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Keeping on mulling over the strange “law of intent” adopted in Russia and related to the circulation of precious metals and precious stones

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We continue the discussion of Federal Law No. 41-FZ “On Precious Metals and Precious Stones” dated March 26, 1998 (hereinafter referred to as 41-FZ) and amended to become Federal Law No. 607-FZ of December 29, 2022, and 71% of new norms of the amended law will enter into force on March 1, 2024 only.

New norm of law No.3 - Buying-up

In amended law 41-FZ that will come into force on March 1, 2024, an explanation of a “buying-up” notion has been included. Although the term “buying-up” has been used in original law 41-FZ since its adoption, the meaning of “buying-up” has not been disclosed in it all the past years, and its meaning was disclosed only 26 years after the law was adopted.

So, “buying-up jewellery and other items made of precious metals and (or) precious stones (PMPS), scrap of such items from private persons is the acquisition of jewellery and other items made from precious metals and (or) precious stones - belonging to them on the right of ownership - under a sale and purchase contract from private persons who are not individual entrepreneurs, as well as the acquisition of scrap of such items, investment precious metals, cut and polished precious stone studs, certified cut and polished precious stones, including those obtained as a result of dismounting jewellery pieces and other items made of precious metals and (or) precious stones (separating cut and polished precious stone studs - and studs made of and non-precious materials - from precious metals).”

The first thing that is surprising is that buying-up centres cannot purchase PMPS items under a sale and purchase contract from private persons who are individual entrepreneurs. Does this mean that if a certain indicative Ivan Ivanovich Ivanov running, for example, an individual entrepreneur making catering business wants to sell any of the PMPS items belonging to him via a buying-up centre, the buying-up centre should refuse him because he is an individual entrepreneur? According to common sense, it should not refuse, but according to the wording of the law, it should refuse.

Well, but if a certain Ivan Ivanovich Ivanov conducts his entrepreneurial activity, for example, as a jeweller or in the field of jewellery trading in specialized stores, has he - as a private person - the right to sell the PMPS items belonging to him via a buying-up centre in this case? Or he won’t be able to do this because the property of a private person and an individual entrepreneur is inseparable... And how can a buying-up centre check whether a private person is an individual entrepreneur or not? Can it check using data-bases in Internet? Then, it will be necessary to check everyone who wants to sell a jewellery piece to a buying-up centre?

Probably, it was meant that the individual entrepreneur Ivanov Ivan Ivanovich, regardless of the field he works in, will be able to sell the PMPS item belonging to him under the sale and purchase contract via an agreement with the buying-up centre as a citizen, a private person, and not as IE (individual entrepreneur) “Ivanov Ivan Ivanovich”. But this does not follow from the wording of the law.

Presumably, by March 2024, some subordinate legislation will be issued to regulate this conflict of law. But the bad thing is that again, the wording of the law in this part is not with direct effect...

Probably, the definition of the “buying-up” notion was introduced into 41-FZ, first of all, to legitimize the actions of buying up centres as the acts of sale and purchase of PMPS items from private persons. The legal uncertainty of the “buying-up” notion also interfered with Federal Law No. 115-FZ “On Counteracting the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism” dated August 7, 2001, which now will use a more general notion of the sale and purchase of PMPS items instead of the vague notion of “buying-up” the PMPS items.

At the same time, the definition of “buying-up” introduced into 41-FZ also defines another notion, “dismounting a jewellery piece”, that now becomes a legal notion; it means the separation of cut and polished precious stone studs and non-precious materials from precious metals. This definition was very important in the past when it was necessary to prove that a particular cut and polished precious stone owned by a private person was removed from a piece of jewellery, i.e., kept legally. Otherwise, article 191 of the Criminal Code of the Russian Federation for illegal possession of precious stones could be applied. But in amended law 41-FZ, the definition of “dismounting” is no longer relevant, but we will dwell on this in more detail below.

However, the most important rule of this new law about buying-up is, of course, the introduction of the right of private persons to sell not only jewellery pieces and scrap jewellery through buying-up centres, but also investment precious metals and cut and polished precious stones. Of course, this is a very important and long-awaited innovation! As Rough&Polished has already written, today, bars of refined precious metals purchased in banks without VAT can legally be sold to the same banks only, at the redemption price set by the banks. Moreover, it can be done in case of providing their proper safety and the documents accompanying the purchased thing. It is no use to talk about the convenience of such investments ...

Of course, granting the right to sell investment bars to buying-up centres is still the restriction on the right of private persons to dispose of their property. However, this is much better than not having such a right at all.

A similar, but even tougher situation may be with the expected removal of VAT on the sale of cut and polished precious stones without VAT to private persons. Obviously, for a variety of reasons (from the risks of a non-disclosure of possible substituting a stone by mistake during its repurchase to reluctance to buy back insufficiently liquid objects), banks can be even more reluctant to buy back these certified precious stones. And without buying-up centres, such a market is generally impossible.

