Compliance

Businessman hand building wooden blocks with Compliance concept.

Compliance. Yuck! Everyone hates the whole compliance thing, but we all must admit, whether we like it or not, it is just going to get worse and not better. When I owned my stores in CA and OR from 1996-2012, I had no idea any of this stuff ever existed. By 2013 I had started a business to help others understand and it has now blossomed into 39 states and Canada!

Title 31 audits (the IRS likes to refer to them as ‘exams’) are occurring with an alarming rate and should have everyone reading this at least paying attention. While these are not “tax” audits, they can lead to them quickly if you are not careful. Nobody wants a “tax” (Title 26) audit. So, what do you need to know?

Title 31 is the U.S. PATRIOT ACT and as pawnbrokers you fall under this act because you are considered a financial institution. You are a bank after all, and many states use their banking regulators to monitor and license pawnbrokers. You then get to follow the same rules as banks. To add to this, you are also considered a ‘high risk’ industry by FinCEN which is the Treasury watchdog and enforcement arm. (FinCEN stands for Financial Crime Enforcement Network.) They set the rules and they DO enforce them. Fines levied by FinCEN can be business ending, and since pawnbrokers are supposed to have had AML programs in place and operational since 2005, they have little tolerance for ignorance, real or feigned.

So, what exactly is a Title 31 Exam? It is an exam of your Anti-Money Laundering program. You will get a notice 30 days ahead of time letting you know you have been selected for an exam. Included with the letter will be a three-page document listing all of the items they will need you to have ready to go for the special day. The first several will be requested digitally prior to the actual review so they can do some homework before they arrive. At the very top of the list is a copy of your AML program.

Question for you. If you do not have an AML, how are you going to send it digitally? On top of that, an audit will go back 6 months to look at your AML program and the systems you have in place in support of that program. How do you prove to their satisfaction that you had a functioning program when in fact you did not? The answer is you do not. And there you are, standing naked in front of the IRS begging for a second chance and trying to explain to them that you had no idea you were required to do this stuff even though the laws have been in place for much of it since George W. Bush was in office.

Exams do not actually take much time when the examiner is on site, but the preparation will set you back several hours, and in some cases depending on the size of your operation(s), days. You will need to provide employment records, training documentation, any 8300 and SAR forms you filed, any workpapers (reports and tracking info to show why you did or did not file 8300 forms and SAR’s), bank statements, and purchase records for the 6 month period in question.

On the day of the review, I highly recommend that you meet the examiner with your treasure trove of documents off-site. I also recommend that you have someone other than yourself sitting there trying to answer questions on your behalf. These exams are new to many IRS folks and they are trying to figure them out. You will be too nervous to answer questions correctly and see what path they are leading you down. You may walk right into a tax audit if you answer something innocently but incorrectly. By the way, your CPA is not the best person for these reviews. They are proficient in Title 26 but NOT Title 31. While they may be well-meaning, I am aware of at least one exam that went south in the last 18 months because of this scenario.

So, what exactly do you have to have in place to pass this exam?

  1. A written program based on the risks inherent in your unique business and its geographic location for the potential to have money laundering or other nefarious activity take place. The program is to be custom (not a template) and a living, breathing document that is part of the culture of your operation.
  2. A designated compliance officer in charge of the whole thing. In addition, if you are an entity, then you need to provide a statement from the top echelon that shows support for the program and the compliance officer at the very least.
  3. Routine documented training, provided at these three times:
    1. Within 30 days of hire for new staff that are required to know the information
    1. Every year for all staff as a refresher
    1. Any time there are substantive changes on a federal level
  4. An annual independent review of your program to determine how well it is working, how up to date it is, and how well it is incorporated into the DNA of the company. Independent means “not you”, and it should be someone who is certified in this stuff.

While this sounds ominous, it is not. Because much of what the IRS folks are looking for does not happen routinely in our industry, your goal is to paint a clear picture for them of what actually does happen in your company. While this may be very little, that is important for them to see. In other words, you can say that you have not filed any 8300 forms ever, but your examiner will need to verify that. Better for you to hand them reports you have already looked at that support your statement than having them digging through your computer. Unless, of course, you want the IRS person digging through your computer…

You will need to be tracking any transactions that are large for your operation to make sure there are no trends or patterns that may lead a reasonable person to believe that money laundering could be occurring under your nose.

