AML for Precious Metals: Beyond the Final Rule

John Bullock[1]

International Precious Metals Institute

29th Annual Conference

12 June 2005

Orlando, Florida, USA

I. INTRODUCTION

A “dealer in precious metals”[2] is now required by law to have an anti-money laundering (AML) program.  The United States Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) issued a final rule on June 3, 2005,[3] imposing this requirement, and directing that AML programs be developed and implemented by dealers not later than January 1, 2006.  This final rule fulfills the mandate of the USA PATRIOT Act,[4] which, among other things, directs that “each financial institution shall establish anti-money laundering programs.”[5]

            This paper will describe the final AML rule,[6] beginning with the somewhat complex issues of which materials are “precious metals” and covered goods, who are covered dealers in such precious metals, and what are covered transactions.  It will then describe the “minimum” AML program that is required of such dealers.  And it will advocate that dealers in precious metals take measures beyond those minimum requirements.

            As it had first proposed in 2003,[7] Treasury has repeated the mandate of the USA PATRIOT Act; it requires that an AML program must include:

            (A) development of internal policies, procedures, and controls;

            (B) designation of a compliance officer;

            (C) an ongoing employee training program; and

            (D) an independent audit function to test programs.

But the trend of the final rule is to clarify and simplify that mandate, and to limit its scope to areas of higher risk.  The final rule excludes many transactions, particularly in lower grade materials, that are common in the precious metal refining industry, and it deems transactions between dealers who have AML programs to be less at risk.  The overall result, while still implementing the Congressional mandate, is a kinder, gentler requirement, with emphasis and burdens on high risk transactions. 

            This approach is rational, but it should not lead dealers in precious metals to a sense that a bare bones AML program will satisfy Treasury.  The issues of money laundering and terrorist finance are taken very seriously, and the guidance that accompanies the final rule reflects that.  So this paper looks at why a dealer in precious metals should be particularly careful and thorough in implementing the AML rule’s minimum requirements, and should consider going beyond the rule, to address other risks that are present in the precious metals industry.

            There are four reasons why a dealer in precious metals should go further than what is now required by Treasury:

·        AML Rule Enforcement – Treasury has required a minimum AML program, but when criminal law enforcement authorities track the proceeds of an actual crime into a precious metals transaction, they will not be so easily satisfied.  If they believe that a dealer could have known what was happening, they will not accept an AML program that failed to produce such knowledge, and that failed to terminate business with criminals.  Failure to develop and maintain an effective AML program may result in civil and/or criminal penalties.[8]

·        Criminal Prosecution – if an employee of a dealer in precious metals has committed a crime, acting through the dealer’s business, a prosecutor can prosecute both the employee and the dealer.  The prosecutor will look at whether the dealer has an effective program to prevent employees from committing crimes, and will then decide whether to prosecute.

·        Criminal Sentencing – if a dealer in precious metals is prosecuted and found guilty of a crime, one that was actually committed by an employee, the court will look again at whether the dealer had an effective program to prevent that crime from happening, and, if the dealer had such a program, the court will reduce its sentence.

·        Civil Conversion – if a dealer in precious metals is found to have purchased stolen metals, even in complete good faith and with the highest degree of care, with no suggestion of criminal guilt, it will still be civilly liable to pay again, in full, to the victim of the original theft.

These civil and criminal challenges to dealers in precious metals are not theoretical.  At the present time, and in the recent past, a number of dealers in precious metals have been charged with civil conversion and with criminal liability, with resulting costs of millions of dollars.  A broad and effective AML/compliance program might have stopped the circumstances that led to those charges.  And an effective program that is created and implemented now can help protect against these kinds of charges in the future, and their potentially disastrous consequences. 

II. THE FINAL AML RULE

            Discussion of the final AML rule for dealers in precious metals must begin with its definitions: what are precious metals, and who is a dealer in them.  As to the first question, it is obvious that some things are precious metals, e.g. LBMA good delivery gold bars.  But in the precious metals industry there are many purchases and sales of materials such rags and wipes, floor sweepings, “empty” containers, spent catalyst, old electronic circuit boards, etc., etc.  Are these transactions in precious metals?

            Treasury’s answer is no.  It has defined precious metal as:

(i) Gold, iridium, osmium, palladium, platinum, rhodium, ruthenium, or 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, or two or more of the metals listed [above].[9]

That is a familiar list of metals that are considered to be precious,[10] but the minimum assay condition is unique and very important.  It means that lower grade materials such as rags and wipes, floor sweepings, “empty” containers, spent catalyst, old electronic circuit boards, and any other material with an assay less than .500, are not precious metals, for purposes of the AML rule.  Even ten karat gold, for AML purposes, is not precious metal. 

