Preparing for the PATRIOT Act

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The U.S. diamond and jewelry industries are beginning to get used to the more common occurrence of new federal and international legislation that targets their trades. After spending the past two years preparing for the implementation of the Kimberley Process, and altering their businesses accordingly, companies involved in those industries are now faced with implementing further adjustments as the proposed rules under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act near finalization and move closer to becoming law.

Industry Reaction

Response to the USA PATRIOT Act legislation from individual companies inside the industry has varied widely, indicating that dealers’ knowledge of the Act ranges from the well educated to the completely uninformed. On the positive side, many companies have indicated that they are aware of the new Act and are now just playing a waiting game until it gets passed. “As of now, we haven’t done anything formally, because the Act hasn’t been passed,” says David Grunberger of Grunberger Diamonds. “Once it is clear as to what the requirements are, we will prepare to meet them. We will definitely comply with anything that is required by law. This is a serious matter and I am taking this very seriously. I am just waiting to find out exactly what I need to do.”

Ronnie Vanderlinden of Diamex agrees. “First of all, we need to have final regulations in place, and once that happens, we will know what we need to do to comply with the law,” explains Vanderlinden. “In the end, though, it is going to be a law with which we all must comply.”

It must be noted, however, that other businesses have demonstrated an alarming ignorance about the subject. Comments from sources wishing to remain anonymous have included “I am not sure it will affect us and I am not even really sure what it is,” to “I don’t know what we are supposed to do, but I am not planning on seeking legal advice.”

According to Jeff Fischer of Fischer Diamonds, this lack of awareness is not an anomaly. “In general, I don’t believe that people are preparing for it. I know that larger companies are keeping an eye on it and have their legal and accounting departments alerted, but because the final legislation is not out yet, there is still a large percentage of people in the industry who are not aware of it.”

That ignorance is not due to lack of effort on the part of the industry’s professional organizations. Both the Diamond Manufacturers and Importers Association (DMIA) and the Diamond Dealers Club (DDC) have held educational seminars for their membership. The Jewelers Vigilance Committee (JVC) is in the midst of preparing a “Compliance Kit” to distribute to industry members once the Act is law that includes an antimoney-laundering program template. Encouragingly, however, the most recent seminar, held at the DDC headquarters on 47th Street in New York City’s Diamond District, attracted a standing-room-only crowd of approximately 150 to 200 people. DDC President Jacob Banda underscored the importance of the huge turnout, saying, “Everyone needs to be made aware of this new legislation. It is possible that a dealer could make what he thinks is a legal transaction and still be charged by the government. We need to educate ourselves.”

Cecilia Gardner, executive director of the JVC, echoed Banda, commenting, “Compliance shouldn’t be a major change in the way you do business. It will be rather easy, but it will be absolutely necessary. Right now, there is nothing that you are required to do except get ready to do something. It is important to keep in mind that pro-activity is a good idea given the publicity of recent cases right here on 47th Street.”

Lack of Discussion

Regarding diamond trading as a whole, it appears that although the new legislation applies to a large part of the industry, outside of educational seminars, the Act has not yet generated a significant amount of discussion within the community itself. Why the lack of dialogue? Grunberger believes it has to do with the timing of the passage of the Act. “What I sense is that very few people are talking about this now, and I believe that is because there are more important matters to focus on for the moment,” he says. “We are now entering the biggest season of the year, the Christmas season, and people are more focused on moving forward and making money. If this issue was brought to the forefront in January or February, more people would be open to those types of conversations. Now, people are concentrating on trying to survive on a daily basis.” Grunberger does believe, however, that, like the issue of conflict diamonds, once the legislation is passed, “sensible companies and companies that act in a responsible manner will take the issue seriously because it is in everyone’s best interest.”

Retailers: Trade-Ins Exempt?

Among retailers, the response has been much the same. “Since the rules and regulations haven’t become final, we aren’t doing anything until we get them — we are waiting,” says Jon Bridge, co-chief executive officer and general counsel of Ben Bridge Jewelers. “It would be a complete waste of time to attempt to brainstorm about this when we don’t even have anything concrete in place.”

Although the Act is somewhat ambiguous in carving out the definition of a dealer, jewelry retailers are mostly exempt, provided that they purchase less than $50,000 a year of jewels, precious metals, precious stones or jewelry composed of such things from persons other than dealers. This exemption, however, does present retailers with a unique dilemma in the form of consumer trade-ins, which are likely to constitute more than $50,000 worth of business a year for a typical retailer. “The issue for retail jewelers is in trade-ins for jewelry,” says Bridge. “All of us who are retailers take in jewelry in exchange for other jewelry. This happens all the time, and under the Act, every occurrence of a trade-in would have to be accounted for. That is preposterous. That is obviously not a money-laundering situation and there needs to be some type of exemption. The government should not track gemstones-for-gemstones transactions.”

After The Rules Become Law: What Then?

So what will everyone do once the Act has been made law? Peter Fields, a partner in the law firm Phillips Nizer LLP who has represented clients in arbitration matters before the DDC, believes that dealers will contact their attorneys. “Clients are beginning to call already and we are consulting with them about this,” Fields says. “We are getting calls from Israel, all over the world. People want to know what they should do. This will only intensify once the rule becomes final.”

Fischer believes that contacting a lawyer might not be absolutely obligatory in light of the template planned by the JVC. “People will be taking those templates to the lawyers. However, while some companies will consider it necessary or prudent to go to outside counsel, a good part of the industry will be able to achieve compliance through the template that the JVC will issue.” Gardner concurs. “Although, obviously, some companies will choose to go to their attorneys, the kit should cover most everybody,” she says.

Fields, however, encourages industry members to think about the rules now and not wait until the rule is passed to at least learn about it. “Start thinking about who your compliance officer will be, think about what types of transactions you find suspect, think about your own comfort factors,” he says. “Understand the proposed rule and the rationale behind it. Understand how it will affect you.”

So when will the legislation be finalized and when will everyone be required to get past the brainstorming stage and on to dealing with the nuts and bolts of what has to be accomplished in order to comply? Estimates vary widely, but according to one industry insider, passage is likely to be sometime in November. At that time, everyone will be required by law to take the Act seriously and to do something about it, whether that means contacting an attorney or just using the JVC’s compliance template.