You will need to be checking all pawn and buy customers against the OFAC SDN list. This is a list of 15,000+ names that evolves almost daily. Fines are ridiculous if you give these folks money. Most pawn systems today will offer a way to check these. One charges for the service (I cannot get them to stop…) which is absurd since it is a federal mandate, but the rest offer something. It is your job to make sure you are paying attention to these. The argument that, “I never get any hits” is fine, but you must be able to prove this! Each software company provides this in different ways. Just because you pay a lot for your software by the way does NOT guarantee they do compliance stuff correctly. Compliance is not glamorous and it is not a huge selling point, so some of them have just put a mediocre solution together that in many cases is 50% there and then you get to push or pull it across the finish line.

Your pawn contract needs to have a ‘customer privacy policy’ somewhere in the small print. This is the same thing as the privacy statement you get from your bank or credit card company every year. You dutifully open it and then when you realize what it is, you throw it away. That piece of paper… At any rate, you must provide this statement to your customers at least once a year. Having it printed on the pawn contract fulfills this obligation. The other option is to hand a little piece of paper to every customer which will then end up on every counter in your building along with the floor and the parking lot.

You will need to be able to demonstrate that you have ‘know your customer’ and ‘enhanced due diligence’ protocols in place. Now the good news here, is that pawnshops overall do a stellar job here. Think about it. In most shops, before the customer ever hits the counter, they are explaining why they are in the shop again. We know, or think we know, their whole life story. To the extent that story never changes, AND nothing about the activity of the customer seems to contraindicate their story, you are fine. BUT you need to have trained your staff what to do if that story changes, AND you need to be able to prove that to the IRS examiner.

They will ask you about your ability to source inventory. In laymen’s terms, that means you must tell them where a ring they pick out of the case came from. If you have an inventory number that ties to a loan or buy number, you are in good shape. If you like to generate unique numbers and it will be hard to explain to that examiner where the item came from and most importantly, how much it cost, you may be walking right into a tax audit. If you are one of those stores that uses your pawn software only to manage the pawns and buys and you have a separate system for inventory, this is your warning to really consider how that looks to the IRS examiner. The old days of operating out of a cigar box…that will get you shut down now.

That is a solid amount of information and all around just the Title 31 AML exam. When it comes to compliance, this is the piece that must be intact and functioning. It is not enough to purchase the program and let it sit on the shelf. I have seen fines levied for $10,000 for folks who did that. That is one expensive AML program! In addition to the AML program, there are many more federal items, and we will not even go into ATF stuff. The other two biggest federal compliance pieces are TILA (Truth in Lending Act) and the MLA (Military Lending Act).

You need to have a reasonable system in place for identifying whether a customer is an MLA covered borrower. You do NOT have to run every single name against the Department of Defense website as was initially reported and to some degree I still stumble upon. You must make sure that your software prorates the military APR to a DAILY rate based on 36%/year. One major software company does not have this box checked in their settings and if you keep it that way you are overcharging these customers! You must provide a written AND oral disclosure of the Military APR since the contract language on the back will not line up with what was printed on the front. Burrell offers a great product just for this purpose (11-5560). Use it. You will need to retain ALL pawn tickets for 5 years from the date of final disposition. This is not read as 5 years from the date you wrote the ticket.

TILA is more about the statements on your contract and your understanding that a signed contract is EVERYTHING in a court of law. Make darn sure that your contract matches your systems and your laws. When the dust settles, whatever is on your contract will rule. When was the last time you actually read your pawn contract anyway? If you use a national company to produce your tickets like Burrell, Apperson, and Technology Media Group for example, then your tickets are likely in great shape. However, if you have gone the cheap route and used a local printer, I would take a serious look at that ticket and make sure you are covered. By taking a serious look I mean having someone who knows what they are doing and understands TILA requirements to look at that ticket.

