[Federal Register Volume 68, Number 35 (Friday, February 21, 2003)]
[Proposed Rules]
[Pages 8480-8486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4171]


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DEPARTMENT OF THE TREASURY

31 CFR Part 103

RIN 1506-AA28


Financial Crimes Enforcement Network; Anti-Money Laundering 
Programs for Dealers in Precious Metals, Stones, or Jewels

AGENCY: Financial Crimes Enforcement Network (``FinCEN''), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: FinCEN is issuing this proposed rule to prescribe minimum 
standards applicable to dealers in precious metals, stones, or jewels 
pursuant to the provisions in the U.S.A. Patriot Act of 2001 that 
require financial institutions to establish anti-money laundering 
programs.

DATES: Written comments may be submitted on or before April 22, 2003.

ADDRESSES: Commenters are encouraged to submit comments by electronic 
mail because paper mail in the Washington, DC area may be delayed. 
Comments submitted by electronic mail may be sent to 
[email protected] with the caption in the body of the text, 
``Attn: section 352--Jewelry Dealer Regulations.'' Comments also may be 
submitted by paper mail to FinCEN, PO

[[Page 8481]]

Box 39, Vienna, VA 22183-0039, ``Attn: section 352--Jewelry Dealer 
Regulations.'' Comments should be sent by one method only. Comments may 
be inspected at FinCEN between 10 a.m. and 4 p.m., in the FinCEN 
Reading Room in Washington, DC. Persons wishing to inspect the comments 
submitted must request an appointment by telephoning (202) 354-6400 
(not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Office of Chief Counsel, FinCEN, (703) 
905-3590; the Office of the General Counsel, (202) 622-1927; or the 
Office of the Assistant General Counsel (Banking and Finance), (202) 
622-0480 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

I. Background

    On October 26, 2001, the President signed into law the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism (U.S.A. Patriot Act) of 2001 (Pub. L. 
107-56) (the ``Act''). Title III of the Act makes a number of 
amendments to the anti-money laundering provisions of the Bank Secrecy 
Act (``BSA''), which are codified in subchapter II of chapter 53 of 
title 31, United States Code.\1\ These amendments are intended to 
promote the prevention, detection, and prosecution of international 
money laundering and the financing of terrorism.
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    \1\ Regulations implementing the BSA appear at 31 CFR part 103. 
The authority of the Secretary the Treasury to administer the BSA 
and its implementing regulations has been delegated to the Director 
of FinCEN.
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    Section 352(a) of the Act, which became effective on April 24, 
2002, amended section 5318(h) of the BSA. As amended, section 
5318(h)(1) requires every financial institution to establish an anti-
money laundering program that includes, at a minimum: (i) The 
development of internal policies, procedures, and controls; (ii) the 
designation of a compliance officer; (iii) an ongoing employee training 
program; and (iv) an independent audit function to test programs. 
Section 352(c) of the Act directs the Secretary of the Treasury 
(``Secretary'') to prescribe regulations for anti-money laundering 
programs that are ``commensurate with the size, location, and 
activities'' of the financial institutions to which such regulations 
apply.
    Although a dealer ``in precious metals, stones, or jewels'' 
(``dealer'') is defined as a financial institution under the BSA, 31 
U.S.C. 5312(a)(2)(N), FinCEN has not previously defined the term or 
issued regulations regarding dealers. On April 29, 2002, FinCEN 
deferred the anti-money laundering program requirement contained in 31 
U.S.C. 5318(h) that would have applied to the industry. The purpose of 
the deferral was to provide FinCEN with time to study the industry and 
to consider how anti-money laundering controls could best be applied to 
the industry.\2\ This rule defines the term dealer and provides 
guidance, tailored to the industry, to such entities in complying with 
section 352.
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    \2\ See 31 CFR 103.170, as codified by interim final rule 
published at 67 FR 21110 (April 29, 2002), as amended at 67 FR 67547 
(November 6, 2002) and corrected at 67 FR 68935 (November 14, 2002).
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    The industry of dealers encompasses various segments, including: 
(1) Those who trade in precious metals, including large scale metal 
suppliers and large and small scale refiners; (2) those who trade loose 
gemstones; (3) large and small scale manufacturers of jewelry; and (4) 
retail stores, including independent and chain stores of varying sizes, 
selling jewelry products to, and buying jewelry products from, the 
consuming public. The size of businesses in each segment of the 
industry varies substantially from a single artisan goldsmith to 
publicly traded commercial manufacturers employing hundreds of people 
and producing millions of finished pieces every year. The sources of 
supply vary as well, from large scale producers of fabricated precious 
metals materials to small dealers selling unique and rare gemstones on 
an individualized basis. Further, there is an active secondary market 
for jewelry, loose gemstones, and precious metals, with small firms 
selling used or antique pieces for scrap value or as unique works of 
art.
    Because dealers are not generally regulated as financial 
institutions, the industry traditionally has been subject to limited 
federal financial regulation. Federal laws governing this industry, 
such as the National Gold and Silver Stamping Act (15 U.S.C. 291-300) 
and the Lanham Act (15 U.S.C. 1117, 1125), are generally intended to 
protect consumers against misleading descriptions of the fineness of 
precious metals or the identity and quality of precious stones and 
jewels. Similarly, state regulation of the industry is focused on 
consumer protection.

