finance

AML programs part 2: I don’t do transactions that large OR I just have a small shop

This is the second installment in a series of articles meant to keep members from making the same mistakes that have proven costly to their competitors. This article will deal primarily with what an AML program really is and is designed to do.

In the last segment, we discussed the importance of being able to present an illusion that you are in full compliance with all things AML when the bank regulators or the IRS examiners come calling. This is not just a thing…it is reality. Provided with enough paperwork and reports, a regulator will agree that much is being done, but may still have some thoughts about what is actually being accomplished. Better to be in that position after a review than in the position of the regulator determining that nothing was even being done. The former will get you much further down the road than the latter for sure.

AML programs, while tiptoeing through the tax issues, primarily deal with keeping the precious metals dealer out of the money laundering and terror financing business. While the tax audit deals in a very concrete matter, the Title 31 rules are somewhat abstract. Title 26 is the tax code. 8300 forms fall under the tax code primarily, but they can also fall into the Title 31 realm. Most of what we deal with in Title 31 is suspicious activity. Title 26 deals with certain thresholds and the appropriate reporting of concrete transactions. In other words, if a customer presents you with $11,000 in cash you must file an 8300 within 15 days. Period. Concrete.

Title 31 is abstract. How so? The primary tools in the arsenal of the precious metals dealer are the Suspicious Activity Report (SAR), the 8300, and the Specifically Designated National (SDN) lookup. While the filing of an 8300 form as mentioned above was straight forward, what would happen if the customer was trying to break up the transactions to avoid the filing of the form, and therefore avoiding the tax ramifications of reporting to the IRS? That now becomes suspicious behavior. Does suspicious behavior have a dollar amount? Nope.

Precious Metals Dealers are exempt from mandatory filing of SAR’s. That means they are strictly voluntary. As soon as a pawnbroker learns that, they usually decide right then and there they will not be filing any of these forms since they don’t have to. I caution them all that we are trying to create an illusion. An illusion that says we are at the ready. We are trying to play by the rules. “If it looks shady, then I will file the SAR”. A word of warning though; one can’t just file SAR’s randomly or they place themselves at jeopardy of being penalized for reckless behavior.

Consider the fact that banks are required to file SAR’s and have entire departments just for this purpose. You know, when a business owner takes multiple deposits to the bank in a week, and while separately they are not over $10,000, but collectively they are? The bank files an SAR. I can give you names and numbers of the pawnbrokers who have gotten sudden unannounced visits from the IRS accusing them of structuring their deposits to avoid the CTR (bank equivalent to the 8300) reporting requirements. ‘Structuring’ is money laundering, and this is the IRS we are talking about. The IRS does not generally hold pawnbrokers in the highest regard as you may know.

So, if the banks have to file these all the time, and they find that you are not filing any…ever, well they then jump to the conclusion that you are not taking this whole AML thing seriously. In reality, you truly may not have any transactions worthy of an SAR filing. So how do you win this battle? By having an illusion in place that you are looking for these transactions but just haven’t encountered any. By having high dollar transaction tracking in place that you can show them. By having internal controls that someone checks monthly to make sure nothing is slipping through the cracks. By having written policies and procedures in place that state what will happen if suspicious activity is indeed encountered. By being set up with an account on the BSA website so you will be ready to file a form immediately if you had to. In the beginning of implementing your program this is all an illusion. As you progress through the first several years of implementation, the appearance to the regulator is that you are doing all you can to comply. Over time, the illusion is that you are in full compliance and it is just part of the company DNA. How does the old saying go? You never get a second chance to make a first impression (illusion)!

What do you need to do to help the illusion along?

  1. Read and become familiar with your AML program. Make sure it is accurate and depicts all of your policies and procedures.
  2. Be on top of the training required:
    1. Within 30 days of hire of a new staff person
    1. Every year as a refresher
  3. Print out monthly reports from your software, if possible, that show you are looking for suspicious activity
  4. Print out reports from your software, if possible, that show you have an active SDN program in place, and that it works.
  5. If you are a corporation, include a resolution annually affirming your commitment as a company to the program and to the compliance officer in place.
  6. Finally, and most importantly, take this stuff seriously. Don’t roll your eyes and make faces when you are explaining to your staff why you “have to do this stuff”. They will key in on you and your efforts will be doomed from the very start.

So, what illusion do you want to provide the regulators when they come calling? If your business depended on it, I bet you would be willing to do whatever it took to get the ship heading in the right direction. The fact is, if you do nothing, the fines that can be levied could be in the business ending realm. Failure to have a program fines can be $25,000. Willful non-compliance fines can be six figures.

A good consultant will help you get your program off the pages of the manual and into the culture of your staff. It is NOT as difficult as you think. Learning to drive was a challenge for all of us the first time. Some of us had to learn on manual transmissions so those that didn’t, can just sit quietly. Seriously, remember how hard it was to get started? It didn’t take too long and we mastered the process and we never looked back. This is no different.

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