            That .500 assay threshold is then applied to the definition of a dealer, which has been changed from the proposed rule to further limit the applicability of the final AML rule to persons dealing in higher risk transactions.  A dealer in precious metals is defined in the final rule as a person engaged within the United States as a business in the purchase and sale of precious metals, with annual purchases of at least $50,000 and annual sales of at least $50,000.[11]  Note that both purchases and sales must satisfy the $50,000 threshold.  So, as Treasury has explained, a gold mine that extracts and sells gold, but does not purchase it, is not a dealer in precious metal.[12]  Similarly, on the other side of the equation, Treasury has explained that a person who purchases high grade gold, but sells only ten karat jewelry, i.e. less than .500 assay, is also not a dealer.[13]  So it is clear, both from the regulation itself and from the preamble explanation, that a person who purchases only low grade materials, such as rags, spent catalyst, even ten karat jewelry, i.e. material with less than a .500 assay, is like the mine, because it has not purchased “precious metals” as defined in the AML rule, and so is not a dealer in precious metals.  This is so even if that person, like the mine, then refines or concentrates low grade materials and sells them as high grade precious metals. 

            In addition to exceptions that result from the assay formula, there are exceptions that are express, and do not require calculation.  The final AML rule exempts a licensed or authorized pawn shop from classification as a dealer, to the extent that actual pawn transactions are involved with no limitation upon assay.[14]  This is a new provision.  It exempts the purchase of precious metals by a manufacturer for incorporation into industrial equipment, and the subsequent sale and purchase of that equipment, with no limitation upon assay.[15]  This is a simplification from the proposed rule, which would have limited this exception to products containing minor amounts of precious metals.  In another new exception, toll refining of any precious metal-bearing materials, whether high or low grade, followed by return of metal to the customer, is deemed by Treasury to be the provision of a service, and is not a purchase or sale of precious metals.[16]  So a number of transactions that involve precious metals have been excluded from the calculations to determine who is a dealer.  When low grade transactions, purchases for incorporation into industrial equipment, and toll refining transactions have been excluded, if a person does not both purchase and sell $50,000 in precious metals annually, that person is not a dealer and has no AML obligation as a dealer in precious metals.  If, on the other hand, a person does purchase and sell precious metals beyond the $50,000 threshold, the AML rule applies to that person, and requires development and implementation of an AML program, approved by senior management, and available for inspection by Treasury.[17]

            The scope of that AML program obligation has been significantly clarified in the final AML rule, with a much greater focus upon higher risk transactions.  The precise terms of the obligation are important:

Each dealer shall develop and implement a written anti-money 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.[18]

Note particularly the limiting qualification: “through the purchase and sale of covered goods.”  This is a significant addition from the proposed rule, and it means that the AML program obligation, as in the dealer threshold calculations, only encompasses transactions in precious metals as they are defined in the rule, i.e. materials with an assay of .500 or more.  Lower grade transactions, purchases of precious metals for incorporation into industrial equipment, and toll refining transactions need not be covered by a dealer’s AML program.  So, for example, a person who deals primarily in lower grade materials, such as electronic scrap, but occasionally purchases and sells higher grade precious metals above the $50,000 thresholds, will be required to have an AML program, but only for those occasional higher grade transactions.

            The actual operation of a dealer’s AML program is much the same as had been proposed.  To fulfill its obligation, a dealer in precious metals must first assess the “money laundering and terrorist financing risks associated with its line(s) of business.”[19]  This assessment, which should be documented and made a part of the dealer’s AML program, is required only for purchases and sales of precious metals as defined, and excludes toll refining, purchases for incorporation into industrial equipment, and transactions involving materials with an assay below .500.  As in the proposed rule, Treasury has included some specific directions for this risk assessment:

“For purposes of making the risk assessment required by .. 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 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 … as a sponsor of international terrorism[20] .. ; designated as non-cooperative with international money-laundering principles or procedures[21] …; or designated .. as warranting special measures due to money laundering concerns.[22]”[23]

These three Treasury directions are essentially unchanged from the proposed rule, with the important addition of the phrase “or other dealers subject to this rule” to “established customers or sources of supply” in direction (B).  This is another movement by Treasury toward simplification and focus of a dealer’s required AML program, by expressly recognizing that a purchase or sale of precious metals between regulated dealers, both of whom have AML programs under the AML rule, presents a lower risk.  The new phrase does not exempt such transactions from the risk assessment or the AML program, but effectively authorizes a lower level of program scrutiny.