II. The Anti-Money Laundering Program

    The Congressional mandate that all financial institutions establish 
an anti-money laundering program is a key element in the national 
effort to prevent and detect money laundering and the financing of 
terrorism. The mandate recognizes that financial institutions other 
than depository institutions (which have long been subject to BSA 
requirements) are vulnerable to money laundering. The legislative 
history of the Act explains that the anti-money laundering program is 
not a one-size-fits-all requirement. The general nature of the 
requirement reflects Congress' intent that each financial institution 
have the flexibility to tailor its program to fit its business, taking 
into account factors such as size, location, activities, and risks or 
vulnerabilities to money laundering. This flexibility is designed to 
ensure that all firms subject to the anti-money laundering program 
requirement, from the largest to the smallest firms, have in place 
policies and procedures appropriate to monitor for anti-money 
laundering compliance.\3\
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    \3\ See U.S.A. Patriot Act of 2001: Consideration of H.R. 3162 
Before the Senate (October 25, 2001) (statement of Sen. Sarbanes); 
Financial Anti-Terrorism act of 2001: Consideration Under Suspension 
of Rules of H.R. 3004 Before the House of Representatives (October 
17, 2001) (statement of Rep. Kelly) (provisions of the Financial 
Anti-Terrorism Act of 2001 were incorporated as Title III in the 
Act).
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    Although dealers do not perform the same functions as banking 
institutions, the industry presents identifiable money laundering 
risks. Precious metals, precious stones, and jewels constitute easily 
transportable, highly concentrated forms of wealth. They serve as 
international mediums of exchange that can be converted into cash 
anywhere in the world. In addition, precious metals, especially gold, 
silver, and platinum, have a ready, actively traded market, and can be 
melted and poured into various forms, thereby obliterating refinery 
marks and leaving them virtually untraceable. For these reasons, 
precious metals, precious stones, and jewels can be highly attractive 
to money launderers and other criminals, including those involved in 
the financing of terrorism.
    In addition, significant incentives currently exist for dealers to 
minimize financial losses caused by fraud in connection with the 
valuable products in which they deal. By their very nature, precious 
metals, precious stones, and jewels are extremely valuable by weight 
and volume, and fraud perpetrators attempt to incorrectly identify the 
mass, quality, or fineness of these products. Theft of such items, 
through the use of counterfeit checks, forged signatures, or other 
means, is likewise a risk. As such, this industry has long been aware 
that rigorous anti-fraud measures are a necessity in order to remain 
economically viable. This proposed rule

[[Page 8482]]

seeks to take advantage of those existing practices by focusing the due 
diligence conducted by dealers to include the potential for money 
laundering or terrorist financing.

