U.S. Propose Anti Money Laundering Rules for Diamantaires: What You Don't Know - May Hurt You
March 20, 03The U.S. government, in its desire to fight terrorists and combat the financing of terror, views diamond merchants (with an annual turnover of at least $50,000) as "financial institutions" in terms of the rules and regulations they have to comply with.
A few days ago, the United States Department of the Treasury issued its proposed rules for its anti money-laundering program for diamonds dealers and jewelers. Diamond dealers who wish to submit their views on these rules have the chance to do so up to April 22, 2003. Though these rules are of utmost importance to every American diamantaire or anyone doing business in, or with, the United States, not enough attention is being paid to the issue from the side of the diamond industry.
However, this may suddenly backfire - and you may find yourself accused of crimes even though you didn't have the foggiest notion you did anything wrong. You probably didn't, but just try explaining that.
The proposed rules are new, but the basic legal requirements already exist. Some diamantaires may have occasionally encountered a request for either over- or under-invoicing of a transaction. In the past that may have been viewed as helping a customer to pay less taxes.
Though it may well be a fiscal violation, in a competitive world suppliers are careful not to lose a client because of a tax technicality. Under the new rules, invoices that don't precisely represent the truth may lead to criminal charges and tie the supplier and his client to money laundering and/or even terrorist financing. The laws require that each diamond dealer develop and implement an anti money laundering program reasonably designed to prevent the dealer from being used to facilitate money laundering or the financing of terrorist activities.
It's not good enough "just to warn employees to be careful." Now, a diamantaire's anti money laundering program must be in writing and should set forth the details of the program clearly, including the responsibilities of the individuals and departments involved. To ensure that this requirement receives the highest level of attention throughout the company, the proposed rule requires that each dealer's program be approved in writing by its senior management. A dealer must make its anti money-laundering program available to the U.S. Treasury or its designee upon request. While it is permissible for a dealer to delegate certain functions relating to its anti money laundering program to a third party, the dealer remains responsible for ensuring compliance with these requirements.
The rules warn the diamantaires "where to look" and list several examples of factors that may indicate that a transaction is designed to use the diamantaire to facilitate money laundering or terrorist financing. Behavior to watch include:
(1) Unusual payment methods, such as the use of large amounts of cash, multiple or sequentially numbered money orders, traveler's checks, cashier's checks or payment from unknown third parties;
(2) Unwillingness by a customer or supplier to provide complete or accurate contact information, financial references, or business affiliations;
(3) Attempts by a customer or supplier to maintain a high and unusual degree of secrecy with respect to the transaction, such as a request that normal business records not be kept;
(4) Purchases or sales that are unusual for the particular customer or supplier or type of customer or supplier; and
(5) Purchases or sales that are not in conformity with standard industry practice.
The U.S. government has gained quite some experience with the diamond and jewelry industry and is willing to provide examples of "bad experiences". For example, one money laundering scheme observed involved a customer who ordered items, paid for them in cash, cancelled the order, and then received a large refund by check or bank transfer. In another case, funds were laundered through large cash purchases of a dealer's goods at artificially inflated prices, followed by re-purchase by the dealer of the same goods at lower prices.
A dealer should make reasonable inquiries when transactions appear to vary from standard industry practice, or from the standard practice of an established customer or supplier. Another practice the U.S. government warns against is called "structuring" of the payments. Such activity may involve payments of more than $10,000 with multiple money orders, traveler's checks, cashier's checks or other bank checks, each with a face value of less than $10,000. Such methods of payment may be indicative of money laundering, particularly when the payment instruments were obtained from different sources or the payments were made at different times on the same day or were made on consecutive days or close in time. Cash payments of over $10,000 may be subject to reporting requirements.
Over- or under invoicing, structured, complex, or multiple invoice requests, and high dollar shipments that are over- or underinsured may all indicate that a transaction involves money laundering or terrorist financing. The list of factors contained in the proposed rules is intended to provide examples of indicators of illegal activity, and is by no means exhaustive. Israeli, Belgian and Indian diamantaires with offices in New York must develop an anti money laundering program which would require describing to one's staff what money laundering is all about, how money laundering is carried out, what types of activities and transactions should raise concerns, what steps should be followed when suspicions arise, and the need to review various governmental rules.
The awkward part is that most diamond dealers would have no idea how "money laundering" works. This requires them to bring in outside experts who can present these illegal systems to the staff. That's not an easy thing to do. But staff members must by law be given the "determining factors", the "reasons", for knowing when a transaction should be refused or terminated. Of course, such decisions will normally be based on the facts and circumstances relating to the transaction and the dealer's knowledge of the customer or supplier in question. It isn't the purpose of this article to present all the legal technicalities (we'll be happy to e-mail the proposed rules to any reader), but one must be aware that there is still time to get the rules amended if they are found to be impossible to implement.
U.S. law requires that each diamond dealer assesses the money laundering and terrorist financing risks associated with his products, customers, suppliers, distribution channels and geographic locations. In addition, a merchant must take into consideration the extent to which the dealer engages in transactions other than those with established customers or sources of supply. Finally, a dealer must analyze the extent to which it engages in transactions for which payment or account reconciliation is routed to or from accounts located in jurisdictions that have been identified as vulnerable to terrorism or money laundering.
Do you remember the days when all that was needed to complete a transaction was a handshake and "mazal u'bracha"? This is normally all that was needed for the parties to know that the deal was proper and sealed. However, this will not satisfy the new U.S. government regulations. The time may be approaching that we may all have to consult with a government official, a forensic expert, a lawyer, an expert valuator and an accountant before one has the legal certainty that all risk assessment requirements demanded by government are fulfilled. Have a happy day.