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FATF Recommendations and fight for cleanliness of financial market in Russia

23 december 2019

No one doubts that terrorism is awful and laundering of illicit income is bad. But why should the accomplices of terrorists, corrupt officials and all sorts of fraudsters be considered fools ready to launder their fraudulent gains through tools unsuitable for this purpose, which obviously leads to the loss of most of their cash? Money laundering through jewellery? Doing this in an era when cryptocurrencies are becoming increasingly more accessible and the liquidity of jewellery in the secondary market is getting lower and lower?

Let's see if we are not ‘going too far’ in the fight for the cleanliness of our financial market when it comes to controlling the circulation of jewellery in compliance with the requirements of anti-money laundering and combating the financing of terrorism (hereinafter referred to as AML/CFT). To begin with, we will analyze recommendations made by the FATF in its document entitled “International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – the FATF Recommendations”.

First of all, the FATF focuses on a sound approach and recommends a risk-based approach in all cases. Not to suspect each and every one, but to pay attention to suspicious cash transactions when performing any operations related to the precious metals and precious stones in a certain case, if the payment is made in cash equal to or exceeding the sum of US$15,000 or euros. There is an important translation nuance: the English-language ‘cash transaction’ used in the FATF document is correctly translated into Russian as a ‘cash payment, while a non-cash payment in English is a ‘cashless payment’ or a ‘credit card payment’, if the payment is effected by a credit card.

In other words, if the following three factors are simultaneously present in any transaction with the precious metals, precious stones or items made from them:

- the transaction amount is from US$15,000 or euros and above;

- the payment is made in cash;

- the deal looks suspicious,

the dealer involved in this transaction must be vigilant, carry out a due diligence of the client and inform the authorized body of the suspicious transaction.

But if there is no at least one of these three conditions of a risk-based approach, a check by a dealer is not required. Accordingly, if the transaction is carried out with a non-cash payment, then according to the FATF recommendations, dealers making such a transaction are not responsible for checking customers - this becomes the responsibility of the banks and financial sector.

But according to the Russian law, everything is different. All the three conditions of the risk-based approach are substantially inflated - the need for a customer identification arises when:

- the amount of a cash payment transaction is from ₽40,000 (US$620 or €560) and above;

- the amount of a bank transfer transaction is from ₽100,000 (US$1,560 or €1,400),

and the customer identification should be carried out in all cases, regardless of the presence or absence of any suspicion when exceeding these thresholds.

And this happens in a country where, unlike the European Union and the United States, the cash payment by citizens for their purchases of any value is a common thing!

Important note: the FATF document also contains the recommendation: “Each country and its national authorities should strive to establish partnerships with their dealers, which will be mutually beneficial for anti-money laundering and combating the financing of terrorism.” According to this recommendation, we will consider how the current Russian AML/CFT standards are mutually beneficial for the regulator (controller) and industry (jewellery) business.

It is worth noting that all those who are somehow connected with the production and circulation of the precious metals, precious stones and products from them fall under the AML/CFT control, including both the jewellery manufacturers and the sellers. And today, this type of control negatively affects the development of the domestic jewellery market, being the main and most costly barrier that hampers the development.

Firstly, the legislative requirement for the registration with the Rosfinmonitoring authorized to control AML/CFT, and the need to comply with the AML/CFT regime, makes it virtually impossible to sell silver tableware and silver souvenirs in those retail outlets where people usually come to buy tableware and souvenirs - in the household goods stores and gift shops. For these shops, silver products are not major goods or especially significant ones in terms of their assortments, and such stores are not ready to shoulder the heavy administrative burden of servicing the AML/CFT standards. And the buyer, who needs to purchase tableware and cutlery, is sent to household goods stores, not to jewellery ones. At the same time, silver utensils have valuable bactericidal properties that are good for the health of people who use it. Which, in the light of the National Goals of Russia, gives additional relevance to their promotion to the Russian market. But due to AML/CFT, on the contrary, the demand base for silverware and souvenirs is narrowing very much.

Moreover, the market value of silver is so low that it is obvious that it is completely pointless to use silverware as a tool for laundering criminal proceeds and for the financing of terrorism.

Secondly, the requirement to identify buyers (presenting a passport) when the jewellery purchased costs over ₽40,000 in case of a cash payment often inspires visceral displays of dissent among the people and they refuse to buy the jewellery pieces. It makes sense that buyers are afraid to transfer, as required by the AML/CFT standards, their personal data to the store employees, especially given that the person’s address is in the passport and someone knows that an expensive jewellery piece is purchased.

In addition, a jewellery piece is often bought as a gift to a beloved woman, and not all men would like to leave such ‘traces’. It should also be borne in mind that purchasing jewellery is often an emotional decision. And the requirement to present a passport makes people think about the possible consequences of a purchase, switch from a romantic wave to a pragmatic one and often a person changes his mind and refuses to buy a jewellery piece.

