FROM THE OFFICE OF PUBLIC AFFAIRS

I am here today to speak to an important category of financial institutions - jewelers.  Some may not think of jewelers as financial institutions.  Most think of jewelers as retailers, wholesalers, dealers, manufacturers, importers, and cutters and refiners of raw product.  But not financial institutions. 

Unfortunately, criminals can and do think of jewelers as financial institutions.  Your products can be - and have been - used by criminals to launder criminal proceeds, store value, transport value to other jurisdictions, and convert the value into liquid forms to fuel criminal enterprises.  In Operation Meltdown, for example investigators in this city discovered Colombian narcotics traffickers who were converting their profits into gold; disguising the gold by alloying it with other elements or casting it into the shape of industrial objects, like wrenches; shipping it to Colombia; and re-selling it for cash.  

Fortunately, jewelers are vigilant.  They recognize that criminals are trying to abuse their products and services.  Jewelers have organized to protect their industry and their individual reputations.  Historically, jewelers organized to prevent criminals from passing off artificial or impure product as the real McCoy.  Over time, however, your vigilance has extended to guard against the possibility that criminals would use your products and services to launder money and finance terrorism.

I am here today to thank you for your vigilance.  Thank you for working with us as we studied your industry and drafted proposed regulations.  Thank you for your comments on those proposed regulations.  Thank you for your strong commitment to comply with those regulations. 

The USA PATRIOT Act

As many of you know, the President signed the USA PATRIOT Act into law on October 26, 2001, just a few weeks after the attacks of September 11th.  As President Bush noted at its enactment, the Act provides “intelligence and law enforcement officials important new tools to fight a present danger.” 

Some of these new tools help us fight money laundering and terrorist financing.  They are concentrated in Title III of the Act.

There are many important new tools in Title III.  I will focus on just one, the one which happens to be most relevant to your industry.  That tool is Section 352, which directs the Treasury to require “financial institutions” to create, implement, and test anti-money laundering programs. 

Congress has defined the term “financial institution” very broadly.  It was defined well before the PATRIOT Act to include banks, credit unions, securities firms, futures firms, insurance companies, finance companies, casinos, vehicle sellers, pawn brokers, travel agents, telegraph companies, real estate settlements and closings firms, the U.S. Postal Service, and, of course, dealers in precious metals, precious stones and jewels.  In case it missed anybody, Congress also gave the Secretary of the Treasury the authority to deem additional businesses “financial institutions.”  

Prior to the PATRIOT Act, the Treasury had the discretion to issue anti-money laundering regulations for any of these financial institutions, so long as an administrative record to support such regulations.  What is new under the PATRIOT Act is that the Treasury is now obligated, not just authorized, to issue anti-money laundering regulations for this wide array of financial institutions.  In other words, Congress has made the determination that money laundering regulations should be imposed on every “financial institution.”

The breadth of Title III of the PATRIOT Act generally and Section 352 specifically reflects a recognition by Congress that criminals are opportunistic.  They seek the path of lowest resistance to laundering their money.  As we improve the controls in one avenue, such as banks, they will turn to other avenues, such as precious metals or gems.  Success in one industry will drive criminals toward another industry.  For a regulatory approach to fighting money laundering to be successful, therefore, we must adopt a comprehensive approach.

As mentioned, Congress gave Treasury much of the responsibility to implement Title III of the Act.  Since the passage of the Act we have promulgated final or proposed rules requiring anti-money laundering programs for a wide array of financial institutions including securities and futures firms, mutual funds, money service businesses, credit card systems operators, unregistered investment companies, investment advisors, commodity trading advisors, life insurance and annuity companies, and, of course, jewelers.

While the specifics of such regulations vary from industry to industry, the required anti-money laundering programs must each have four common elements: 

1.a written anti-money laundering program;

2.the designation of one or more individuals to head the program and to provide guidance to other employees on the program and to oversee its implementation;

3.training for employees; and

4.independent testing of the program to ensure that it is operating appropriately and effectively.

Not long after the passage of the Act, we reached out to your industry, and found in you partners ready, willing and able to shoulder this common burden.  All parts of the industry, from manufacturers, to retailers, and from gold, silver, and platinum group metals, from diamonds to colored stones dealers, all were extremely helpful and gracious as we learned, and continue to learn about this varied and fascinating industry. 

As you know, we published a proposed regulation, and received many helpful comments, which we are continuing to examine.  I cannot comment on our specific thoughts regarding those comments and the shape of the final rule.  But I can say that your input will be evident in the final rules.  We are grateful for your comments.  

I can also say that we have learned lessons in applying our regulations to a diverse array of financial institutions.  In my experience, these lessons apply generally, whether you are talking about regulating banks, credit unions, broker-dealers, mutual funds, commodity futures merchants, money transfer businesses, or jewelers.  I wish to speak to three such lessons.