            Based upon its risk assessment, a dealer must then develop and implement written “policies, procedures and controls to assist the dealer in identifying transactions that may involve use of the dealer to facilitate money laundering or terrorist finance.”[24]  Again Treasury adds a list of specific factors that may indicate such transactions:

(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 affiliation;

(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.[25]

These factors are unchanged from the proposed rule, with the exception that “unusual” secrecy rather than “high” secrecy is now the description of the concern.  Because none of these factors is necessarily indicative of underlying criminal intent, a dealer’s AML program must provide for follow-up, described as “making reasonable inquiries to determine whether a transaction involves money laundering or terrorist finance.” And the AML program must provide, in appropriate cases, for a refusal to engage in a proposed transaction, or termination of a business relationship.[26]

            The operational structure of an AML program has also not changed from the proposed rule.  Once established, a dealer’s program is to be administered and maintained by a Compliance Officer,[27] who “will be responsible for ensuring that:

(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  [law], and further guidance issued by the Department of the Treasury; and

(iii) Appropriate personnel are trained in accordance with [the AML program].”[28]

An AML program must provide for compliance with Bank Secrecy Act reporting of certain transactions and accounts,[29] and for “on-going training of appropriate persons concerning their responsibilities,”[30] and for “independent testing to monitor and maintain an adequate program.”[31]  Reporting of suspicious activity is not required, but it is encouraged.[32]

            The cumulative impact of the changes in the final AML rule, compared to the proposed AML rule, is that there will be fewer regulated dealers in precious metals, and those dealers’ AML programs will be less complex, and more focused.  As had been proposed, an AML program must pay particular attention to new customers, especially those customers who are not themselves dealers with their own AML programs.  And the program  must direct attention to certain business factors in high grade precious metal transactions that might indicate or favor an underlying criminal purpose, and look for unusual aspects of those transactions.  The applicability and scope of the new AML rule have been reduced to direct the attention of dealers and regulators upon transactions that have a higher risk of use in money laundering and terrorist finance, and to reduce the burden associated with other, low risk transactions. 

III.  ENFORCEMENT OF THE FINAL AML RULE

            A dealer in precious metals should seriously consider going beyond what the final AML rule appears to require.  Both the final rule and the preamble repeatedly say that the requirements are “minimum.”[33]  A minimum program may satisfy the Internal Revenue Service when it first examines a dealer’s books and records to determine if a program exists.[34]  Treasury has promised to begin regulation with a light touch, emphasizing “education” for newly regulated industries.[35] 

            But when a crime has been committed, and criminal law enforcement personnel trace the proceeds of that crime into a transaction in precious metals, they will examine a dealer’s AML program with much greater rigor.  The standard expressed in the AML rule is that a program must be “reasonably designed” to prevent a dealer from being used to facilitate money laundering and terrorist finance.  But views of what is “reasonable” will differ, and law enforcement personnel will be particularly attentive to whether dealers in precious metals have used “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.”[36]  Reasonable use of expertise is a higher standard than reasonable use of ordinary intelligence by a layman.  Law enforcement personnel will look at a dealer’s senior management, persons, presumed to have special expertise in precious metals transactions, who have specifically approved the AML program.  And they will similarly look at the Compliance Officer, who “should be competent and knowledgeable regarding .. money laundering issues and risks”[37] and “in all cases .. should be thoroughly familiar with the operations of the business itself and with all aspects of your anti-money laundering program.”[38]  Law enforcement personnel will question what these people, applying their special expertise, reasonably should have asked about a proposed customer and/or transaction, and, with information that an effective AML program should reasonably have uncovered, what these people reasonably should have decided. 

            The failure of an AML program to detect and deter all criminal activity does not mean that the program has failed to meet the requirements of the Bank Secrecy Act.  But it will be a lens through which an AML program will be examined.  And because there are significant civil and criminal penalties for failure to meet BSA requirements, dealers will want to be sure that their programs are well developed and implemented, and survive that scrutiny.

