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What is the SIIS PMPS for the Russian market - an armour or a leaky sieve?

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The reason for writing this article was the response of consumers to the headline of the news in the public media that the deadlines for the introduction of mandatory jewellery marking in Russia have been extended until 2024. While inside the jewellery community, all the market participants understand what the matter is, ordinary jewellery buyers, that is, citizens, were suddenly alarmed that they would bear some risks for more than a year when buying jewellery pieces... So, are Russian jewellery buyers protected from faked jewellery today, or do they still have to wait for some time?

The analysis of the functioning of the State Integrated Information System in the Sphere of Control over the Circulation of Precious Metals and Precious Stones (SIIS PMPS) gives an answer. Did this system work or not 20 months after it was launched, is the SIIS PMPS already effective for the state and consumers? Let us turn to the goals set for the SIIS PMPS during the preparation for launching it. The tasks of the SIIS PMPS are formulated in Federal Law No. 41-FZ dated March 26, 1998 “On Precious Metals and Precious Stones” reading “a federal state information system designed to receive, process, store and provide information on the origin and circulation of precious metals, precious stones and products made from them, as well as for the organization of special record-keeping.” But these are tasks, not goals.

Interestingly, even Decree of the Government of the Russian Federation No. 270 dated February 26, 2021 on the implementation of the system does not state the goals of introducing the SIIS PMPS. The goal of the development of the SIIS PMPS is mentioned not in the regulatory legal documents, but just on the system’s website page (https://dmdk.ru/about/):

“The SIIS PMPS is a unified information platform for the interaction of the precious metals and precious stones market participants, state control and supervision bodies, as well as other interested federal executive authorities.

The SIIS PMPS is developed with the purpose of:

ensuring the traceability (recording) of precious metals, precious stones and products made from them in order to control the circulation of precious metals and precious stones, as well as to confirm their genuineness and legal origin;

obtaining effective tool for control and supervision in the PMPS market;

ensuring the transition to electronic document management, including gradual abandoning the practice of reporting in non-electronic form by market entities and switching to the use of electronic data as the main source of statistical and analytical information about the PMPS market;

improving the efficiency of consumer rights protection procedures through the use of goods traceability tools and technologies confirming their genuineness;

formation of analytical information on the state of the industry of precious metals and precious stones.”

In the absence of a definition of the system’s goals in regulatory legal documents, we will judge by an assessment of achieving these semi-officially declared goals of introducing the SIIS PMPS. The first two mentioned goals are the interests of the state. The third to fifth goals are the interests of the business, and the fourth goal is the interests of consumers.

The goals of “ensuring the traceability (recording) of precious metals, precious stones and products made from them, and, as a result, “obtaining an effective tool for controlling their circulation” are, of course, the main ones. It is safe to say that these goals have already been achieved using the system. After all, thanks to individual record-keeping in the computer databases of the SIIS PMPS, each unit of products (using identification numbers of product, INP) and each jewellery piece (using unique identification numbers, UIN) can be traced. The fact that the UIN is introduced today in the DataMatrix code printed on the tag of a jewellery item, and not applied directly on a jewellery piece itself, plays absolutely no role for traceability purposes for the following reasons.

Firstly, the DataMatrix code printed on a jewellery piece tag and the DataMatrix code that is supposed to be applied directly on the surface of a jewellery piece are the same code with the same information about the jewellery piece, that is, it contains its UIN. But technologically, it is so difficult to read a tiny (no more than 1 mm) DataMatrix code on the jewellery piece itself that no one would do this in the jewellery pieces’ movement chain, except for the manufacturers of these goods who have to do this upon the arrival of jewellery pieces from the Federal Assay Chamber after assaying, hallmarking and stamping. And all other participants in the jewellery circulation, in any case, will successfully read the same code printed on a jewellery piece tag, which is a simple and inexpensive procedure.