It is very good for developing the domestic market of precious stones that in the new norm of law under consideration, buying-up centres are allowed to make deals not only for certified cut and polished precious stones but also with uncertified ones. However, in the new norm of law under consideration, uncertified cut and polished precious stones are called “cut and polished precious stone studs”, which suggests appearing some criteria in subordinate legislation to distinguish “cut and polished precious stone studs” from just “cut and polished precious stones”. For example, the requirements regarding the presence of traces of metals on the surface of a stone (which, by the way, can be found not on every dismounted stone). Of course, the introduction of such a norm or a similar one into a subordinate legislation would bring the common sense of introducing the norm into 41-FZ to nothing. Moreover, even before introducing this norm into 41-FZ, in fact, cut and polished precious stone studs were “items made of precious stones”, theoretically available for circulation among private persons. And the right given now to buying-up centres to make deals for any cut and polished precious stones, is, of course, a kind of the market liberalization.

New norm of law No.4 - Precious stones

We have already discussed above the innovations in terms of granting the right to buying-up centres to work with any cut and polished precious stones owned by private persons. But amended law 41-FZ contains several new norms of law related to precious stones.

Firstly, the notion of “unfit precious stones” is withdrawn from law 41-FZ as the paragraph of Article 22 was eliminated: “3. Precious stones unfit for manufacturing jewellery pieces and other items from precious metals and (or) precious stones are used as products for industrial purposes without the restrictions established by this Federal Law.

The criteria and procedure for classifying precious stones as unfit for manufacturing jewellery and other items from precious metals and (or) precious stones are established by the Government of the Russian Federation.”

Decree of the Government of the Russian Federation No. 437 of May 17, 2016 classified all the residuals of precious stones as “unfit” as well as “melee” stones of linear dimensions under 2 mm formed during any processing of precious stones (except for natural diamonds).

We do not consider here the regulation of the diamond circulation by 41-FZ, limiting ourselves to the analysis of the new norms of law relating the circulation of “coloured” precious stones, for which linear dimensions under 2 mm cannot be of any practical interest. Therefore, this clause in the previous versions of 41-FZ was of no importance to jewellers or individual collectors of minerals, that is why there were no regrets for its withdrawal from amended 41-FZ. The meaning of this old norm in 41-FZ without “taking into account” the rules for classifying as “unfit”, of course, gave some illusions that some precious stones in Russia are in free civil circulation, but those were only illusions ... So, mentioning the rights to free circulation of only residuals of precious stones in new paragraph 5 of Article 22 of the law is a more honest norm.

However, amended law 41-FZ gave a new expectation of any hints at the liberalization of the precious stone circulation. For lawyers unaware of the specifics of the precious stone regulation, the new norm of law discussed below may seem prohibitive, but in fact, it is a permissive one. Article 22 of law 41-FZ was amended by introducing new paragraph 6:

“6. Private persons who are not individual entrepreneurs or jewellery artists are not allowed to make deals for precious metals and precious stones, except for jewellery pieces and other items made of precious metals and (or) precious stones, cut and polished precious stones and investment precious metals owned by these private persons and provided with certificates.

What is permissive in this new norm of law? It is the fact that for the first time in the Russia’s modern history, paragraph 6 of amended law 41-FZ will allow private persons both to store and even to make deals for cut and polished precious stones with each other from March 1, 2024! However, the wording of this norm of law is made in such a way that it is impossible to understand whether the need to have a certificate applies to cut and polished precious stones, or whether this requirement applies to investment precious metals only. It is likely that some subsequent subordinate legislation will clarify the situation, but it seems that this subordinate legislation will clarify that deals with private persons will be allowed only for certified cut and polished precious stones. It just so happened in the regulation of the PMPS that if anything relatively liberal is stipulated by a law, then a subordinate legislation must necessarily prohibit this with additional conditions, turning the liberal norm of law into a fiction.

The funny thing about this is that taking into account that the norms of law under consideration will come into force only from March 1, 2024, it means it will not work for another year. So, it turns out that during this year, private persons can make deals for any precious stones with each other, including for rough precious stones, collectable samples, and not only for cut and polished ones? After all, there is no direct ban on this in the previous version of the law, and the ban under paragraph 6 of the law has not yet entered into force. But you need to understand: in Russia, much happens not according to the law, but according to by ‘special’ rules. In this case, according to the rules of law enforcement agencies. So, it’s better not to tempt fate!

If we touched on the topic of the circulation of collectable samples with precious stones (not rough ones) among private persons, it is worth mentioning that the relevant department of the Ministry of Finance of the Russian Federation is familiar with the problem relating to mineral collectors, and is does not mind to allow the circulation of such items. But a certain federal executive body objected, and this norm was not included in amended law 41-FZ. Well, collecting minerals is an environmental, cultural part of the citizens’ hobbies, it is not of the highest priority in our time ... However, making this decision would increase the circulation of precious stones on the domestic market, including through the sale of aesthetic specimen samples with emeralds as souvenirs and gifts, but, apparently, this argument did not work.

CONCLUSION: Amended law 41-FZ demonstrates a generally positive movement towards the development of the Russian PMPS market, however, in fact, everything will be determined not by the law, but by the subordinate legislation that will be issued during the year. And it will be possible to understand the real trend in the regulation of the PMPS market when we see it.

Vladimir Zboikov for Rough&Polished