Follow the Golden Rules

By Robert Frimet, CMS

It’s no surprise announcement that the gold buying business has swept the nation. If you’re not on the gold buying band wagon, you probably should be by now.

But what about compliance?

Unknown to many, there is something called the U.S. Patriot Act (our old friend), and since 2006, laws have been in effect that require certain dealers in precious metals to be regulated under Chapter X, formerly CFR 103.140.
What this means is that as a purchaser of precious metals, you may have expanded responsibilities. Before you decide to take a liquid bath in nitric acid, there are exemptions that may apply.

Under the regulation, if you purchased less than $50,000 in precious metals from the general public in the previous year, you wouldn’t have to comply with this ruling.

If business was booming in 2010 and you did purchase in excess of $50,000 in precious metals and also sold those metals to a refiner or third party, you would be required to follow the regulation by June of 2011.

To get to the down and dirty, all precious metals including platinum, silver and palladium are covered under the regulation if the metal exceeds 500 parts per thousand, which equates to 50 percent pure.

That means that if all you did was purchase 10K gold all day long and no other karat, you wouldn’t be required to comply with the law as 10K is approx 39 percent pure, not 50 percent pure.

However, if you bought a combination of metals that exceed 50 percent in purity, then you must comply.

Full Program

If you hit that 50 percent mark, you need a full compliance program under Title 31 which means:

• Incorporating policies and procedures based on the risk associated with purchases from customers.
• Creating a risk assessment
• Specifying types of products offered
• Specifying what countries you deal with if out of the U.S.
• Detailing how you spot and handle risk
• Conducting ongoing training for staff
• Providing for an independent review (unlike Title 31, for MSBs, a person who is involved with the operation of the program may not be the reviewer.) An outside person such as a consultant, CPA or bookkeeper could conduct the review if they are familiar with such review processes.

More Compliance

The kicker is that if you do fall under this regulation, you would then comply with 26 and file the 8300 form, not a CTR, which would force you to comply with Title 31 and Title 26 (Title 31 for the program and Title 26 for the 8300.)
You may also file an 8300 under suspicious activity transactions or file a form 109 to protect you under the safe harbor rule.

If you are processing metal through a broker, are they offering you a program or did they even make you aware of these requirements? These are questions business owners should ask themselves when dealing with outside companies.
Jim Colllachia of Hometown Cash Advance, with 24 locations in multiple states, was questioned about his compliance.

“We are a large gold buyer and we really could not have gotten as successful as we are without using Retail Gold Brokers, as they set us up from beginning to end and addressed all our compliance needs, both state and federal,” Colllachia says.

Feds Important, Too

Many in the industry are focused on state issues. While these are critically important, so are the federal requirements.

It also appears that the IRS, on behalf of FinCen, is stepping up its audits and looking closely at those companies that don’t have a compliance program in place despite meeting the requirement under Title 31. Fines can be steep for non-compliance.

Other things to consider on the state level are weights and measures, as well as hold times and reporting to local law enforcement. It pays to have someone involved in your business who can ensure that all regulations are being followed and, if necessary, process your metals as well.

Robert Frimet is the president of RMF Consulting Group, Inc and is a Certified Anti Money Laundering Specialist. He has served the pawn, check cashing, payday, title, and other industries since 1991. Frimet offers compliance programs and independent reviews and federal/state examination audit assistance nationwide. He may be reached at (702) 596-8370 (PST), at Bob@checkconsultants.com or via www.checkconsultants.com



Consumer Lawsuits: Practical Defense Tips

By Stephen J. Torline, Kyle P. Seelbach and Sean D. Tassi, Husch Blackwell LLP

Neighborhood financial services providers have become prime targets of plaintiffs’ lawyers across the country. Armed with favorable consumer-protection statutes, plaintiffs’ lawyers are challenging the industry’s business practices by filing class-action lawsuits in which they seek millions of dollars in cash, debt forgiveness and attorney’s fees.

Your company, however, is not defenseless. Although lawsuits cannot be prevented, proper corporate structuring and the use of arbitration agreements containing class-waiver clauses are two tools that can help your company limit its exposure to class-action suits.

Deter Forum Shopping

With careful planning, a company can structure itself in a way that makes it more difficult for plaintiffs (and those hoping to serve as class representatives) to force the company to defend a nationwide class action in a venue chosen by the plaintiff’s counsel.

In 2005, Congress enacted the Class Action Fairness Act to combat the problem of plaintiffs’ lawyers being free to select the jurisdiction in which they file a lawsuit. Once certain criteria have been shown, CAFA affords a defendant the right to remove a lawsuit filed in state court to federal court.
Although dependent upon the circumstances, defending against class-action claims in federal court is usually preferable to defending against those same claims in state court, primarily because the federal courts are often better equipped to handle class litigation.

Although your ability to utilize CAFA will depend on the specific facts of the case, where your company is incorporated and where your company chooses to maintain its principal place of business will directly impact its ability to invoke CAFA. That is because the threshold question of CAFA jurisdiction compares the citizenship of the plaintiff(s) with the citizenship of the defendant(s).

