Pursuant to the U.S. AML regulations rules applicable to the jewelry industry, each dealer covered under the rule must perform a risk assessment when engaging in transactions with suppliers or customers for the purchase and sale of precious metal, stones and jewels.
Retailers are generally excluded from the definition of dealer under US regulations. However, if a retailer purchases and sells $50,000 or more of precious metals, stones or jewels from a source not covered by the US regulations, then these specific transactions will be subject to the requirements of institution of an AML policy and program. Therefore, as part of their total AML obligations, a retailer will be obliged to assess the risk of transactions involving the purchase and sale of precious metal, stones and jewels obtained from a foreign source of supply.
In assessing the risk of a foreign source of supply, many factors should be considered. The rules are designed to provide the dealer flexibility when assessing the risk associated with any particular foreign source of supply. The risk assessment exercise is directed to the specific business, not an overall assessment of the jurisdiction in which the dealer operates although this is a factor that should be included in the assessment.
Among other factors, a dealer should assess is whether or not the foreign source of supply and the jurisdiction in which they operate are susceptible to money laundering. Foreign jurisdictions have taken many different approaches to shield their industries from money laundering – therefore no one aspect of any jurisdictions’ regime in assessing risk is more important than any other. There is no exhaustive list of the aspects to be considered – here are some factors that could be considered when performing this assessment.
1. The nature and scope of the supplier’s jurisdiction’s regulatory efforts to prevent money laundering and terrorist financing.
Some jurisdictions require dealers in precious stones, or precious metals to institute controls that assist in identifying transactions or parties that may involve the use of the dealer to facilitate money laundering. Others may require additional identification procedures. Licensing provisions for entry into the industry by dealers may also be a factor to be considered in addressing the regulatory atmosphere. Required reporting of cash transactions, filing of suspicious activity reports, designation of a compliance officer are some other elements that could serve to protect the dealer from engaging in money laundering transactions.
2. Whether the dealer has met other required mechanisms within the jurisdiction designed to combat money laundering and terrorist financing.
Some jurisdictions combine government regulatory systems with self imposed efforts to shield dealers from unwillingly engaging in money laundering or terrorist financing transactions. For example, Israel is an example of a country that has strong AML controls, with a central supervisory agency overseeing compliance with AML regulations and requirements for licensing to enter the precious metal or precious stone trade. Israeli diamond trade associations impose additional requirements on their members such as identification of their trading partners, registration, etc. These add to the overall setting that address prevention of exploitation of their businesses for the purposes of laundering money or financing terrorism. All these factors should be included in a dealers risk assessment of a foreign source of supply. As another example, Belgium is a jurisdiction that has imposed strict AML requirements on dealers in precious metals, stones and jewels.
3. The dealer’s relationship with the supplier
A dealer’s historical relationship with any particular supplier is another factor to consider when performing a risk assessment. When a dealer knows and trusts a foreign supplier with whom they have been dealing over an extended period of time, this will also factor into a risk assessment of any particular dealer. This assessment is based not only on longevity, but also knowledge of the supplier’s lawful practices and compliance with AML requirements. There are other risk factors to be considered when performing this assessment: whether the transaction is unusual and non-standard, whether there are unidentified parties involved in the transaction, whether the customer or supplier seeks to maintain an unusual degree of secrecy, whether the transaction is not in accordance with industry norms.
Evaluation of risks pertaining to transactions from foreign sources of supply can result in an assessment that the transaction presents a low risk for money laundering or terrorist financing, and will therefore require minimal monitoring. In the alternative, a transaction from jurisdiction with inadequate financial controls, or in a jurisdiction with an inadequate AML regime may present substantial risk. It is important to ask questions, to get information and then assess the relationship on a case by case basis.
If you have questions regarding the regulatory system in a particular country, please contact the JVC.