IV. CRIMINAL PROSECUTION

            And failure to develop and implement an effective AML program is not the only risk that a dealer in precious metals faces.  Precious metals are, as Treasury notes, “easily transportable, highly concentrated forms of wealth and can be highly attractive to .. criminals.”[39]  So dealers in precious metals, in the broad industry sense of that term, should consider going beyond even a through AML program, to encompass more of the risks that they face beyond unwitting involvement in money laundering and terrorist finance. 

            Dealers in precious metals usually have intensive security provisions to deter and detect theft, and these security provisions can be incorporated into a broader compliance program.  That can be particularly important if a dealer’s security provisions are not successful, and an employee of a dealer is involved in theft.  Such an employee-thief is, of course, first and foremost guilty of a crime, and can and should be prosecuted.  But a thief’s employer can also be legally responsible for the actions of its employees.  Under the legal principle of respondeat superior,[40] if a theft occurs in the course of employment, and benefits the employer even in small part, the employer may also be criminally liable for the actions of its employee.  So if an employee of a dealer in precious metals, while acting within the scope of his or her duties, has committed a crime that, even in part, benefits the employer, both the employee and the employer can be prosecuted and convicted of that crime. 

            Whether an employer should be prosecuted for, say, the unauthorized – or even expressly prohibited – actions of a rogue employee is not a simple question.  What are the rank and authority of the rogue employee?  Was the criminal activity uncommon, or was it frequent?  Perhaps most importantly, was the criminal activity known, or should it reasonably have been known, by others, such as by upper management, e.g. the owner or the board of directors?

            That issue – who knew or should have known – is the primary key to whether a company will be prosecuted for the criminal acts of an employee.  And a prosecutor may be persuaded that a company would not, and reasonably should not, have known of a crime within its business, if that company has a compliance program that reasonably addresses the issue, a systematic, diligent effort to avoid becoming involved in criminal activity.

            This is the message from a primary source of guidance for US government prosecutors called the Thompson Memo.[41]  Larry D. Thompson, Deputy Attorney General, United States Department of Justice, issued this guidance to federal prosecutors under the subject heading: “Principles of Federal Prosecution of Business Organizations.”  It openly encourages prosecution of companies for the actions of their employees: “In all cases involving wrongdoing by corporate agents, prosecutors should consider the corporation, as well as the responsible individuals, as potential criminal targets.[42]

            That does not preclude, however, the exercise of prosecutorial discretion to not sue a corporation for the illegal actions of its employees.  The Thompson Memo sets forth nine areas of inquiry by which that discretion should be guided:

1. the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime;

2. the pervasiveness of wrongdoing within the corporation, including the complicity in, or condonation of, the wrongdoing by corporate management;

3. the corporation's history of similar conduct, including prior criminal, civil, and regulatory enforcement actions against it;

4. the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection;

5. the existence and adequacy of the corporation's compliance program;

6. the corporation's remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies;

7. collateral consequences, including disproportionate harm to shareholders, pension holders and employees not proven personally culpable and impact on the public arising from the prosecution;

8. the adequacy of the prosecution of individuals responsible for the corporation's malfeasance;

9. the adequacy of remedies such as civil or regulatory enforcement actions.[43]

Inquiry 5 – the existence and adequacy of the company’s compliance program – and Inquiry 6 – remedial efforts to implement a compliance program – are directly related to the development and implementation of an AML program, at least within the area of possible criminal activity that such an AML program addresses.  So the existence of an AML program, or efforts to create one, can have a positive influence upon a prosecutor who is considering whether to bring criminal charges against a dealer in precious metals. 

            That positive influence will strongly depend upon the “adequacy” of the program.  A “paper program” will not be seen positively.  The Thompson Memo directs prosecutors to examine a compliance programs to assure that it is:

“designed and implemented in an effective manner, … whether the corporation has provided for a staff sufficient to audit, document, analyze, and utilize the results, … [and] whether the corporation's employees are adequately informed about the compliance program and are convinced of the corporation's commitment to it.”[44]

If those criteria are satisfied, an AML program, even though may have failed to completely prevent a crime within the company, will be a factor favoring the company, and a decision not to prosecute the company.

            And even though the prior existence and adequacy of a compliance program is only one of nine areas of inquiry, the results of an adequate plan should also be reflected in positive responses to five other Thompson Memo inquiries:

Inquiry 1. It should have reduced the nature and seriousness of an offense, by having made it harder to commit larger crimes without detection;

Inquiry 2. It should have reduced the pervasiveness of wrongdoing within a company, and demonstrated that crime is not condoned by management;

Inquiry 3. It should have reversed a history of similar conduct, if such history existed;

Inquiry 4. It should have enabled prompt discovery of crime, timely and voluntary disclosure to authorities, and cooperation in investigations;

Inquiry 6. It should have already adapted, without government direction, to previously unforeseen criminal circumstances, by implementing remedial measures, and thus it should have shown acceptance of responsibility by the company.

