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How Designers Can Comply with the Patriot Act (it's mandatory!)
by Ettagale Blauer

Patriot Act Now In Force

After four years of tinkering, the US government has finalized the rules applicable to the jewelry trade under the Patriot Act. Virtually all of the rules were already known to the trade.

At a meeting held at the New York Diamond Dealers Club, Jewelers Vigilance committee president and general counsel Cecilia Gardner and IRS Enforcement Officer Alex Basden detailed the process by which members of the trade will, and must, comply with the Act. The meeting attracted one of the biggest crowds ever seen at the Club.

Some in the audience believed that they were exempt from the provisions of the Act because they are either one-man businesses, or small businesses or that their current business practices were sufficient. None of these beliefs are correct.

The rules apply to virtually all dealers who are defined simply: Jewelry dealers who buy precious metals, precious stones, jewels and covered goods in an amount in excess of $50,000 in one calendar year and receive more than $50,000 in gross proceeds from the sale of precious metals, stones and jewels during the same period, must comply by January 1, 2006.

The aim of the act is to subvert those who would use the jewelry industry, including dealers in diamonds and other precious stones, manufacturers of jewelry, and those who sell these products, from being used by terrorists. While this may sound far-fetched, the jewelry trade is well-positioned to assist terrorists unwittingly, by laundering money. Terrorists are using mechanisms other than banks to launder their money, and jewelry is an ideal commodity for their needs.

-- There is a highly concentrated value in the goods.
-- It is highly transportable.
-- It is highly marketable, anywhere in the world.
-- Gems and jewels can be transferred into cash almost anywhere in the world.

The Patriot Act is designed to force you to remain vigilant and to alert you to efforts on the part of terrorists to use your business to launder money.

Compliance with the requirements of the Patriot Act follows five basic steps:

1. You must appoint a compliance officer. This person must be an employee of the business. If you are a one-person business, you are, by default, the compliance officer. If you are a two-person business, choose the person who handles the finances of the business.

2. You must perform a risk assessment. Is your business vulnerable to money laundering? You must consider:
-- who you buy from
-- where you buy
-- who you sell to
-- how you get paid
-- how you pay people

In each instance, you must look at the origin of the goods or payments. For jewelers who deal exclusively with other US-based firms, the risks are fairly low. For jewelers who deal in part or more wholly with foreign-based firms, the risks may be higher. You must know if you are dealing with people in a country on the State Departments list of countries that support terrorism: Iran, Syria, Libya, Cuba, North Korea and Sudan. While you may not be doing so directly, you might be doing so through a third party. There are also countries that are considered non-cooperative including Ukraine and Nigeria.

Do you know the people you are dealing with? Do you pay them in cash or receive cash for your goods? Has their policy of paying or receiving payments from you changed recently, that is, are they now asking to deal in cash where before they settled accounts with checks?

3. You must have a written anti-money laundering program.
This is a simple statement that answers the questions raised in the risk assessment. Write down:

-- who you buy from
-- where you buy
-- who you sell to
-- how you get paid
-- how you pay people

Your client list already exists and forms the basis for this part of the Act. It should include the name, address, telephone number and tax ID of your clients. This is information you should already have as part of your daily business. In the case of foreign clients, a passport number would take the place of the tax ID number.

If you are dealing with, or considering dealing with, a person or company that does not want to give you this information, you should consider this to be a high risk situation.

Your plan must be made available to the Department of Treasury should you be asked to provide it. This is why it must be in writing.

It must incorporate controls based on your assessment of the relevant money laundering risks associated with your supplier's geographical location. When you are dealing with other than established customers, you must have enhanced due diligence. For example, if someone you do not know suddenly admires your jewelry, places a large order, and wants to pay in cash, you must consider the reason for this. You must ask this person where and how he intends to sell your work. Is he a retailer? Does he have a recognizable address or only a post box address? Does he seem more interested in the transaction and not in the quality of the merchandise?

Similarly, if someone wants to pay in several cash payments that together total more than $10,000, this will be seen as an attempt to evade the bank reporting requirement, in effect since the early 1970s, for cash payments of more than $10,000.

All cash transactions over $10,000 or a series of payments that total more than $10,000 and have been broken up in an obvious attempt to evade the $10,000 reporting requirement require you to fill out Form 8300. You must keep this form for five years.

4. You must train employees.

Anyone in your business who deals with these risk elements should be taught the procedures, the security risks and your company's plan. This includes anyone who makes any financial decision regarding your business, buys or sells your product, or buys elements of your product. It includes, for example, the gems you use to create your jewelry or the gems you buy and sell without creating jewelry from them.

5. You must check your program periodically to see that it is running correctly.

Even if you are a one-person business, this is still required. You could ask your accountant to do this. The person must look at your written material and ask questions about your risk assessments. The person must test the program by coming in and attempting to make a transaction that should raise suspicions.

Follow up on your suspicions

If you identify factors that seem suspect, you have to take reasonable steps to see if your suspicions are justified. New customers require considerable scrutiny.
-- What is their income source
-- Do they have a facility that justifies the size of the order
-- Are they offering you gems or metals at prices below market value
-- You must get a tax ID number
-- Do they want to pay by cash only

With established customers
-- Are they suddenly offering unusual payment methods.
-- Are they paying with large amounts of cash or cashier's checks for the first time.
-- Do they refuse to offer enough contact information.
-- Is there an attempt to maintain secrecy about their business
-- Are they making inappropriate purchases for their kind of business.
For example, someone who does not make gem-set jewelry is now buying diamonds.
Someone buying large quantities of stones and doesn't specify clarity and color, only the total dollar amount of goods.
Someone buying quantities of gold jewelry without showing any interest in the style or selection, again, only the value of the purchase.

Covered goods

What goods are covered by the Patriot Act?
-- Jewels, stones and precious metals
-- Jewelry containing jewels, stones and precious metals if the value of the these elements make up more than 50% of the value of the jewelry
-- Precious metal must have a minimum of 500 parts per thousand of the precious metal; for example, 14k gold is covered but 10k gold is not


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