A. Definitions

    Section 103.140(a) defines the key terms used in the proposed rule. 
Paragraph 103.140(a)(1)(i) defines ``dealer'' as any person who is 
``engaged in the business of purchasing and selling jewels, precious 
metals, or precious stones, or jewelry composed of jewels, precious 
metals, or precious stones.'' The proposed definition of dealer 
reflects Treasury's determination that all segments of the industry are 
vulnerable to money laundering and terrorist financing. Thus, the anti-
money laundering requirement contained in the proposed rule covers 
entities including manufacturers, refiners, wholesalers, retailers, and 
any other entity engaged in the business of purchasing and selling 
jewels, precious metals, precious stones, or jewelry.
    The proposed definition contains an explicit minimum dollar 
threshold, to carve out small businesses that may, on a part-time 
basis, deal in precious metals, stones, jewels, or jewelry. Thus, 
paragraphs (a)(1)(i)(A) and (B) provide that a person is a ``dealer'' 
only if, during the prior calendar or tax year, the person (1) 
purchased more than $50,000 in jewels, precious metals, precious 
stones, or jewelry, or (2) received more than $50,000 in gross proceeds 
from the sale of jewels, precious metals, precious stones, or jewelry. 
Thus, an amateur silversmith, who sells a portion of his production to 
finance his hobby, would not be subject to this rule if he were to 
remain below the proposed threshold. FinCEN specifically solicits 
comment on the amount of the proposed threshold, and whether an 
alternative threshold should be employed, such as specific physical 
quantities of precious metals, stones, or jewels, or other types of 
thresholds.
    In addition to the minimum dollar threshold, the definition of 
``dealer'' contains two exceptions, found in proposed paragraph 
(a)(1)(ii). The first exception provides that a retailer \4\ is a 
dealer only if it purchased more than $50,000 in jewels, precious 
metals, precious stones, or jewelry from persons other than dealers 
during the prior calendar or tax year. Thus, a retailer that purchases 
jewels, precious metals, precious stones, or jewelry from a dealer (for 
example, from a wholesaler), would not fall within the definition of 
``dealer,'' even if its gross sales of jewels, precious metals, stones, 
and jewelry exceeded $50,000 in the prior calendar or tax year. 
However, a retailer that, in the prior calendar or tax year, purchased 
more than $50,000 in jewels, precious metals, precious stones, or 
jewelry from sources other than a dealer (for example, from the general 
public), would be a dealer for purposes of the rule. The rationale for 
this limited exception is that, in order to abuse this industry, a 
money launderer must be able to sell as well as purchase the goods. 
Therefore, there is substantially less risk that a retailer who 
purchases goods exclusively or almost exclusively from dealers subject 
to the proposed rule will be abused by money launderers.
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    \4\ The NPRM defines a retailer as a person engaged in the 
business of selling to the public jewels, precious metals, or 
precious stones or jewelry composed of jewels, precious metals, or 
precious stones.
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    The second exception, contained in proposed paragraph 
(a)(1)(ii)(B), carves out from the definition of ``dealer'' a person 
buying or selling value-added fabricated goods containing minor amounts 
of precious metals or gemstones. Precious metals, stones, and jewels 
often have minor uses in equipment for which they act as a very small 
component, for example, in computers or drills with industrial diamond 
cutting tools, or as reflective coating on windows. Similarly, sapphire 
bearings may be used in highly precise electronic equipment, because of 
the toughness exhibited by corundum. Although the amount of precious 
metals, stones, and jewels contained in each industrial product may be 
minimal, the high volume production or sale of such products could 
result in a high volume of sale of precious metals, stones, or jewels. 
FinCEN has determined that the anti-money laundering program 
requirement should be imposed on those sectors of the industry that 
pose the most significant risk of money laundering and terrorist 
financing, and for this reason, persons who buy and sell value-added 
fabricated goods containing minor amounts of precious metals or 
gemstones are excluded from the proposed definition of ``dealer.''
    The term ``jewel'' is defined in paragraph (a)(2) to include 
organic substances that have a market-recognized gem level of quality, 
beauty, and rarity. Certain substances, such as coral, are available in 
two forms that are not generally transmutable, one that is of gem 
quality, and another that is of non-gem quality. As proposed, the 
definition of ``jewel'' would not include substances that are of non-
gem quality.
    Paragraph (a)(3) contains a definition of the term ``precious 
metal,'' which is defined to include gold, silver, and the platinum 
group of metals, when it is at a level of purity of 0.500 (50 percent) 
or greater, singly or in any combination. For example, an alloy of 25 
percent gold and 30 percent platinum would be a precious metal under 
the proposed rule. Similarly, this definition excludes the products of 
a mining firm or refinery that does not deal in precious metals refined 
to that purity level, but would include 12 karat gold jewelry. The 50 
percent threshold is intended to exclude materials that have incidental 
levels of precious metals, such as polymer resin castings that have 
been electroplated with gold, or antique mirrors with a thin silver 
foil on the back. Similarly, operations that process lead ore that may 
contain smaller amounts of silver or gold would also be excluded. As a 
result, the focus of the definition is on materials that are 
predominantly precious metal.
    The term ``precious stone'' is defined in paragraph (a)(4) to 
include inorganic substances that have a market-recognized gem level of 
quality, beauty, and rarity. Certain substances, such as diamonds, are 
available in two forms that are not generally transmutable, one that is 
of gem quality, and another that is of industrial (or non-gem) quality. 
For example, diamonds are available in both industrial grades and gem 
quality grades. However, industrial grade diamonds cannot generally be 
transformed into gem quality diamonds. Similarly, a flame fusion 
synthetic corundum may be chemically identical to a gem quality ruby, 
yet not be a ``precious stone.'' Therefore, precious stones of 
industrial quality have been carved out of the definition of precious 
stones.