Fun stuff, right? If you use someone who knows what they are doing to help you out, it is really not too difficult. But remember the old Fram marketing slogan, “You can pay me now…or you can pay me later”? It applies here. Your best bet is to have this in place 6 months before you get your Title 31 letter from the IRS, not after. Feel free to reach out if you want help!

How to prepare for, and survive, a Title 31 Exam

Work work work

Possible discussion points

  • What determines if I will have an exam? Is it something I did?
    • Once I have an exam will I ever have to have another one?
  • What does the IRS think I am doing that I have to have the exam? I’m just a pawnbroker!
    • Give examples of money laundering opportunities found in pawnshops across the country.
      • Use marijuana dispensaries as an example. They have lots of money they can’t bank. The act of buying items and running the money through a third party (Paypal) to put the money in an account is a form of money laundering. Might the pawn shop be a party to that? When would they know? How would they know? What could happen if they know and keep going?
      • Other real-world examples such as gold coins and bullion being used by drug dealers. Drug money used to buy gold which is then taken across town and sold at another shop for example.
  • What is the difference between a Title 26 audit and a Title 31 exam?
    • What types of things might cause a Title 31 exam to morph into a Title 26 audit?
  • Help folks understand related transactions as they relate to 8300 forms
  • Help folks understand the importance of tracking high dollar transactions for suspicious behavior
  • When should I file an SAR since they are voluntary? Help give clarity here
  • What is the difference between a suspicious 8300 and an SAR? Under what circumstances would I file them so I file the correct form
  • What are the most common errors that auditors see during Title 31 exams?
    • Does it matter that I am trying?
  • What can happen if I don’t have a current AML program in place when I get my 4479 letter?
  • Clarify the importance of being able to source inventory
  • What types of errors do you see in the way folks present their documents from the 4564? In other words, what common gaps are there that if they knew ahead of time, they might be able to do a better job of being ready for their exam? Organization etc..?
  • How long does the process take when you are onsite?
  • Once you leave, am I done?
  • Can you tell the difference between a company who has the AML program in its muscle memory as opposed to someone who is trying to fake it? How long does it take from the moment you walk in the door until you know? Or do you already know because of their responses to the 4564 and the type of materials they provided along with their communication or lack thereof?
  • What is the single most important thing that shops can do to survive the exam? Conversely, what is the single worst thing shops can do that will almost be an instant fail?
  • Do I have to do SDN searches? I never get any and the potential matches are always wrong. How do I prove to you that I am doing them anyway?

Prepare for the worst, and hope for the best

Success

If 2020 has taught us anything at all, it is the value of being prepared. We have just experienced a live fire course in planning and some of us sailed right through things while struggling with others. To be truthful, we ALL struggled. Suffice it to say, we are ready for “normal”, whatever that is, to return and linger a while.

On the evening of May 28, around 10:30 to be precise, I got a text from the manager of a local store asking me to give him a call if I was up. He was in Portland, and I was in Southern CA. Any time a manager of a store calls me at 10:30 at night it cannot be good. He wanted me to know that the owner of the store he worked for was being rushed to the hospital due to a medical emergency. He had a ruptured aorta. Let that sink in for just a bit. Very few people survive a ruptured aorta. From onset, his was already five hours along by the time he entered the OR. The manager had uncertainty and fear in his voice. I tried to reassure him from 1000 miles away and told him I was on my way home the next morning so could lend a hand.

The next morning, I got word that Tim had made it through surgery and was sitting up watching TV. While we were all relieved, it got me thinking. What if the odds won and he didn’t make it? Then what?

I went into the store a few days later to help his wife do the books and pay bills. She was at a loss as to how to do the books in a store that had been open just shy of 10 years. Nobody on the planet can put jewelry away better than her, but books? That was not going to happen. We got talking and she said many times she had told Tim that they needed a plan. His plan was to just get me…that I would know what to do.

Tim would have been proud. They worked the plan. Followed it 100%. The problem was, he never told me about the plan. We had never walked through the plan. I know how to do the books. I know lots of things about running a shop from my 15 years of owning shops in CA and OR. You know what I didn’t know?