Diversity

First, we have learned the incredible diversity of the industries we regulate.   I have already spoken to horizontal diversity, the diversity of the different industries we now regulate.  As mentioned, we have taken steps to recognize this diversity in the rules that we have made for each industry. A dealer in colored stones operates very differently from a bank, an insurance company, or a settler of commercial real estate deals.  We recognize that important differences exist and seek to tailor our regulations to the realities of each industry.

We have also sought to recognize this horizontal diversity in other ways.  For example, we recently expanded the Bank Secrecy Act Advisory Group to include many industries that are newly regulated under the Bank Secrecy Act.  This Advisory Group was established by Congress to provide the Secretary of the Treasury with the expertise, views, and perceptions of the regulated community.  In October, the Director of the Financial Crimes Enforcement Network hosted the first meeting of the reconstituted Advisory Group.  The membership is now much more diverse.  It includes, for example not only representatives from depository institutions and their regulators, but also representatives from securities firms, commodities firms, insurance firms, money transfer businesses, casinos, and others. 

In addition to horizontal diversity across industries, there is vertical diversity within industries.  For example, we regulate money center banks in Manhattan and community banks in Oberlin, Ohio.  We regulate the Pentagon Federal Credit Union, with over $5 billion under management, and credit unions operating one day a week out of a church basement.  Vertical diversity is particularly evident in the jewelry industry.  For example, jewelers include retailers as large as Wal-Mart or as rarified as Tiffany and Company.  Jewelers include small businessmen and women operating one or two room shops to wholesalers with fully integrated operations from extraction to sale.  Jewelers include dealers in precious gems and precious metals.  Broadly conceived, jewelers include those whose products are used for ornament and those whose products are used for industrial purposes.

Our proposed regulations for jewelers recognize this vertical diversity in several ways.    For example, they recognize that dealers in industrial diamonds or industrial sapphires are less likely to be used by money launderers than gem quality stones.  As another example, our proposed regulations recognize that many retailers sell jewelry as an incidental line of business or as a hobby.  Accordingly, the proposed regulations exempt from compliance those who do $50,000 or less in jewelry business a year. 

In addition, our proposed regulations allow individual firms to tailor their anti-money  laundering programs to the specific risks they face and to the specific nature of their businesses.  For example, the program for a small two-person business will generally be different from the program of a large business with thousands of employees.  As another example, although it is required that you designate one or more individuals as responsible for the program, it is not required as a general matter that this program be a full-time position.  Of course, in large enterprises with significant levels of money laundering risk it may be, but in most cases this will represent a fraction of someone’s duties, especially once the program is up and running.  In brief, the level and quality of your efforts should be commensurate with the money laundering risks that exist.  In other words, you should first stratify your money laundering risk and then act accordingly. 

Focus

A second lesson we have learned is that there is a danger that overly-prescriptive regulation will change the focus from the people we are trying to stop - criminals - to the people we need to stop them - honest financial institutions.  Overly prescriptive or inflexible regulations focus attention on complying with the regulations, rather than on stopping money laundering.  Bad regulation can result in honest businesses being more concerned about the legal risks they face for not complying with some aspect of our regulations than about the risk that their businesses will be victims of money launderers or terrorist financiers.  If that happens, we lose.  The stakes are too high, to take our eyes off the ball.  There are people out there who are trying to kill us and our allies.  The moment you start worrying more about government bureaucrats than criminals, we have got you worried about the wrong thing.  You are our biggest ally in this fight.  You are on the front lines.  We need you focused on stopping people from using your business to finance terror.  

Guidance & Feedback

Third, in all your efforts to stop the potential for criminal abuse of your businesses, you need and deserve quality guidance and feedback from the government.  We recognize that one of our tasks is to help you to identify how criminals are targeting your industry and how your efforts are making a difference.  Such information is vital if you are to guard against money laundering abuse effectively.  We also recognize that we cannot expect you all to become anti-money laundering experts.  You have a right to the anti-money laundering expertise that exists in the government so that your efforts can be better focused, more useful, and ultimately more effective.  Accordingly, we have made an effort to issue questions and answers along with our regulations.  This is part of our statutory obligation to issue a staff commentary with our regulations.  We need to issue such commentary more systematically.  We are also working to share information in other ways.  For example, we indicated our willingness to offer staff views on industry best practices, with an emphasis on providing what we know about money laundering abuse.  We are open to any ideas from any industry on how we can maximize the quality as well as the quantity of such information sharing. 

Conclusion

It is regrettable that criminals seek to exploit your businesses.  Fortunately, we are prepared to meet them.  Congress gave us the tools.  But, as importantly, you gave us your trust.  That was crucial.  It made it possible for us to work together to calibrate anti-money laundering regulations to maximize their effectiveness and minimize their burdens on you and your customers. 

I know that many of you have already begun the effort to establish your anti-money laundering programs, and I commend those efforts.  By the time we formally promulgate an anti-money laundering program requirement, many of you will already have such systems in place, due in part to training such as this conference.  As a result, your employees will already be effectively watching for money laundering abuse. 

Thank you for your vigilance.  Thank you for this opportunity to speak with you today.  Specifically, Cecilia Gardner, thank you for your kind invitation.