The AML rule for precious-metals dealers: are you actually covered?

Part 1027 of title 31 is the rule that turns some jewellery and watch businesses into financial institutions for anti-money-laundering purposes. If it reaches you, you need a written AML program. If it does not, you need nothing under this particular rule.

Most of the work is in deciding which of those is true, and the answer is far less about your turnover than people assume.

Two thresholds, both of which must be crossed

A "dealer" is a person engaged in the United States as a business in the purchase and sale of covered goods who, during the prior calendar or tax year:

• purchased more than $50,000 in covered goods; and
• received more than $50,000 in gross proceeds from selling covered goods.

Both limbs. A year of heavy buying without the matching proceeds does not make you a dealer under this definition, and neither does the reverse.

What a "covered good" is — and why a steel watch probably isn't one

Covered goods are jewels, precious metals and precious stones themselves, plus finished goods that derive 50 percent or more of their value from those materials.

The definitions are precise:

• Precious metals — gold, iridium, osmium, palladium, platinum, rhodium, ruthenium or silver at a purity of 500 or more parts per thousand, or a qualifying alloy of two or more of them reaching 500 parts per thousand in aggregate.
• Precious stones — a substance with gem quality, market-recognised beauty, rarity and value. The listed examples run from diamond and corundum (sapphire and ruby) and beryl (emerald and aquamarine) through spinel, topaz, zircon, tourmaline, garnet, quartz, peridot, tanzanite, jade, spodumene, feldspar, turquoise, lapis lazuli and opal.
• Jewels — the organic equivalent: pearl, amber, coral.

Now apply that to a watch. A steel sports watch has to derive half its value from listed materials to be a covered good at all, and a steel case and bracelet will not do it. Neither will the movement — a movement is not one of the listed materials, whatever it is worth.

So the counter-intuitive result on the face of the regulation is this: a dealer turning over a very large book of steel sports watches may never come near this rule, while a much smaller business in gold, platinum and diamond-set pieces may be squarely inside it.

Only the metal counts, not the watch

This is the provision that does the most work, and it is easy to miss.

Section 1027.100(b)(5) says that when applying the $50,000 thresholds to finished goods, only the value of the jewels, precious metals or precious stones contained in, or attached to, those goods is taken into account.

So a gold watch does not put what you paid for it against the threshold. It puts the value of its gold against the threshold — and on a collectible watch the metal is usually a small fraction of the price, because most of what you paid was for the reference, the condition and the provenance.

Two consequences:

1. Your threshold arithmetic is not your turnover, and cannot be taken from your books without adjustment.
2. The regulation gives no safe-harbour method for doing that valuation across a mixed inventory year. That is a real gap, and it is the first question on the list for an attorney.

Scrap is different. Buying gold cases or scrap as material means buying a covered good directly, with no 50-percent test to clear. The full value counts, and the thresholds arrive far sooner.

The carve-out that reverses on exactly our business model

A retailer — a business selling covered goods primarily to the public — is excluded from the dealer definition.

Then § 1027.100(b)(2)(i) takes the exclusion away where the retailer, in the prior year, purchased more than $50,000 in covered goods from persons other than dealers or other retailers — the regulation's own examples being members of the general public and foreign sources of supply.

Read that against how an independent watch dealer actually works. Buying from private sellers, estates and walk-ins is buying from persons other than dealers or retailers. The reversal is not an edge case for this trade; it is the normal case.

There is a narrowing worth knowing if you land here. A retailer who becomes a dealer only because of those non-dealer purchases needs to address only those purchases in its AML program (§ 1027.210(a)(2)) — a narrower program than a full dealer's.

Whether an independent dealer who both buys from the public and resells is a "retailer" in the first place, or simply a dealer, is not resolved by the text. The exclusion looks aimed at businesses buying mostly from wholesalers. That is an interpretation, and it is flagged below rather than asserted.

Two more exclusions

Pawnbrokers. A person licensed or authorised under state or local law to conduct business as a pawnbroker is excluded — but only to the extent they are engaged in pawn transactions, including selling pawn loan collateral. Outright buying and reselling run alongside the pawn book is not sheltered.

Trade-ins taken as credit. Where you accept covered goods from a customer and credit the value to their account without paying out funds, that is neither a purchase nor a sale for threshold purposes (§ 1027.100(b)(3)). The structure is what matters — credit against another purchase, no money out. A part-exchange where you also hand over cash is a different animal, and how far the exclusion survives that mix is worth advice.

If you are covered: four elements

A dealer must develop and implement a written anti-money-laundering program reasonably designed to prevent the business being used to facilitate money laundering. It has to include:

1. Risk-based policies, procedures and internal controls, built on an assessment of your own exposure;
2. A designated compliance officer;
3. Ongoing education and training for staff;
4. Independent testing to monitor and maintain the program.

Part 1027 also carries cross-references to the wider Bank Secrecy Act machinery — large-cash reporting, recordkeeping and information-sharing sections in part 1010. The large-cash piece is the one you will meet first, and it is covered in cash reporting and Form 8300.

An honest note on where this lands

Whether a particular watch dealer crosses these thresholds is a factual question about that dealer's inventory mix, and it turns on a valuation exercise the regulation does not tell you how to perform. This page sets out what the rule says. It cannot tell you which side of it you are on, and any page that claims to — without seeing your purchase ledger and a metal-content valuation — is guessing.