Implementation of an effective compliance/AML program, even if it has not prevented all criminal activity, can therefore lead to positive responses to six of the nine inquiries that prosecutors will make.  If these conditions have been satisfied, the Thompson Memo says that such an effective compliance plan “may result in a decision to charge only the corporation's employees and agents.”[45]

V. CRIMINAL SENTENCING

            If a dealer in precious metals is changed with a crime, it must face the possibility of conviction and sentencing.  An AML program may play a part in reducing a sentence, and thus in the strategies and defenses that might be available in negotiations.  The most recent publication of the United States Sentencing Guidelines[46] contains a formula for determining an appropriate sentence for a crime by a company, in which a variety of relevant factors are added and subtracted.  Without going through all of those factors, it is important to know that one factor, which can be subtracted to produce a lower sentence, is the existence of an effective compliance and ethics program.  Indeed, in the introduction to the chapter dealing with sentencing of organizations,[47] the Guidelines express the intent “that the sanctions imposed upon organizations and their agents, taken together, will provide just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct.”  The introduction then repeats this message:

These guidelines offer incentives to organizations to reduce and ultimately eliminate criminal conduct by providing a structural foundation from which an organization may self-police its own conduct through an effective compliance and ethics program. The prevention and detection of criminal conduct, as facilitated by an effective compliance and ethics program, will assist an organization in encouraging ethical conduct and in complying fully with all applicable laws.

The Sentencing Guidelines then set forth, in significant detail, what an effective compliance and ethics program should be.[48]  As with the Thompson Memo’s guidance to prosecutors, with its emphasis on the adequacy of a compliance program, the Sentencing Guidelines emphasize the effectiveness of a program.

(a) To have an effective compliance and ethics program, ..  an organization shall—

(1) exercise due diligence to prevent and detect criminal conduct; and

(2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.  Such compliance and ethics program shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct. The failure to prevent or detect the instant offense does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct.

(b) Due diligence and the promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law within the meaning of subsection (a) minimally require the following:

(1) The organization shall establish standards and procedures to prevent and detect criminal conduct.

(2) (A) The organization’s governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.

      (B) High-level personnel of the organization shall ensure that the organization has an effective compliance and ethics program, as described in this guideline. Specific individual(s) within high level personnel shall be assigned overall responsibility for the compliance and ethics program.

      (C) Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority.

(3) The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.

(4) (A) The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals referred to in subdivision (B) by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.

      (B) The individuals referred to in subdivision (A) are the members of the governing authority, high-level personnel, substantial authority personnel, the organization’s employees, and, as appropriate, the organization’s agents.

(5) The organization shall take reasonable steps—

      (A) to ensure that the organization’s compliance and ethics program is followed, including monitoring and auditing to detect criminal conduct;

      (B) to evaluate periodically the effectiveness of the organization’s compliance and ethics program; and

      (C) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

(6) The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through

      (A) appropriate incentives to perform in accordance with the compliance and ethics program; and

      (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

(7) After criminal conduct has been detected, the organization shall take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.

(c) In implementing subsection (b), the organization shall periodically assess the risk of criminal conduct and shall take appropriate steps to design, implement, or modify each requirement set forth in subsection (b) to reduce the risk of criminal conduct identified through this process.

These factors, by which a sentencing court will determine if a compliance program is effective, can be applied and incorporated into creation and implementation of an effective AML program.  If they are, that AML program can lead to a significantly reduced sentence.[49]  And like the Thompson Memo criteria, an effective compliance program can have additional benefits in sentencing beyond the program itself.  It can show that high-level personnel do not condone or tolerate crime, which would otherwise warrant an increased sentence.[50]  It can, over time, reduce or eliminate a history of similar activity, also a factor that will increase a sentence.[51]  And it can be a means of prompt reporting of a crime and investigative cooperation with government, which can further reduce a sentence.[52] 

VI. CIVIL CONVERSION

            Even if criminal liabilities can be completely avoided, there are risks of civil liability that every dealer in precious metals must face.  Conversion is a civil tort, i.e., a wrong for which damages can be claimed.  In legal language, it is the wrongful taking of personal property from the owner or other person entitled to its possession, or the exercise of dominion over the property inconsistent with or in defiance of the rights of that person. Conversion thus can be simple theft, or start with simple theft.  If a person steals precious metal, that person has committed not only a crime, but also the civil tort of conversion, and has a civil liability to return the metal to its owner, or, if return is not possible, to pay for the full value of the metal. 

