Compliance for Pawnbrokers

When is a Pawnbroker also defined as a Precious Metals Dealer?

Good question, but very simple to answer – All you really need to do is look at the information from the NPA (National Pawnbrokers Association).  See NPA Alert issued January 2014 and NPA Important Information – These documents state very clearly when you are required to comply with the AML regulations for precious metals dealers.  If you are or were a member of NPA, then you can’t deny having knowledge or the law or requirements.  These two documents give you all the knowledge that the government needs.  Even if you were not a member, if you were mailed or emailed either of these documents, the government will be able to show that you received it.

However, the simple answer is, as long as you are conducting what is considered pawn business (the customer has the ability to redeem the items at a later date, those pawn transactions are exempt.  However, if you purchase merchandise (what is defined as covered goods – scrap metals etc.) from the customer (meaning they can’t redeem the merchandise at a later date and you own the merchandise after the purchase) and you can now either place it in inventory for sale or you can sell the merchandise to a refinery, then you would also be defined as a dealer in precious metals, if the amount purchased is in excess of $50,000 in a year.

Although the AML regulations for the precious metals industry specifically exempts pawnbrokers from complying with the regulations, that exemption only applies to pawn transactions.  See Interim Final Rule “AML Regulations” (page 33706, left column, 2nd paragraph, last sentence).  Therefore, with respect to precious metals, the exemption only covers pawn transactions, meaning the customer has the ability to redeem those items at a later date.  The transaction is not exempt if you purchase the precious metals from the customer, meaning the customer cannot redeem the merchandise at a later date and you have immediate ownership (usually for resale to a refinery or to place into inventory) then these transactions are not exempt under the regulations.  And if those purchases exceed $50,000 in a year, then the pawnbroker would also be defined as a dealer in precious metals and therefore would be required to comply with the AML regulations issued for precious-metals dealers, effective on January 1, 2006.  We have represented pawnbrokers who are also defined as precious-metals dealers as they have faced IRS compliance exams.  I assure you that the IRS knows the AML rules that apply to pawnbrokers and if you are defined as a dealer.  If they do come in to conduct a compliance exam and you are not compliant, they may refer your pawn business to FinCEN for possible sanctions.  They also know that many pawnbrokers are relying on the exemption part of the regulations to avoid having to comply, but with the information available to pawnbrokers, especially the NPA information mentioned above, playing dumb won’t work.  They can and will find out if you have or had access to and/or received the NPA information.  Electronic media leaves a very nice trail for the government to follow.  In addition, NPA will let them know who the information was mailed or emailed to.

Many pawnbrokers are also defined as an MSB (money services business) because they cash checks, conduct Western Union wire transfers, issue and/or redeem money orders or some combination of these services.  If you offer any of these services, you could be required to comply with several sets of AML regulations.  Fortunately, the MSB requirements are basically the same as the precious-metals dealer requirements, except that the MSB must register with FinCEN every two years.

If you meet the definition of a dealer or MSB, the IRS already knows it, so they could examine you for 8300 compliance and/or a Title 31 exam if you are an MSB.  In addition, banks are now realizing that not all precious-metals or scrap transactions conducted by pawnbrokers are exempt from the regulations and may also be contacting you wanting you to provide certain documentation to them to ensure compliance.  If you lose the bank account you have now, you may have problems securing a new one, because of a possible high-risk industry designation.  What you need to understand is that banks are also required to comply with similar regulations and they also get audited by federal regulators (FDIC or OCC) and must be compliant.  For them to be compliant, they need to be sure that you are compliant also.  If they don’t, they may be heavily fined.

If you believe that you meet one or both of the definitions of a precious-metals dealer and/or an MSB, go to the respective pages on this web site under Industries to see what you need to do to become compliant.

Should you need additional information or if you have any questions or concerns, please feel free to contact me at any time.