Thirdly, the requirement to provide his/her passport when paying with a bank card for jewellery worth above ₽100,000, especially if the buyers are foreign tourists, generally causes a complete misunderstanding and practically all of them refuse to buy because the buyers suspect that a seller has criminal purposes. It is obvious to credit-card holders that their identity was established by the bank when the card was issued, and any additional check of their identity is clearly not required.

Fourth, business spends money on servicing the AML/CFT requirements, the compensation of which is impossible due to pricing in a weak jewellery market. Thus, the costs of AML/CFT servicing not only reduce the margin of the business in the PMPS sector, but also decrease the investment attractiveness of doing this business in Russia as a whole.

Parliamentarians tried to deal with a partial solution of the AML/CFT servicing issues. However, their attempts to amend the AML/CFT law were not successful. So, attempts to raise the lower threshold of the jewellery cost for the customer (individuals) identification purposes - to be closer to the FATF requirements – have already been made twice, but both times the bills were rejected. The first bill, No.734802-6, was introduced by the members of the Federation Council N. A. Zhuravlyov and A. B. Ter-Avanesov on 03.03.2015, the project intended to raise the lower threshold to a ₽150,000 jewellery purchase for the customer identification in case of a cash payment and up to ₽600,000 in case of a non-cash payment. On December 14, 2016, the bill was rejected. The second bill, No.225171-7, proposing to increase the lower threshold for the customer identification starting with a ₽200,000 jewellery purchase in case of a cash payment, and up to ₽500,000 in case of a cashless payment, was submitted to the State Duma of the RF by the State Assembly of the Republic of Sakha (Yakutia) on 13.07.2017, but on 16.10. 2019, it was also rejected.

Thus, changing the AML/CFT legislation is not possible without the goodwill of the RF Government. What is really sad, this type of the state control was not included in the list of types of control and supervision falling under the “regulatory guillotine”. Given that another type of control over the precious metals and precious stones sphere - assay supervision - fell under the “guillotine”, and perhaps the business will receive some easing of the mandatory requirements due to the “guillotine”, the AML/CFT control issues for the jewellery industry will be addressed first. Although today, this problem for the circulation of silver products has already come to the fore.

Obviously, the additional burden on the jewellery business due to the need to satisfy the AML/CFT requirements, where over 98% of the subjects are small enterprises, can in no way contribute to the development of both small business and this sector of the economy. But if there was at least any benefit from this extra load! The benefit is in question. It is hard to imagine an ill-minded person buying up jewellery in a store in order to cash out his money. It is even more difficult to imagine an accomplice of terrorists who massively purchases jewellery pieces. To sell them later, with a loss of more than 50%?

In the reports of the law enforcement authorities you can often read about the ‘deposits’ of jewellery found with a particular corrupt official. But is not it obvious that the jewellery purchase is only a tribute to national ideas about wealth in the form of a coffer with jewels? That these jewellery stocks are simply meaningless and thoughtless waste of illegal money, but not the “laundering” procedure, the legalization of illicit income, which provides for the subsequent putting this money into use? Corrupt officials do not intend to sell these jewellery pieces, they just need them to feel rich. And would such a buyer really present his passport in a jewellery store? Such a buyer would look for devious paths and will find them. So, it turns out that this AML/CFT norm only stimulates the shadow circulation of jewellery, and does not fight it.

In the discussion of the business and the state on any issue, there is usually no parity, the opinions and arguments of the officials are much more likely to be more weighty for decision-making than the entrepreneurs’ opinions. And as for the AML/CFT control, the business is practically deprived of any opportunity to protest. If there was an exchange of views on issues of the state assay supervision with the industry regulator, the Ministry of Finance of Russia and the Russian State Assay Chamber, and it should be mentioned that this interaction only intensified with the launch of the “guillotine”, the communication with Rosfinmonitoring is only at the level of a “teacher and a student”, if any. Does this correspond to the principle of mutual benefit laid down in the FATF, as well as the establishment of partnership relations between the authorities and business?

Meanwhile, according to the information of Rosfinmonitoring dated 29.12.2018, “On the use of the results of the national assessment of the risks of the legalization (laundering) of criminal proceeds and the financing of terrorism”, the risks in the circulation of the precious metals, precious stones and jewellery in terms of the possibility of financing terrorism are officially recognized as low.

And the forthcoming introduction of the integrated system for controlling the circulation in the field of the precious metals and precious stones (SIIS PMPS) will many times reduce the risks of using the precious metals, precious stones and jewellery as for the legalization (laundering) of the illicit income, because the computer processing of the data coming to the regulator can allow - using any given algorithm - to easily track any suspicious operations remotely.

Is not this a reason to ease the AML/CFT requirements for the precious metals and precious stones to the level of the FATF requirements? To everyone's benefit, as the FATF recommends!

Vladimir Zboikov for Rough&Polished