What are the passwords? When do we do payroll? How do we do payroll? How do I open the safe? Who

Is scheduled today/next week? How can I pay bills if I don’t have access at the bank? Speaking of the bank, how am I going to get change? Who is next in line now that the ugly has happened? How long before they can get here? What do you mean it is two children who have not spoken in 8 years and hate each other? Why do you hate me so much that you would put me in this position?

We managed to muscle our way through and got the books done and the bills paid. Two days later I called Tim in the hospital. (FYI…he didn’t go back to work for over 2 months) He said he had been expecting my call! We had our talk and came to the conclusion that his plan had some flaws. We agreed to sit down and make a real plan once he got back to it and we are working on that now.

So, what about you? Are you ready? I am going to give you some things to ponder. If you want help in your pondering, I encourage you to reach out to me and others along the journey, but do not tarry. Get to it. Emergencies happen at the worst times and you know what? They are almost always a surprise. Planning, training, preparedness…whatever you want to call it, helps eliminate the fog because you have already gone over that eventuality in your mind. You have a plan.

If you are an entity, are you listed as every officer and a director? Are you Super-Pawnbroker and nothing will ever happen to you? Think about Tim. Divvy up the titles and make sure the parties do not all live at the same address and fly together on planes all year long. Prepare for the worst and hope for the best. While we are on entities, if you are a corporation, get your minute book up to date. You have only a few little things to do to protect yourself with that expensive corporation or you have thrown your money down the drain. One is to have an annual meeting, the minutes of which are to be recorded. Nobody cares if it is just you and your wife. Document the meeting and put it in that expensive binder they gave you. Every. Single. Year. That new Treasurer you appointed? Make sure they are included in the annual meeting and know all about your books. You are hamstringing them otherwise.

What happens if a principal in your business becomes incapacitated short-term (like Tim), or worse? What are the steps? Write it all down and use a pencil because it will change if you really think it through. Who is the first person to call that will carry on with the store? You have a viable enterprise with active loans. You do not get the luxury of just closing up shop right away. Someone must man the loan counter at the very least until the last loan is disposed of.

What if something happens to the building? (Riot, arson, unplanned fire,            natural disaster, drunk driver plowing through the front windows etc…) What are you going to do? At what point do you conclude that you’ve had a good run and you are calling it a day? Decide now when that is and then plan around that decision. In the meantime, remember, you have, or had, pawns. Items that belong to other people stIll, remember? Have you really thought about what happens in case of the loss of large numbers or all of your pawns due to an event beyond your control? What will you do?

If you have a cloud-based software, you will at least have records. If you are server based, well you may have a problem. If your backups are stored onsite you will likely have a much larger problem. If you don’t perform backups because they are a pain, you will rethink that way too late in the game. How will you identify what was actually lost and what had been redeemed? How will you notify the customers and what are you going to tell them? Who gets to perform this task? Have you had a serious conversation with your insurance company to really dig deep into this topic?

There are enough topics that I could go on and on, but the space is limited. Anti-money laundering audits, bank discontinuance, shootings, kidnappings (yes kidnappings), it gets almost mind-numbing. You must plan. The better your plan, the better your chance of sleeping well at night because you have given the ultimate gift to all who will be impacted.

There is absolutely no reason to do this on your own! Reach out to state and national associations, your competition, social media groups, and yes, even consultants. Get the information you need and make this a huge priority. Once you get it all in writing, don’t neglect a few important pieces. First, make copies and place them in safe places with all the key people. Second, sit down with all key players and talk this stuff through. Finally, re-evaluate on an annual basis so changes can be made in real time. Keep your document from getting stale. You won’t be sorry.

Thoughts around banking risk in the precious metals space as it relates to the request received by FTB

luxury gold jewelry chains, bracelets background, selective focus. Stylish beautiful bijouterie

It is exciting to know that an answer exists for one of the biggest questions in the precious-metals world today, and that is “when is it my turn to get a discontinuance letter from my bank”. As recently as January of this year, I assisted a well-established pawnbroker in Los Angeles on her quest to find a bank after she got her letter from Wells Fargo. She had gotten the same letter from Bank of America two years prior.