            But the right of the owner to claim conversion also follows the stolen property beyond the thief, to persons who subsequently take possession of it.  And no proof of criminal intent is needed to make those other persons liable.  In practical terms, a person who acquires stolen property does not acquire good title to that property, and must return it to its rightful owner.  This is because the thief did not acquire good title to the stolen property, and could never have given good title to a subsequent purchaser.  And that subsequent purchaser could never have given good title to another.  And on and on, through a chain of transactions.  So all subsequent purchasers of that property, even when they were acting in complete good faith, even when they were taking all proper care, never acquired good title to that stolen property.  If the original true owner can trace that stolen property, even through a long chain of buyers, a claim can be filed against every one of those buyers, alleging the tort of conversion, demanding the return, or payment of the full value, of the stolen property.

            This is not a theoretical claim in its applicability to dealers in precious metals.  The tort of conversion is presently being claimed against some members of the precious metals industry, and millions of dollars are sought as damages.  Thefts were discovered; thieves were found; they confessed; and they revealed how they disposed of the stolen metal.  Each subsequent purchaser, in turn, revealed the next transaction.  So a chain of persons who came into possession was established.  No improper knowledge or intent need be proven.  It needs to be emphasized that under the tort of conversion, a purchase of precious metals, at full market prices, in the utmost of good faith, with exceeding diligence and care as to its ownership, and even at the end of a long chain of intermediary purchases and sales, may nevertheless be subject to liability in full to the original true owner.  Of course, the values involved in purchases and sales of precious metals are very high.  So paying twice for precious metals can be ruinous.  Costs of repayment to an original true owner may be shared among several subsequent purchasers, but even a shared cost of precious metal is a high cost, invariably much higher than a profit margin.

            An AML Program, in which the identity of a prospective customer and the legitimacy of its operations – or of its sources of precious metals – can be established, can help a dealer to avoid purchasing stolen precious metal.  It will not provide a legal defense to a claim of conversion, but it may help to avoid the circumstances that give rise to liability.  And when many dealers in precious metals have AML programs, and when having an AML program is a pre-condition to a business relationship with another dealer, there will be a chain of AML programs that will go back along a chain of transactions, to the source.  If all works as intended, stolen precious metals should be kept out of the precious metal industry. 

VII. CONCLUSION

            The final AML rule for dealers in precious metals has been published in the Federal Register, and dealers must, by January 1, 2006, develop and implement AML programs that are reasonably designed to detect and deter involvement in criminal activities:

            (A) development of internal policies, procedures, and controls;

            (B) designation of a compliance officer;

            (C) an ongoing employee training program; and

            (D) an independent audit function to test programs.

But the stated requirements are “minimum” standards, and dealers should be wary of underestimating the problem.  If actual money laundering or terrorist finance is traced into a precious metals transaction, there will be expensive complications, and perhaps worse.

            More can be done, both to meet the obligations of the final AML rule, and to protect against broader criminal and civil risks in the precious metal industry.  Both  the Thompson Memo and the US Sentencing Guidelines describe compliance and ethics programs that, at first glance, exceed the minimum requirements.  But a larger compliance and ethics program is not so far beyond the proposed AML program as it might seem.  For example, the Treasury AML rule requires steps by a Compliance Officer that fit well in broader compliance programs:

(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.[53]

Treasury also proposes to require the same kind of high level management commitment that the Thompson Memo and Sentencing Guidelines look for, through a requirement of approval by senior management.[54]  So it is not such a great leap forward to look to the Thompson Memo and Sentencing Guidelines for factors to incorporate directly into an AML program.

            And beyond formal legal requirements, it is important to create and implement a program that works, that reduces actual risks that a dealer in precious metals faces.  There are civil and criminal legal pressures in force right now that should be shaping the course of business for every dealer in precious metals.  The costs of finding that you have purchased stolen metal, or have harbored criminal activity by an employee, can break your company.  A broad compliance program, starting with a thorough and effective AML compliance program, but looking beyond it, can keep you out of those troubles, and reduce if not eliminate those costs.