B. Anti-Money Laundering Program Requirements

    Section 103.140(b) requires that each 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. The program must be in writing and should set 
forth clearly the details of the program, 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.\5\ A

[[Page 8483]]

dealer must make its anti-money laundering program available to 
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.
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    \5\ This may be the sole proprietor in the case of a sole 
proprietorship, the board of directors, or a committee authorized 
for this purpose in the case of a corporation, or partners 
representing a majority interest in a general partnership.
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    Section 103.140(c) sets forth the minimum requirements of a 
dealer's money laundering program. Section 103.140(c)(1) requires the 
anti-money laundering program to incorporate policies, procedures, and 
internal controls based upon the dealer's assessment of the money 
laundering and terrorist financing risks associated with its line(s) of 
business. Policies, procedures, and internal controls must also be 
reasonably designed to ensure compliance with BSA requirements. The 
only BSA regulatory requirement currently applicable to a dealer is the 
obligation to report on Form 8300 the receipt of cash or certain non-
cash instruments totaling more than $10,000 in one transaction or two 
or more related transactions.\6\ To assure reasonable compliance, the 
program should be reasonably designed to detect and report not only 
transactions required to be reported on Form 8300, but also activity 
designed to evade this reporting requirement. Such activity, commonly 
known as ``structuring,'' may involve payments of more than $10,000 
with multiple money orders, travelers' checks, or cashiers' checks or 
other bank checks, each with a face amount 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. Should dealers become subject to 
additional requirements, their compliance programs would have to be 
updated to include appropriate policies, procedures, training, and 
testing functions relating to such requirements.
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    \6\ See 31 CFR 103.30.
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    Section 103.140(c)(1)(i) provides that, for purposes of making the 
risk assessment required under section 103.140(c)(1), a dealer must 
consider all relevant factors, including those listed in the rule. 
First, the dealer must assess the money laundering and terrorist 
financing risks associated with its products, customers, suppliers, 
distribution channels, and geographic locations. In addition, a dealer 
must take into consideration the extent to which the dealer engages in 
transactions other than 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.\7\ The proposed rule is 
intended to give a dealer the flexibility to design its program to meet 
the specific money laundering and terrorist financing risks presented 
by the dealer's business, based on the dealer's assessment of such 
risks.
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    \7\ Examples of designations to this effect include the 
Department of State's designation of a jurisdiction as a sponsor of 
international terrorism under 22 U.S.C. 2371, the FATF's designation 
of jurisdictions that are non-cooperative with international anti-
money laundering principles, or the Secretary of the Treasury's 
designation pursuant to 31 U.S.C. 5318A of jurisdictions warranting 
special measures due to money laundering concerns.
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    Section 103.140(c)(1)(ii) provides that a dealer's policies, 
procedures, and internal controls must be reasonably designed to detect 
transactions that may involve use of the dealer to facilitate money 