Two weeks, and twenty-six (26) banks later, she was able to find one that would bank her (for now). That being a Home Street branch several miles away from her store. Her family owned and operated store has been established since 1955 and is one of the most well-known shops in the Los Angeles area.

Upon finding that there was a bank willing to take pawnbrokers as clients, I instructed a client of mine with 4 stores in the Riverside and Orange County areas to give Home Street a try. Two days after the first store was approved, he walked into a different branch (closer geographically to him) and they turned him down. So, in his case, it is not a bank issue, it is a branch issue. It also tells me that my first client in Los Angeles, needs to keep looking for a back-up before she gets the dreaded letter from Home Street which is all but guaranteed.

When the country is not in lockdown due to a virus, I regularly speak at and attend conferences that focus on the pawn industry. I hear the same concerns all year long, and get the same questions from business owners when they get document requests from their banks. We have regions of the country that seem more prone to discontinuance (regardless of the bank) and we see banks that are doing their EDD right now when it comes to AML compliance. Bank of America in particular has been sending out an unusually high number of AML document requests to pawnbrokers over the last 2 quarters.

An additional concern of mine is that the BB&T merger with Sun Trust has gone through forming Truist Bank. BB&T was one of the best options for pawnbrokers on the East Coast as they would perform the extra Due Diligence required for Cash Intensive businesses. I had some fairly regular interactions especially with branches in Florida. Sun Trust on the other hand has issued press releases about not being friendly to pawnshops in particular. So now that BB&T has merged with Sun Trust, what is to come of the hundreds of banking relationships that at one time were safe for pawnbrokers? What is to come of those who may have credit lines that may be termed out leaving the business in a very tight spot?

Unfortunately, the banks have been horrible communicators to their customers the last several years. I have yet to hear of a pawnbroker that was given a reason why the bank closed their account. Branch Managers, who use to have a great amount of persuasion generations ago, now have much less to say and even less influence in these matters. They almost as a rule blame the head office or the compliance committee for the decision. Ironically, the discontinuance letters all start with some worthless statement about how much the bank has appreciated doing business with the particular customer. This is akin to getting a break-up note at recess when we were kids. No explanation, just pack your bags and get out. You have 21 days to find a new account.

We know of course that the OCC is on record on more than one occasion of pushing back against the wholesale discontinuance of an entire industry. Thomas J Curry on March 17, 2014 when speaking before the ACAMS folks said “No matter what type of business you are dealing with, you have to exercise some sound judgment, conduct your due diligence, and evaluate customers individually. Even in areas that traditionally have been viewed as inherently risky, you should be able to appropriately manage the risk. This is basic risk management, and that’s a business that the institutions we at the OCC supervise excel at. You shouldn’t feel that you can’t bank a customer just because they fall into a category that on its face appears to carry an elevated level of risk. Higher-risk categories of customers call for stronger risk management and controls, not a strategy of total avoidance. Obviously, if the risk posed by a business or an individual is too great to be managed successfully, then you have to turn that customer away. But you should only make those decisions after appropriate due diligence.” (Emphasis mine)

A few months later, on October 23, 2014, FATF states clearly, “De-risking should never be an excuse for a bank to avoid implementing a risk-based approach, in line with FATF standards. The FATF Recommendations only require financial institutions to terminate customer relationships, on a case-by-case basis, where the money laundering and terrorist financing risks cannot be mitigated. This is fully inline with AML/CFT objectives. What is not in line with the FATF standards is the wholesale cutting lose of entire classes of customer, without taking into account, seriously and comprehensively, their level of risk or risk mitigation measures for individual customers within a particular sector.” (Emphasis mine)

Clearly the issue is still ongoing because on July 22, 2019 a joint statement was issued from the Board of Governor’s of the Federal Reserve System, FDIC, FinCEN, NCUA, and the OCC. The statement was put forth to emphasize the risk-focused approach to examinations of banks BSA/AML compliance programs. They go on to say that their statement “aligns with the federal banking agencies long-standing practices for risk-focused safety and soundness examinations.” In part, the statement reads, “Banks that operate in compliance with applicable law, properly manage customer relationships and effectively mitigate risks by implementing controls commensurate with those risks are neither prohibited nor discouraged from providing bank services. As the federal banking agencies have previously stated, banks are encouraged to manage customer relationships and mitigate risks based on customer relationships rather than declining to provide banking services to entire categories of customers.” (Emphasis mine)