Secondly, if it happens that any manufacturer or importer changes a tag of one jewellery piece for the tag of another one, this can only be a single case by unwitting mistake. Any of the participants in the jewellery circulation cannot have any economic interest in changing the jewellery items’ tags, since the total weight of the jewellery pieces received by each of the market participant must always coincide with their total weight of the jewellery pieces sold. The SIIS PMPS monitors this process; as in mathematics, ‘permuting the summands of a sum does not change the value of the sum’. That is, cheating with changing the tags of jewellery pieces is a very stupid thing that no one would do, taking into account the general recording of all goods in the SIIS PMPS.

Thirdly, it would be interesting to hear the answer to a question: why can the circulation of raw precious metals be reliably controlled and traced in the SIIS PMPS by an INP using the marking by the DataMatrix code of an accompanying information carrier, but tracing the circulation of jewellery pieces from the same metals and stones in the same SIIS PMPS system should be carried out only with the help of marking, that is, applying the DataMatrix code directly on the jewellery pieces? Even bars of refined precious metals will not be marked on metal, and this does not bother anyone ... Which is absolutely correct.

Fourthly, it is worth paying attention to the example of marking other goods in the system of the Ministry of Industry and Trade, the Centre for Advanced Technologies Development’s ‘Fair Mark’, which successfully uses the marking of goods either on the jewellery item itself or on an accompanying information carrier. And everything is ok, the system works! Why doesn’t the SIIS PMPS take advantage of this positive experience and refuse to duplicate completely useless (to be honest) marking of jewellery pieces directly on the metal of jewellery items?

Fifthly, marking the jewellery pieces directly on metal is an additional and considerable, but unreasonable costs for market participants, as well as the decrease in microelectronic components that are already in short supply due to the sanctions and are necessary for the production of readers; and most importantly, this is the risk of a complete collapse of the Russian jewellery market due to the lack of the required number of such readers used by market participants in a trade sector.

Sixthly. Why did no one in the world come up with the idea of marking/stamping jewellery directly on metal? There is no point in mentioning the marking on a diamond girdle as an example - after all, the purpose of the laser inscription on a diamond girdle is not to trace the circulation of marked diamonds, but to increase the consumer confidence in ultra high-end goods with the properties that can be evaluated by experts (gemologists) only. That is, in accordance with the goal, the tool was chosen. Confirming the genuineness of jewellery pieces, unlike polished diamonds, is quite possible with a tag.

In fact, the idea to mark jewellery pieces directly on metal was initially an erroneous, duplicative and redundant technological solution. It happens, while introducing something new, reasonable corrections are always made. The thing is not to spend a lot of money in vain ...

Naturally, any traceability of goods is possible only if anyone has entered the corresponding goods (metal, stones, items) to be recorded into the system. Putting the items into circulation through entering them into the SIIS PMPS is a key stage, without which there can be no legal circulation of precious metals, precious stones and products made from them.

Oddly enough, the opinion was recently voiced that at present, the traceability of the goods circulation is not yet ensured by the SIIS PMPS system. The opinion was based on the decision to extend for six months the period for entering the updated information on stock balances (into the SIIS PMPS) that are available according to inventory data as of January 1, 2022, taking into account the sales. There were concerns that before the deadline for providing updated data on a stock balance, there illegal attempts may be made to ‘replenish’ these stock balances with newly purchased metal sold to individuals without a VAT. However, this is not the case, - after all, the submission of information by market participants to the SIIS PMPS on the total balances of valuable goods has long been completed, and the data is updated not because of the goods replenishment, but, on the contrary, because of their sale and use in the current period. This means that no new goods can appear there because any valuable goods entered ​​into the system during this period are considered by the system as a new entry and do not increase a stock balance in any way.

The traceability of the goods in the SIIS PMPS has already been achieved if they were entered into the system. And without entering valuable goods ​​into the system, without their subsequent withdrawal from circulation in the SIIS PMPS, it is impossible to legally sell precious metals, precious stones and products made from them.

The established delay for credit institutions to submit information to the SIIS PMPS on the receipt and sale (shipment) of bars of refined precious metals until March 1, 2023 does not pose a threat to the traceability of the circulation of precious metals. It is impossible to legally enter precious metal bars purchased by individuals from banks without a VAT in the SIIS PMPS for industrial use.