laundering or terrorist financing. In addition, a dealer's program must 
incorporate procedures for making reasonable inquiries to determine 
whether a transaction involves money laundering or terrorist financing. 
A dealer that identifies indicators that a transaction may involve 
money laundering or terrorist financing should take reasonable steps to 
determine whether its suspicions are justified and respond accordingly, 
including refusing to enter into, or complete, a transaction that 
appears designed to further illegal activity.\8\ The proposed rule 
provides flexibility to dealers in developing procedures for making 
reasonable inquiries under paragraph (c)(1)(ii). For example, a dealer 
may appropriately determine that reasonable inquiry with respect to a 
transaction conducted by a new customer or supplier involves 
considerable scrutiny, including verification of customer identity, 
income source, or the purpose of a transaction. In contrast, reasonable 
inquiry with respect to an established customer may not involve 
additional steps beyond those normally required to complete the 
transaction, unless the transaction appears suspicious or unusual to 
the dealer. As explained further below, the determination whether to 
refuse to enter into, or to terminate, a transaction lies with the 
dealer. In addition, dealers are encouraged to adopt procedures for 
voluntarily filing Suspicious Activity Reports with FinCEN and for 
reporting suspected terrorist activities to FinCEN using its Financial 
Institutions Hotline (1-866-566-3974).
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    \8\ 18 U.S.C. 1956 and 1957 make it a crime for any person, 
including an individual or company, to engage knowingly in a 
financial transaction with the proceeds from any of a long list of 
crimes or types of ``specific unlawful activity.'' Although the 
standard of knowledge required is ``actual knowledge,'' actual 
knowledge includes ``willful blindness.'' Thus, a person could be 
deemed to have knowledge that proceeds were derived from illegal 
activity if he or she ignored ``red flags'' that indicated 
illegality. See, e.g., U.S. v. Finkelstein, 229 F.3d 90 (2nd Cir. 
2000) (owner of jewelry/precious metals business convicted for 
participation in money laundering scheme; sentence enhancement based 
on willful blindness of certain funds received derived from 
narcotics trafficking).
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    The proposed rule lists several examples of factors that may 
indicate that a transaction is designed to involve use of the dealer to 
facilitate money laundering or terrorist financing. Factors that may 
indicate a transaction is designed to involve use of the dealer to 
facilitate money laundering or terrorist financing include: (1) 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 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. For example, one money laundering scheme 
observed in this industry involved a customer who ordered items, paid 
for them in cash, cancelled the order, and then received a large 
refund.\9\ In one case, funds were laundered through large cash 
purchases of a dealer's gold at artificially inflated prices, followed 
by re-purchase by the dealer of the same gold at lower prices.\10\ 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. Over- or under-invoicing, 
structured, complex, or multiple invoice requests, and high-dollar 
shipments that are over- or under-insured may all be indicia that a 
transaction involves money laundering or terrorist financing.
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    \9\ See United States v. Huppert, 917 F.2d 507 (11th Cir. 1990).
    \10\ See Finkelstein, supra n. 8.
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    The list of factors contained in the proposed rule is intended to 
provide

