Compliance or Commitment?
By Mike Riess

As published in the Precious Metal News, 4th Quarter 2003

Our Government ties terrorism to criminal activity and criminal activity to money laundering.  To use the proceeds of their crimes, criminals must legitimize (launder) their money by introducing it into the commercial mainstream.  Precious metals offer efficient laundering mechanisms, so the precious metals industry is now subject to the USA PATRIOT Act of 2001. 

  A surprising number of us have had difficult encounters with anti-money laundering enforcement authorities.  We have had to produce records, respond to questions, even had assets and bank accounts frozen.  People we know have gone to prison, and we have seen companies prosper for generations, then vaporize because they took in a launderer. 

Until recently, few precious metals companies have taken steps to prevent or detect money laundering—despite the encounters with launderers and authorities, and despite the fact that anti-money laundering statutes have been in place for decades.  Why? Because the cost and drain on management time are severe handicaps in an intensely competitive business. 

The Patriot Act resolves these conflicts for you.  It eliminates competitive disadvantage by forcing you and your competitors alike to establish at least the rudiments of an anti-money laundering program.  The rules and their enforcement are likely to intensify, with real consequences to our industry:

1.    The Act offers broad discretion in designing your anti-money laundering program, but the Government holds heavy weapons for the negligent. When promulgating the regulations, the Treasury Department recognized the diversity of the industry stating it is not a “one size fits all” situation.  Each of us can establish an anti-money laundering program based on our own appraisal of risk to laundering. 

Behind this carrot is the stick of “willful blindness.”  If you are caught up in a laundering situation and the Government finds your anti-money laundering efforts knowingly inadequate, it can prosecute you or your company for willful blindness.  Knowledge is pivotal and subject to interpretation.  Willful blindness can carry the same penalties as the underlying violation.  Penalties can be as much as $1 million and 20 years in prison, so the law is not to be taken lightly.

2.     Financial regulatory law is unfamiliar to the precious metals industry because it requires a proactive response. Criminal and civil laws are prohibitive:  if you don’t transgress, you are free to go about your business without State intrusion.  The Patriot Act is a Federal regulatory law requiring proactive participation.  The “thou shalt nots” of the criminal and civil statutes still apply, but doing nothing wrong is insufficient.  Now, we must also observe “thou shalts.”  Thou shalt appoint, detect, report, respond, record etc., which means increases in staff, management time and money.

3.    The same regulators will be setting enforcement standards for dealers in metals and for financial services firms. The regulations for precious metals emanate from the Patriot Act and other statutes directed at financial services firms.  The same administration, undersecretaries and agents enforcing rules for financial service firms will be interpreting them for metals companies.  We can reasonably anticipate that the comprehensive enforcement in the financial sector will migrate to the metals.  

These are good reasons to err on the side of caution when designing your anti-money laundering program.  We know the rules for financial services companies, so we can anticipate the direction precious metals regulations will take.   

But to the extent your anti-money laundering efforts focus narrowly on the enforcement mechanism, they are misdirected.  The enemy, after all, is launderers, not our Treasury Department.  If you are concerned that money laundering is a threat to your business, this is the time to establish a program—not just to pass under the enforcement radar but to actually deter laundering.  The law says you have to install a basic program anyway. With an incremental commitment, you can gear anti-money laundering protection to the risk your company faces.    

There are programs available to help you. To illustrate, let’s go through some of the Act’s requirements:

§      Appoint an Anti-Money Laundering Compliance Officer.  Risk-assessment support and training programs for compliance officers are available.

§      Establish a written anti-money laundering program. You can get help from advisors who know the industry and understand the problems.   Programs should include:

o      Customer due diligence procedures.  The Act requires you to establish reasonable procedures to verify a customer’s identity.  The Act also requires you tell customers you are collecting information as part of your compliance procedure, so you can now expect answers to questions you once never thought to ask.  You can use account-opening software that grades customer information for risk factors enumerated by Treasury for commercial applications—rank credit risk, collect marketing information, etc. 

o      Checking Treasury lists of known launderers and non-cooperative countries. The Act requires you to check new customer names against Treasury’s list of known launderers and to check their addresses against non-cooperative locations.  The list of names is voluminous and confused by aliases, sometimes a whole page for a single person.  You can cut through this with a search engine, such as the one available at www.MaterialsManagement.net   

o      Recordkeeping.  Treasury can require you to produce records and demonstrate that your anti-money laundering program is operating.  Your efforts to know your customer, check treasury lists, monitor activity, find red flags and comply with the Statute’s other requirements will be wasted if you don’t record your documentary and non-documentary verification of customer identification and the analyses, free-form notes and reconciliations of a customer’s activity.  Software is available to electronically receive, file, update and store customer files in legible, readily retrievable form.

§      Train staff.  Employee complicity is part of many if not most laundering schemes.  Employees are often unaware or unmindful of the risks.  Training alerts them to the problem and lets them consider the penalties.  The more serious your training program, the more likely employees will reflect before colluding with a launderer.  You can subscribe to an interactive, online course designed for metals and jewelry companies.  It can be used as stand-alone training or to supplement a training regimen and can be customized to your company’s needs.

§      Test program effectiveness.  The presence of an independent auditor will reinforce the importance of your anti-money laundering program to your staff—in addition to confirming that your procedures work.  

Concluding note:  You will find most anti-money laundering discussions a thicket of abbreviations and acronyms.  To guide you through them, click the Glossary tab at www.MaterialsManagement.net (The only acronym in this article is USA PATRIOT Act, which stands for “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism.”)