But it is really a question whether all goods are entered into the SIIS PMPS legally. This question does not relate to the introduction of the SIIS PMPS or the traceability of goods in the system, but the question relates to the regulatory framework. Obviously, the illegal circulation cannot be associated with the quality of the SIIS PMPS functioning because such a circulation is beyond the system’s control.

Raw precious metals and cut and polished gems that should be subject to a VAT (and not only) as primary goods, theoretically can, indeed, be illegally entered into the SIIS PMPS as secondary ones that are not subject to a VAT. The case in hand is about the theoretical illegal possibility to legalize through the entry of illegally mined precious metals or bars of refined precious metals into the SIIS PMPS as secondary ‘VAT-free’ scrap jewellery items purchased from individuals. Likewise, smuggled cut and polished gemstones could also theoretically be legalized through shops for scrap jewellery items, without a VAT, as stones supposedly removed from jewellery items sold by individuals.

It’s worth emphasizing once again that this problem has nothing to do with the functioning of the SIIS PMPS, the presence of some loopholes in the system, the problem existed even before the introduction of the SIIS PMPS, since this is not a problem of organizing computer-aided traceability. This is the problem of a crime as such. The problem is well known in the Rosfinmonitoring (Federal Financial Monitoring Service of the Russian Federation), which can be seen on the agency’s website page https://www.fedsfm.ru/fm/risksml/metals: “There is an increased threat of committing characteristic predicate offenses in the sector, using illegal and semi-legal methods of evading payment taxes (including a VAT), illegal mining of the precious metal, illegal refining and smuggling of precious stones.”

To a large extent, the fiscal interests of the state in the PMPS market can be protected from the aforementioned illegal actions if a VAT is introduced on all precious metals and precious stones purchased from individuals, naturally, with the inclusion of the corresponding option of imposing a VAT on purchased valuables in the SIIS PMPS. In case of ‘laundering’ illegally mined precious metals or smuggled precious stones, the state can still receive at least a 20% VAT from them, which the state does not receive today.

Final conclusions:

1. The SIIS PMPS is a properly functioning system ensuring the traceability of the circulation of precious metals, precious stones and products made from them. But this is true in case of a correct (not fraudulent) putting of goods into circulation, that is, the correct input of data into the system. It can be said that the SIIS PMPS is an ‘armour’ to protect the correct circulation of precious metals and precious stones.

2. The state’s fiscal interests in the PMPS market can be observed much more fully if the normative regulation includes the charge of a VAT on all precious metals and precious stones bought from individuals. At the same time, the share of the circulation of illegal precious metals and precious stones will most likely decrease due to the decrease in the economic feasibility of putting illegal precious metals and precious stones into circulation with paying a VAT.

3. Direct marking of jewellery pieces on the metal surface is not required to achieve the goals set for the SIIS PMPS, this is a duplicative and redundant operation to ensure the reliable functioning of the system.

And now let’s return to the issue of marking jewellery pieces in the SIIS PMPS, to the consumers’ interests. As noted on the system’s website, this is the goal of higher efficiency of the consumer protection through the use of goods traceability tools and technologies for verifying their genuineness. This goal is successfully achieved in the SIIS PMPS due to applying the DataMatrix code on tags that are attached to jewellery pieces.

According to paragraph 11 of Decree of the Government of the RF No. 270 dated February 26, 2021, starting from March 1, 2022, the circulation of all jewellery manufactured and imported after January 1, 2022 is possible only if a jewellery item’s tag contains the DataMatrix code with the UIN of the jewellery item. That is, these jewellery items are sold today already de facto (but not de jure!) marked.

And for jewellery items manufactured before January 1, 2022, that is, for ‘stock balances’, according to paragraph 10 of the same resolution, the DataMatrix code with the UIN of the jewellery item should be applied on tags no later than on March 1, 2023.

Thus, the jewellery markings printed on the tags attached to jewellery pieces and available for consumers to read using smartphones having Federal Assay Chamber’s applications are already on jewellery pieces produced this year, and from March 1, 2023, they will surely be available on all jewellery items on sale, regardless of the year of their manufacture.

Vladimir Zboikov for Rough&Polished