[[Page 8484]]

examples of indicia of illegal activity, and is by no means exhaustive. 
Determinations as to whether a transaction should be refused or 
terminated must be based on the facts and circumstances relating to the 
transaction and the dealer's knowledge of the customer or supplier in 
question. It is not intended that dealers automatically refuse to 
engage in or terminate transactions simply because such transactions 
involve one or more of the factors listed in the rule. Rather, it is 
intended that dealers will develop procedures for identifying 
transactions involving potentially illegal activity, and procedures 
setting forth the actions that a dealer will take in response to such 
transactions.
    Section 103.140(c)(2) requires that a dealer designate a compliance 
officer to be responsible for administering the anti-money laundering 
program. The person (or group of persons) should be competent and 
knowledgeable regarding BSA requirements and money laundering issues 
and risks, and should be empowered with full responsibility and 
authority to develop and enforce appropriate policies and procedures 
throughout the dealer's business. The role of the compliance officer is 
to ensure that (1) The program is being implemented effectively; (2) 
the program is updated as necessary; and (3) appropriate persons are 
trained in accordance with the rule. Whether the compliance officer is 
dedicated full time to BSA compliance would depend upon the size and 
complexity of the dealer's business and the risks posed. In all cases, 
the person responsible for the supervision of the overall program 
should be an officer or employee of the dealer.
    Section 103.140(c)(3) requires that a dealer provide for training 
of appropriate persons. Employee training is an integral part of any 
anti-money laundering program. Employees of the dealer must be trained 
in BSA requirements relevant to their functions and in recognizing 
possible signs of money laundering that could arise in the course of 
their duties, so that they can carry out their responsibilities 
effectively. Such training could be conducted by internal or external 
seminars, and could include videos, computer-based training, booklets, 
etc. The level, frequency, and focus of the training should be 
determined by the responsibilities of the employees and the extent to 
which their functions bring them in contact with BSA requirements or 
possible money laundering activity. Consequently, the training program 
should provide both a general awareness of overall BSA requirements and 
money laundering issues, as well as more job-specific guidance 
regarding particular employees' roles and functions in the anti-money 
laundering program.\11\ For those employees whose duties bring them in 
contact with BSA requirements or possible money laundering activity, 
the requisite training should occur when the employee assumes those 
duties. Moreover, these employees should receive periodic updates and 
refreshers regarding the anti-money laundering program.
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    \11\ Appropriate topics for an anti-money laundering program 
include, but are not limited to: BSA requirements, a description of 
money laundering, 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 OFAC and 
other government lists.
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    Section 103.140(c)(4) requires that a dealer conduct periodic 
testing of its program, in order to ensure that the program is indeed 
functioning as designed. Such testing should be accomplished by 
personnel knowledgeable regarding BSA requirements. Testing may be 
accomplished either by dealer employees or unaffiliated service 
providers so long as those same individuals are not involved in the 
operation or oversight of the program. The frequency of such a review 
would depend upon factors such as the size and complexity of the dealer 
and the extent to which its business model may be more subject to money 
laundering than other institutions. Any useful recommendations 
resulting from such review should be implemented promptly or reviewed 
by senior management.
    Section 103.140(d) provides that a dealer must develop and 
implement an anti-money laundering program within 90 days after 
enactment of a final rule based on the Notice, or not later than 90 
days after the date a person becomes a dealer for purposes of the rule.

III. Regulatory Flexibility Act

    It is hereby certified, pursuant to the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.), that the proposed rule is not likely to have a 
significant economic impact on a substantial number of small entities. 
Because the requirements of the proposed rule closely parallel the 
requirements for anti-money laundering programs for all financial 
institutions mandated by section 352 of the Act, the costs associated 
with the establishment and implementation of anti-money laundering 
programs are attributable to the statute and not the proposed rule. 
Moreover, FinCEN believes that the definition of ``dealer'' in section 
103.140(a)(1), which excludes dealers who have less than $50,000 in 
gross proceeds in a year, will exclude most small dealers from the 
requirements of the rule.
    Furthermore, the proposed rule provides for substantial flexibility 
in how each dealer may meet its requirements. This flexibility is 
designed to account for differences among dealers, including size. In 
this regard, the costs associated with developing and implementing an 
anti-money laundering program will be commensurate with the size of a 
dealer. If a dealer is small, the burden to comply with section 352 and 
the proposed rule should be similarly small.
    FinCEN specifically solicits comment on the impact of section 352 
and the proposed rule on small dealers, particularly whether the 
proposed $50,000 threshold should be higher or lower, and whether an 
alternative threshold (such as one based upon specific physical 
quantities of precious metals, stones, or jewels, or other types of 
thresholds) would be more appropriate.