So it is clear that those in the position to regulate banks are telling banks NOT to discharge entire industries. Rather they are to mitigate the risks that may or may not be inherent in those industries. They are NOT to just tell folks over the phone when asked, “I’m sorry but we don’t give accounts to pawnbrokers.” In fact, Comptroller Curry advocated that it was the banks responsibility to actually engage that customer through a more robust system of checks and balances until it was clear that the bank could not mitigate the risks of the relationship and at that point, the customer would be set free.

What is missing in all of these statements from the banking regulators and FinCEN is any form of enforcement. It seems as though while the banks are being told (quite clearly) to not engage in the wholesale elimination of industry specific banking relationships, they are doing so with no consequences. Nowhere is this more prevalent than in Los Angeles, CA as I write this document.

What can be done? In my mind we need to engage the pawn industry head on. They need to know that there is at least one banking option for them if they would like to enter into a dialogue. This dialogue needs to clearly and unambiguously spell out WHY exactly pawnshops are viewed as high risk. They need to understand that there are real, and perceived, reasons for their plight. They also need to know what needs to be done to counter these hurdles to the best of their abilities. They need to be aware of the behaviors that will eliminate them from any further banking relationships, and the activities that they need to steer clear of in order to maintain their banking relationship. They need to know that it is no longer 1980. They will be required to provide regular documentation to the bank. They need to know that the impression by the bank that the business is not engaging will put them at risk of losing the one banking option they have. Help the pawn community know that they MUST put forth effort and this effort will be ongoing. They need to know that the time and energy required from some customers will be more than for others, based on the individual risk they represent to the bank. Those who choose to engage in MSB activities will have a great many more hurdles to overcome than those who do not. Those who have higher volumes of activity and do higher dollar loans on average will come under more scrutiny than those who do not. Those who engage in a higher percentage of coin/bullion transactions as a part of their businesses will have to answer more questions and provide more frequent reports to the bank, etc…

From my experience across the country, with literally hundreds of pawnbrokers, they are more than willing to meet the requirements of the bank. They just need to know what those are. It is impossible to play by an invisible set of rules, and therefore we need to bring the playbook to them so they can have every opportunity to play by those rules.

Pawnbrokers are very heavily regulated in one sense. Meaning, there are lots and lots of rules. The problem is that enforcement is sporadic and limited at best. In the state of California, for example, the legislature writes the rules. Local law enforcement is the one to mete out citations. Without exception, local law enforcement looks at pawn shops as a solution to their problem of reacquainting stolen items with property crime victims. In a large number of jurisdictions, the only time a police officer enters a pawnshop is to confiscate an item that has been reported stolen. Ergo, the police officer becomes conditioned to believe that everything in the shop is stolen, but it just hasn’t been reported yet. This is clearly not true. In fact, the average rate of police confiscation across the country is .05%. This means that of all items reported to the police as a requirement by the police, only .05% are actually reported stolen and therefore subject to confiscation. 1 out of 2,000 transactions. Yet, we have this misconception about pawnbrokers that continues. Even though the data is there to prove otherwise, the public and those in legislation believe that pawnbrokers are all fencing operations.

FinCEN lists all enforcement actions taken since 1999 on their website. When filtered for precious metals dealers, there is only 1 case that is noted, and that in 2015. I know of no other pawnshop or group of pawnshops that have been successfully litigated against under BSA regulations. When one filters out all other entities but depository institutions, 41 are named. There are 10,000 pawnshops in the country at any given time. Only one caught the attention of FinCEN. Yet, the depository institutions who have been cited 41 more times by FinCEN are the ones telling the pawnbrokers they can’t have accounts since they are such a high risk. I am quite certain that the depository institutions cannot articulate why this is so. The fact that pawnbrokers use cash and deal in precious metals is all it takes to get them on a list with parking garages and liquor stores.

So what do I look for and what do I think banks should be watching?

