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BY DEREK MOSCATO Illustration by Michael DiBiase

After years of debate, the U.S. Department of the Treasury has finally released provisions that specify what members of the jewelry industry have to do to comply with the U.S.A. PATRIOT Act. For certain segments of the industry, it’s not good news.

The U.S.A. PATRIOT Act, which stands for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism, was passed in October 2001, in the aftermath of the events of September 11. Regulations under the Act require financial institutions to develop anti-money laundering programs to prevent the laundering of funds used to finance criminal activities. The Act’s definition of “financial institutions” includes dealers in precious metals, gemstones, or jewelry, putting the industry firmly in the government’s line of sight.

The PATRIOT Act stands as one of the most divisive and controversial pieces of government law in recent times. While its stated aim is to monitor activity that is dangerous to the United States, its critics claim it’s perhaps the greatest setback to civil liberties in decades.

But while Democrats, Libertarian-leaning Republicans, privacy protection groups, student radicals, and the American Civil Liberties Union are crying foul over the PATRIOT Act, industry groups are being cautiously optimistic that the provisions for their industry won’t be a drain on privacy or profits.

On June 3, 2005, the Financial Crimes Enforcement Network (FinCEN), U.S. Department of the Treasury, issued the Interim Final Rule implementing section 352 of the U.S.A. PATRIOT Act, which requires dealers in precious metals, stones, or jewels to establish anti-money laundering programs. These programs, which will be subject to inspection and regulation by FinCEN, need to be implemented by January 1, 2006.

The Interim Final Rule defines a “dealer” as a person who both purchased at least $50,000 worth of covered goods and sold at least $50,000 worth of covered goods during the preceding year. “Covered goods” include jewels, precious metals, 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.

In general, jewelry retailers are exempt from the rule. However, in a surprise move, FinCEN ruled that retailers must comply with the act if they purchase more than $50,000 of covered goods from non-U.S. dealers or members of the general public and also sell more than $50,000 of covered goods. Pawnbrokers are exempt from the rule entirely.

The jewelry industry was included in the PATRIOT Act because jewelry and its components present identifiable money laundering risks — they are easy to transport and serve as highly concentrated forms of wealth. In other words, they serve as an excellent medium of exchange around the world and have good liquidity because of their universally acknowledged value.

Case in point, according to Deputy Assistant Secretary of the Treasury Michael A. Dawson: In a Federal Bureau of Investigation sting code-named Operation Meltdown, investigators discovered Colombian narcotics traffickers who were converting their U.S. profits into gold, before having it disguised and smuggled into Colombia to be reconverted to cash.

In a November 2003 speech, Dawson said he’s counting on jewelers and miners to join the fight against terrorism and organized crime. “Fortunately, jewelers are vigilant,” he said. “They recognize that criminals are trying to abuse their products and services. Jewelers have organized to protect their industry and their individual reputations.”

The act is of greatest concern to the firms doing much of their business overseas, particularly in countries noted for terrorism or political corruption. The regulations require that the anti-money laundering programs include written policy and procedures, the designation of a compliance officer, ongoing employee training, and an independent audit function to test the program.

“None of it is too complicated,” maintains Cecilia Gardner, executive director and legal counsel of the Jewelers Vigilance Committee (JVC). But, she says, “These businesses do have to address some matters that are rather important.”

Since the PATRIOT Act provisions were first published, industry organizations have been partnering with the JVC to present workshops designed to help the jewelry industry understand what is expected and how to comply with the provisions.

“The events of September 11 have caused us to reevaluate how we do business,” said James F. Marquart, president and CEO of the Manufacturing Jewelers and Suppliers of America (MJSA), in a public statement. “MJSA supports our industry’s response to new regulatory rules initiated by the U.S. government. . . . Based on our meetings with Treasury, we do not believe the regulations will present a financial burden on industry operations.”

“These regulations will be much less onerous than people suspect. People will be OK with it,” agrees Douglas Hucker, executive director of the American Gem Trade Association. “[The idea is to] get people aware that this industry could be responsible for involvement in money laundering. You’ve got to have a plan in place, and it has to be a written plan.”

Gemstone wholesalers have expressed the most concern about complying with these regulations. If a dealer routinely travels overseas and buys from street brokers who can barely speak English, much less issue formal invoices on the spot, documentation becomes a serious issue. However, as Hucker points out, the dealers aren’t required to investigate all of their suppliers personally. “If you’re buying in Sri Lanka or Chanthaburi [Thailand], the government doesn’t put the onus on you to detect whether money laundering is taking place. But a practical person understands that there are certain kinds of questions that raise a red flag.”

According to a document put out by FinCEN, those red flags include: unusual methods of payment, especially large amounts of cash or payments from third parties; unwillingness by the customers to provide complete or accurate contact information; asking that the transaction be kept a secret; and purchases or sales that are outside standard industry practice.

What dealers of all types are required to do, says Gardner, is keep as much information as they can on the people they do business with.

“They are obligated under the provisions to make the best effort to determine who they are purchasing from,” she says. “Specific, detailed information about the identity of the person — anything that helps them identify who they are dealing with.”

Companies that do encounter suspicious transactions are encouraged to file a Suspicious Activity Report with FinCEN. The choice of whether or not to continue any transaction lies with the dealer.

Gardner emphasizes that ignoring the law can have serious repercussions. While the jewelry guidelines issued by the Federal Trade Commission, for example, are enforced mainly through civil suits, the PATRIOT Act provisions can come with the power of criminal prosecution.

“If [gem and jewelry businesses] are ignoring the provisions of the U.S.A. PATRIOT Act, they are in violation of the law, and they could be found guilty of money laundering by simply ignoring these obligations,” Gardner says. “Compliance is not an option.”

September/October 2005 • Style: Common Ground - German vs. No. American cutters • Selling: PATRIOT Games • BONUS: How to comply with the PATRIOT Act • News & Updates • In This Issue