IV. Paperwork Reduction Act

    The collection of information contained in this proposed rule has 
been submitted to the Office of Management and Budget for review under 
the requirements of the Paperwork Reduction Act, 44 U.S.C. 3507(d). An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a valid 
control number assigned by OMB.
    Comments concerning the collection of information in the proposed 
rule should be sent (preferably by fax ((202)395-6974)) to the Desk 
Officer for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Office of Management and Budget, Paperwork 
Reduction Project (1506), Washington, DC 20503 (or by the Internet to 
[email protected]), with a copy to FinCEN by mail or the Internet at 
the addresses previously specified.
    FinCEN specifically invites comments on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of FinCEN, and whether the information shall have practical 
utility; (b) the accuracy of the estimate of the burden of the 
collection of information (see below), including the number of dealers 
(as defined in section 103.140(a)(1)) who will be subject to the 
requirements of the proposed rule; (c) ways to enhance the quality, 
utility, and clarity of the information collection; (d) ways

[[Page 8485]]

to minimize the burden of the information collection, including through 
the use of automated collection techniques or other forms of 
information technology; and (e) estimates of capital or start-up costs 
and costs of operation, maintenance, and purchase of services to 
maintain the information.
    The collection of information is the recordkeeping requirement in 
section 103.140(b). The information will be used by federal agencies to 
verify compliance by dealers with the provisions of sections 103.140 
and 103.141. The collection of information is mandatory.
    Estimated Number of Recordkeepers: 20,000.
    Estimated Average Annual Burden Per Recordkeeper: The estimated 
average burden associated with the recordkeeping requirement in section 
103.140(b) rule is 1 hour per recordkeeper.
    Estimated Total Annual Recordkeeping Burden: 20,000 hours.

V. Executive Order 12866

    It has been determined that this proposed rule is not a significant 
regulatory action for purposes of Executive Order 12866. Accordingly, a 
regulatory impact analysis is not required.

List of Subjects in 31 CFR Part 103

    Administrative practice and procedure, Authority delegations 
(Government agencies), Banks and banking, Currency, Investigations, Law 
enforcement, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the preamble, part 103 of title 31 of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 103--FINANCIAL RECORDKEEPING AND REPORTING OF CURRENCY AND 
FINANCIAL TRANSACTIONS

    1. The authority citation for part 103 continues to read as 
follows:

    Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314 
and 5316-5332; title III, secs. 312, 313, 314, 326, 352, Pub. L. 
107-56, 115 Stat. 307.

    2. Subpart I of part 103 is amended by adding new Sec.  103.140 to 
read as follows:


Sec.  103.140  Anti-money laundering programs for dealers in precious 
metals, precious stones, or jewels.

