FinCEN’s proposed requirements are designed to prevent criminals from using the precious metals market for money laundering and other illicit activities. Under the proposed rules, dealers would be required to establish customer due diligence procedures, including identifying and verifying the identity of customers involved in covered transactions. In addition, dealers would be required to maintain records of covered transactions and report suspicious activities to FinCEN.
What are the Implications of these Proposed Changes?
The proposed changes would have a significant impact on businesses operating in the precious metals market. These requirements could result in increased compliance costs, as well as potential delays in processing customer orders due to extra steps taken to verify customer identities. Additionally, the proposed rules could lead to an increase in reporting requirements, which could present a challenge for businesses that are not familiar with the financial regulations.
The Office of Foreign Assets Control (OFAC) sanctions screening is a requirement of the U.S. Treasury, and dealers must comply with it in addition to AML compliance. Both criminal and civil penalties may be imposed for failing to adhere to AML or OFAC rules. Periodic audits, which will also include a review of your AML compliance program, will be carried out by the IRS and the state in which you conduct business.
AML Red Flags in precious metals Business
- Large sums of cash, numerous or sequentially-numbered money orders, traveler’s checks, cashier’s checks, or through third parties are used for payment
- The buyer or seller tries to maintain a high level of secrecy about a transaction, such as by asking that standard business records not be kept
- The buyer or seller makes unusual purchases or sales for the specific buyer or seller
- The buyer or seller makes purchases or sales that don’t follow standard industry practice.
Dealers are expected to have a compliance program that is properly created and customized to their business. It should start with a risk analysis and then adhere to the “four pillars” of BSA
1. Written internal controls, rules, and procedures.
2. The appointment of a compliance officer
3. Giving staff members continuous AML training.
4. Periodic independent evaluations
How to Establish a Compliance Programme precious metals Businesses
- Create a risk-based assessment of the exposure caused by the company’s products, services, and channels of delivery, as well as the types of customers and other parties they deal with, the countries in which they operate or do business, the volume or pattern of their transactions, the nature of their trade, and their business relationships.
- To reduce risk, implement controls and risk reduction procedures.
- Create an AML/CTF program that includes customer identification, screening for sanctions/SDN/PEP, and beneficial ownership or third-party business relationships.
- Having in place policies and processes for reporting suspicious transactions (STR).
- Implement a risk-based strategy for ongoing examination of company relationships, patterns, and international trades.
IRS examining Guide
The Internal Revenue Service (IRS) is responsible for auditing dealer AML compliance programs. The IRS will inform a dealer that it intends to inspect the company,
Examiners will request documentation supporting your program
including but not limited to:
- A compliance officer designation and resume; an AML compliance handbook with policies, processes, and internal controls; materials for an AML training program,
- Documentation of training for necessary staff
- Independent audit and testing reports
- Customer due diligence
- Reporting needs
- Record-keeping and other requested paperwork
Conclusion
It is not enough to just create internal AML/CFT policies and processes, compliance programs, and assign a compliance officer to oversee them. Programs for AML/CFT cannot be static. Regulations will require that internal AML/CFT policies and procedures be updated in response to changes in the laws or whenever a trigger event has an impact on how corporate operations are conducted. Simply hiring people with little experience won’t help precious metals industry instead, selecting a compliance officer or outsourcing the compliance role to a knowledgeable company will go a long way toward safeguarding the sector.