CAFA can only be invoked in lawsuits where a substantial majority of the plaintiffs of the proposed class and the defendants are “citizens” of different states.

By structuring your company so that its citizenship is different than the citizenship of your typical customer (this is commonly referred to as “diversity”), you will increase the likelihood of satisfying the threshold element of CAFA.

As a general example to illustrate this point, if you intend to operate stores in Missouri, your company could incorporate under the laws of Delaware and maintain its principal place of business in Kansas. Your company would then be a citizen of Delaware and a citizen of Kansas for purposes of CAFA.

Since your stores will primarily service individuals who reside in Missouri, the substantial majority of your customers should be citizens of Missouri.
If a customer brings a class-action suit against your company in Missouri, your company should then be in a better position to invoke CAFA jurisdiction and remove the lawsuit to federal court, since the substantial majority of the plaintiffs and your company would be considered citizens of a different state.

While the availability of CAFA jurisdiction in any specific case will depend on numerous factors, and not just your company’s citizenship, structuring your company such that it is diverse from your typical customer will greatly increase your company’s chances of invoking CAFA jurisdiction if your company is forced to defend against a class-action lawsuit filed in state court.
You should consult your lawyer for legal advice relating to the specific circumstances involved with your company.

Include a Class-Waiver Clause

Arbitration is a contractual agreement between two parties whereby they agree to waive their right to litigate certain disputes in the courts and instead agree to allow a third party (the arbitrator) to decide their claims.

Although arbitration can be preferable to litigation for several reasons, the primary advantage of arbitration is that the parties may be able to set the rules by which they agree to arbitrate.

Submitting any potential disputes to individual arbitration — as opposed to allowing class arbitration — is one such rule that can be incorporated into an arbitration agreement that will also help protect your company from exposure to class action cases.

A class-waiver provision basically prevents either party from serving as a class representative or from joining a class-action lawsuit filed against the opposing party. Instead, both parties agree to only bring their claims on an individual basis.

Requiring customers to pursue individual claims is advantageous, as a practical matter, because individual claims are less expensive to defend and they greatly reduce your overall exposure.

The United States Supreme Court recently held in AT&T Mobility LLC v. Concepcion that such class-waiver provisions are enforceable when incorporated into an otherwise valid arbitration agreement.

Specifically, the court held that the Federal Arbitration Act prohibits states from conditioning the enforcement of arbitration agreements on the availability of class action procedures. Creating a valid and enforceable arbitration agreement is therefore critical to utilizing the benefits provided by class-waiver provisions.

Some courts are undoubtedly reluctant to enforce arbitration agreements because most of those arbitration agreements are found in form contacts, e.g., form loan agreements.

Enforceable Agreement

Although you should consult your lawyer for advice relating to the circumstances involved with your company, there are several principles that may help you create a valid and enforceable arbitration agreement.

• Introduce the arbitration agreement with conspicuous language expressly stating that the loan agreement contains a contract to arbitrate. Utilize all caps and bold font to introduce the various headings of the arbitration agreement, and use the same size font as the font used in the other portions of the agreement. Following these practices makes it difficult for your customers to later argue that the arbitration agreement was buried in the fine print of the loan agreement.
• Provide a mechanism by which your customers can choose to opt out of the arbitration agreement contained in their loan agreements. Regardless of the mechanism you create, clearly explain the opt-out process in the arbitration agreement and give your customers a reasonable time to make their decision. (60 days is usually considered reasonable). These opt-out provisions make it difficult for your customers to later argue that they were forced into or under duress when they contracted to arbitrate.
• Agree to advance the costs associated with arbitration, e.g., filing costs, arbitrator fees, etc., until the case is resolved. These provisions make it difficult for your customer to later claim that the expense of arbitration serves as a barrier to them pursuing their merit-based claims.
• Allow the customer to recover in arbitration any remedy that would otherwise be available in court. For example, your arbitration agreement should expressly state that the customer can recover attorney’s fees, statutory damages and punitive damages in arbitration if those remedies would be otherwise available in a court of law. These provisions make it difficult for your customer to later contend that the purpose of the arbitration agreement is to essentially immunize your company from liability.
• Carve out an exception to the arbitration agreement so that your customers are permitted to file suit against your company in small claims court. Small claims court serve as an effective means of quickly resolving disputes concerning relatively small amounts of damages. Allowing customers to utilize these tribunals makes it difficult for them to later allege that the real purpose of the arbitration agreement is to delay resolution of the dispute, making it futile to file their claims.

Vital Provisions

The foregoing are examples of provisions that may increase the probability of a court enforcing an arbitration provision included in your loan agreement.
Although your company cannot prevent lawsuits, by consulting your lawyer to obtain legal advice regarding these issues, you can take steps to limit the exposure your company may face from class-action lawsuits.

This article provides a general discussion of a legal topic and should not be interpreted as legal advice. Please consult a licensed attorney to discuss how the concepts discussed in this article may apply to any particular situation. The opinions expressed herein are solely those of the authors and not necessarily those of Husch Blackwell LLP.