    (a) Definitions. For purposes of this section:
    (1) Dealer. (i) Except as provided in paragraph (a)(1)(ii) of this 
section, the term ``dealer'' means a person engaged in the business of 
purchasing and selling jewels, precious metals, or precious stones, or 
jewelry composed of jewels, precious metals, or precious stones, and 
who, during the prior calendar or tax year:
    (A) Purchased more than $50,000 in jewels, precious metals, or 
precious stones, or jewelry composed of jewels, precious metals, or 
precious stones; or
    (B) Received more than $50,000 in gross proceeds from transactions 
in jewels, precious metals, precious stones, and jewelry composed of 
jewels, precious metals, or precious stones.
    (ii) The term ``dealer'' does not include:
    (A) A retailer, i.e., a person engaged in the business of sales to 
the public of jewels, precious metals, or precious stones, or jewelry 
composed thereof, other than a retailer that, during the prior calendar 
or tax year, purchased more than $50,000 in jewels, precious metals, 
precious stones, or jewelry composed of jewels, precious metals, or 
precious stones, from persons other than dealers (such as members of 
the general public or persons engaged in other businesses); or
    (B) A person who engages in transactions in jewels, precious 
metals, or precious stones for purposes of fabricating finished goods 
that contain minor amounts of, or the value of which is not 
significantly attributable to, such precious metals, precious stones, 
or jewels.
    (2) Jewel means an organic substance with gem quality market-
recognized beauty, rarity, and value, and includes pearl, amber, and 
coral.
    (3) Precious metal means:
    (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, of two or more of the metals listed in paragraph (a)(3)(i) 
of this section.
    (4) Precious stone means an inorganic substance with gem quality 
market-recognized beauty, rarity, and value, and includes diamond, 
corundum (including rubies and sapphires), beryl (including emeralds 
and aquamarines), chrysoberyl, spinel, topaz, zircon, tourmaline, 
garnet, crystalline and cryptocrystalline quartz, olivine peridot, 
jadeite jade, nephrite jade, spodumene, feldspar, turquoise, lapis 
lazuli, and opal.
    (5) Person shall have the same meaning as provided in Sec.  
103.11(z).
    (b) Anti-money laundering program requirement. 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. The program 
must be approved by senior management. A dealer shall make its anti-
money laundering program available to the Department of Treasury or its 
designee upon request.
    (c) Minimum requirements. At a minimum, the anti-money laundering 
program shall:
    (1) Incorporate policies, procedures, and internal controls based 
upon the dealer's assessment of the money laundering and terrorist 
financing risks associated with its line(s) of business. Policies, 
procedures, and internal controls developed and implemented by a dealer 
under this section shall include provisions for complying with the 
applicable requirements of the Bank Secrecy Act (31 U.S.C. 5311 et 
seq.), and this part.
    (i) For purposes of making the risk assessment required by 
paragraph (c)(1) of this section, a dealer shall take into account all 
relevant factors including the following:
    (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; 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 by the Department of State as a 
sponsor of international terrorism under 22 U.S.C. 2371; designated as 
non-cooperative with international anti-money laundering principles or 
procedures by an intergovernmental group or organization of which the 
United States is a member and with which designation the United States 
representative or organization concurs; or designated by the Secretary 
of the Treasury pursuant to 31 U.S.C. 5318A as warranting special 
measures due to money laundering concerns.
    (ii) A dealer's program shall incorporate policies, procedures, and 
internal controls to assist the dealer in identifying transactions that 
may involve use of the dealer to facilitate money laundering or 
terrorist financing, including provisions for making reasonable 
inquiries to determine whether a transaction involves money laundering 
or terrorist financing, and for refusing to consummate, withdrawing

[[Page 8486]]

from, or terminating such transactions. Factors that may indicate a 
transaction is designed to involve use of the dealer to facilitate 
money laundering or terrorist financing include, but are not limited 
to:
    (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 
affiliations;
    (C) Attempts by a customer or supplier to maintain a high 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.
    (2) Designate a compliance officer 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, current requirements of this 
part, and further guidance issued by the Department of the Treasury; 
and
    (iii) Appropriate personnel are trained in accordance with 
paragraph (c)(3) of this section;
    (3) Provide for on-going education and training of appropriate 
persons concerning their responsibilities under the program; and
    (4) Provide for independent testing to monitor and maintain an 
adequate program. The scope and frequency of the testing shall be 
commensurate with the risk assessment conducted by the dealer in 
accordance with paragraph (c)(1) of this section. Such testing may be 
conducted by an officer or employee of the dealer, so long as the 
tester is not the person designated in paragraph (c)(2) of this section 
or a person involved in the operation of the program.
    (d) Effective date. A dealer must develop and implement an anti-
money laundering program that complies with the requirements of this 
section on or before May 22, 2003, or not later than 90 days after the 
date a dealer becomes subject to the requirements of this section.

    Dated: February 12, 2003.
James F. Sloan,
Director, Financial Crimes Enforcement Network.
[FR Doc. 03-4171 Filed 2-20-03; 8:45 am]
BILLING CODE 4810-02-P