Regulations book. Law, rules and regulations concept.
Regulations book. Law, rules and regulations concept.

AML programs part 1: Why the big deal?

This is the first of a several part series highlighting the issues I find routinely in pawnshops, large and small, across the country today. It is my hope that by highlighting these issues, our members will be better educated and can make more well-informed decisions before crisis strikes. Future articles will discuss corporate minutes (or the lack thereof), SDN checks and what stores are doing right and what they are doing wrong, 8300 forms and related transactions, debunking myths around the Military Lending Act, and primers on the Privacy Act and the Safeguards rule.

AML programs part 1: Why the big deal?

In late August, 2019, one of our CAPA members posted on the forum that they were going through an IRS Title 31 Exam. This is the exam of, in this case, a precious metals dealers anti-money laundering (AML) program and is not to be confused with the more common (and greatly feared) Title 26 tax audit. This AML program has been a Federal requirement for precious metals dealers since January 1, 2006 but we will get back to that in a minute.

In the forum post, our member implied that things were not going well and that there was a fair amount of stress involved in the process. They also indicated that the IRS examiners had shared that “pawnbrokers had been flying under the radar, but no longer.” I was in the middle of an Alaskan cruise and my phone blew up with dozens of calls in a 2-day span from members who needed reassurance that they were either okay or that they could be okay. Needless to say, when I got back from my vacation, I was a busy man. Three weeks later I was at the CAPA Long Beach event and was swamped on Sunday throughout the entire vendor time allotment setting up account after account. Many of the folks who set up accounts in September have been pawnbrokers for generations. Thank you, IRS.

So why bother you with the details? Let me summarize. The IRS is now taking a serious look at pawnshops. Banks never stopped looking at pawnshops even after we were told that Operation Chokepoint was in the rear-view mirror (enter “de-risking”). Lose your bank account and you have immediate pain and frustration. You must take your eyes off running a business and focus your efforts on garnering another account. The new bank? They will likely ask to see your AML program. What they want to see, is an active (read ‘well-used’) AML program that has been around for a while. Think about it. If you had that program, you would probably still have the old bank account. They will tolerate a brand-new AML program, but you will likely be put under a microscope anyway because having an AML program is not the important part. Incorporating the program into the culture of your business is what they need to see.

In large part, you will need to create the illusion early on that you place a very high value on Compliance while you are still trying to get the hang of it. Much like driving a car when you first got your license. You wanted everyone to know you had it, but you still needed to practice and get better. Did you get better by driving once a year? Nope. Same reason why those pawnbrokers who purchase an AML program and then take it out once a year (if that) for the obligatory independent review, look like beginners. When a bank regulator or IRS examiner starts asking you questions about your program you should already have a working knowledge of it. This is the wrong time to try to fake it. Everyone knows what is going on and you just look, and feel, silly trying to save your backside from whatever punishment is likely to be doled out.

Title 31 audits are real.  I know because I sit in on them helping represent my customers. They are happening in California with a much greater frequency than ever before and according to the examiners I deal with will continue to do so. Bank de-risking is real and is never going away. CA pawnbrokers need to be very aware of this and get out in front of it. Title 31 exams for those with active programs usually go well. Those that have inactive or non-existent programs usually pay a price for their inaction.

Functioning AML programs have 4 key components. These are known as the 4 pillars. An AML program missing one or more of these pillars is much like a Rolex watch with a phony movement…worthless. Those 4 pillars are:

  1. A written program based on the dealer’s risk assessment that puts policies, procedures, and controls in place to eliminate the possibility of money laundering, terrorist financing, and other illicit activities.
  2. The designation of a compliance officer to be in charge of the implementation and updating of the program and the training of the staff.
  3. The ongoing education and training of specific staff (all who handle sales and pawns plus owners and managers) at least once a year and usually within 30 days of hire.
  4. An annual independent review of the program to make sure that it is working and effective.

Those who treat this as anything less than a priority stand to pay the penalties that go along with postponing the inevitable. Many of us wait until one of our friends goes through something before we jump on the bandwagon. In fact, I would say that the vast majority of us tend to react to others pain and we use that as the stimulus to get us moving. Perhaps that is the difference between leaders and followers. Call it what you want, but once you get a letter from either the bank or the IRS, if you do not already have an AML program in place, it is too late. PERIOD.


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