  • Does the customer have an AML program in place
    • If yes
      • Is the material in the AML program current and does it accurately reflect the business as a whole
      • Are staff trained with the guidelines noted in the program and do those guidelines match industry standards and BSA regulations
        • Initial training is done of all appropriate staff within 30 days of hire (industry standard since BSA says as soon as possible after hire)
        • Refresher training is performed annually and is current
        • Documentation for training is complete and representative of what was covered, who attended, and who provided the training
      • Does the business entity endorse the AML program and the Compliance Officer?
        • If yes, is this memorialized in the corporate minutes?
      • Is the Compliance Officer designated by name within the AML program
      • Is the AML program complete and does it deal with all BSA/AML requirements?
      • Is recordkeeping complete and accurate?
      • Is the AML program ‘risk-based’ as required?
      • Is the risk assessment current? To what date?
      • Does the risk assessment match any external audit reports?
      • Does the Compliance Officer seem to know their way around the AML program?
      • How many years of experience does the Compliance Officer have and are they certified CBAP or CAMS
  • Is the business in a HIFCA or HIDTA designated area and does that matter?
  • What is the population base served by this business?
  • What is the makeup of the actual customer base?
    • Are they mostly local?
    • What is the percentage of transient folks that use the services?
    • What is their geographic range of customers?
      • Ex. Is there a casino nearby that draws people from further away than if you have only a 5 mile radius because you are rural?
    • How much exposure does the business have to foreign nationals? (San Ysidro vs Redding)
    • Individuals only or do they deal with businesses too (this would be a first but deals with the beneficial ownership piece)
  • What is the average transactions amount?
  • What is the makeup of their transactions? (loans versus buys)
  • What is the default ratio of their loans?
  • What is the actual police confiscation rate?
  • How long has the store been in business?
  • What is their customer turnover rate (if that is easily determined. Some software can and others can’t provide this information)
  • What are the cash handling procedures like?
  • What is overall security assessment of the business?
  • How much cash does the store keep on hand?
  • How much cash on hand insurance do they have?
  • Are records retained as required?
    • Securely?
    • Easily produced?
  • Are they familiar with SDN lookups?
    • What is the current procedure for new customers and OFAC?
    • What is the procedure for known customers and OFAC?
    • What is the frequency of potential matches?
      • What name match % do they use? (85% is industry standard)
    • What is procedure if they get a potential match notification
    • How is all of this documented or proven
  • What is the frequency of retail sales in excess of $10,000 annually to a single customer?
  • What is the frequency of Loan redemptions in excess of $10,000 to a single customer
    • At one time?
    • Over a 365-day rolling period if related transactions?
  • What is the policy with regards to large transactions? Is there any cutoff for the amount of cash and what would be the procedures in that instance?
  • How many 8300 forms in the average year?
  • How many SAR’s in the average year? (Strictly voluntary for precious metals)
  • How do they track high dollar transactions for SAR pattern tracking if at all?
    • Manually?
    • Software reporting?
    • Thresholds in place?

There is more that could be put in place, but that is based on the banks requirements. I find that historically, the average pawnshop encounters high dollar transactions very rarely and so they stand out. They rarely if ever file SAR forms, and may file 2 or 3 8300 forms a year. The average pawn amount is $175 across the country, so we are talking about small amounts. In the south, that number is under $100 because of the high interest rates charged.

Pawnbrokers are small money lenders. They are only licensed to do collateralized loans and are by definition non-recourse lenders. The vast majority of their business is small loans to un-banked or under-banked individuals who live paycheck to paycheck. This number is 20% or more of the US population. They tend to see their customers regularly and get to know them very well. It is easy therefore to identify when stories do not line up and EDD needs to kick in. It is not uncommon for customers to multi-generational. In my store for example I had four generations all loaning with me. It is all they knew, and this is common.

Pawnbrokers by and large represent a very small risk to any bank, and I believe we could mitigate that easily by the use of Google form type documents where the information is presented to the pawnbroker for their completion. Follow-up meetings can be had as required based on the risk matrix put in place by the bank.

I look forward to further conversations and hope that this information has been helpful in some way.

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