The Financial Action Task Force (FATF) is an intergovernmental body established in 1989 by the G7 Summit in Paris, charged with setting international standards for combating money laundering, terrorist financing, and the proliferation of weapons of mass destruction. Among the sectors it has identified as vulnerable to financial crime is the trade in precious metals, gemstones, and finished jewellery. FATF's guidance for dealers in precious metals and stones (commonly abbreviated DPMS) represents the most consequential regulatory framework ever applied to the gem and jewellery industry, obliging traders, jewellers, auction houses, and gem dealers worldwide to implement customer due diligence, transaction monitoring, record-keeping, and suspicious activity reporting in ways that have fundamentally altered commercial practice — particularly at the high-value end of the market.

Why Gems and Jewellery Are Considered High-Risk

Gemstones and jewellery possess a constellation of characteristics that make them attractive vehicles for illicit finance. They are portable, durable, and internationally fungible: a parcel of fine rubies or a significant diamond can be carried across borders with relative ease, converted to cash in multiple jurisdictions, and valued in a range that is genuinely difficult for non-specialists to challenge. Unlike real estate or financial instruments, high-value stones leave a paper trail only when the parties to a transaction choose to create one. Cash transactions have historically been common in gem-trading centres from Antwerp to Bangkok to Mumbai, and the opacity of pricing — where two identical-looking stones may differ in value by an order of magnitude depending on origin, treatment status, and market conditions — provides cover for the manipulation of declared values.

FATF has consistently noted that the sector's global reach, its reliance on informal trust networks, and the absence of a single international regulatory body make it structurally susceptible to abuse. Specific typologies documented in FATF reports include: the use of gemstones to transfer value across borders outside the formal banking system; the layering of illicit funds through multiple gem purchases and resales; the use of jewellery as a store of value that can be liquidated discreetly; and, in conflict-affected regions, the sale of gemstones to finance armed groups — a phenomenon most visibly associated with the diamond trade in the 1990s and early 2000s, which eventually gave rise to the Kimberley Process Certification Scheme.

The FATF Forty Recommendations and DPMS

FATF's primary normative instrument is its Forty Recommendations, first issued in 1990 and substantially revised in 1996, 2003, and most recently in 2012 (with ongoing amendments thereafter). Recommendation 22 is the provision most directly relevant to the gem trade: it extends customer due diligence (CDD) obligations to designated non-financial businesses and professions (DNFBPs), a category that explicitly includes dealers in precious metals and stones when they engage in cash transactions above a defined threshold — set at USD/EUR 15,000 in the 2012 Recommendations, though individual jurisdictions may set lower thresholds.

Recommendation 23 requires the same DNFBP categories to report suspicious transactions to their jurisdiction's financial intelligence unit (FIU), regardless of transaction size. Recommendations 11 and 12 impose record-keeping obligations: relevant records must generally be retained for a minimum of five years. Recommendation 10 sets out the core CDD requirements: identifying and verifying the customer's identity, identifying the beneficial owner where the customer is a legal entity, understanding the nature and purpose of the business relationship, and conducting ongoing monitoring.

For the gem trade, these requirements translate into practical obligations that many smaller dealers found — and continue to find — operationally challenging. A gem dealer selling a single fine Kashmir sapphire for USD 200,000 to a private collector must, under a compliant regime, verify the collector's identity through reliable, independent documentation; establish whether the collector is acting on behalf of a third party; screen the collector against sanctions lists and politically exposed persons (PEP) databases; and file a suspicious activity report if the circumstances of the transaction give rise to concern. The same obligations apply to auction houses handling jewellery lots above the threshold.

The 2008 Guidance Paper and Its Successors

FATF published its first dedicated guidance document for the DPMS sector in June 2008, titled Guidance for a Risk-Based Approach: Dealers in Precious Metals and Stones. This paper acknowledged that a one-size-fits-all approach was impractical for a sector ranging from multinational jewellery conglomerates to single-person gem-cutting operations, and introduced the concept of a risk-based approach (RBA) as the organising principle for compliance. Under the RBA, the intensity of due diligence measures should be calibrated to the assessed risk of a given customer, transaction, or business relationship: higher risk warrants enhanced due diligence (EDD); lower risk may permit simplified measures.

The 2008 guidance identified key risk factors specific to the sector, including: geographic risk (transactions involving jurisdictions with weak AML regimes or known to be sources of conflict minerals); customer risk (PEPs, customers who are reluctant to provide identification, customers paying in cash for high-value items); product risk (untreated, high-value stones that are particularly portable and liquid); and delivery channel risk (internet sales, anonymous transactions). It also provided practical guidance on what constitutes adequate customer identification documentation and how to approach beneficial ownership for corporate customers.

Subsequent FATF publications have refined and extended this framework. The 2019 update to FATF's guidance on virtual assets introduced additional considerations for gem dealers accepting cryptocurrency, a payment method that carries its own AML risks. FATF's 2021 and 2022 work on beneficial ownership transparency has increased pressure on jurisdictions to ensure that shell companies cannot be used to obscure the true parties to gem transactions. The ongoing revision of FATF's DNFBP guidance continues to address emerging typologies, including the use of high-value jewellery in trade-based money laundering schemes.

Mutual Evaluations and Jurisdictional Implementation

FATF's standards are enforced through a peer-review process known as mutual evaluation. Each member jurisdiction undergoes a periodic assessment — conducted by a team of expert evaluators from other FATF members — of both its legal and regulatory framework (technical compliance) and the practical effectiveness of its AML/CFT system. Jurisdictions that fail to meet FATF standards may be placed on the so-called grey list (jurisdictions under increased monitoring) or, in the most serious cases, the black list (the FATF Public Statement, identifying high-risk jurisdictions subject to a call for countermeasures). Placement on either list carries significant consequences for a jurisdiction's financial sector and, by extension, for gem traders operating within it or transacting with counterparties there.

Implementation of FATF's DPMS recommendations varies considerably across jurisdictions. The European Union has progressively incorporated FATF standards into its Anti-Money Laundering Directives (AMLD), with the Fourth, Fifth, and Sixth AMDLs progressively tightening obligations on the jewellery and gem trade. In the United Kingdom, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) implement FATF standards and require high-value dealers — defined as those who accept or make cash payments of EUR 10,000 or more (or equivalent) in a single transaction or a series of linked transactions — to register with His Majesty's Revenue and Customs (HMRC) and comply with full CDD and reporting obligations. In the United States, the Bank Secrecy Act and its implementing regulations impose currency transaction reporting and suspicious activity reporting requirements on certain gem and jewellery dealers, though the US framework has historically been considered less comprehensive than the EU approach in its coverage of the DPMS sector.

In major gem-trading jurisdictions in Asia — including Thailand, Sri Lanka, and Hong Kong — implementation has been uneven, reflecting both the political economy of industries that are significant national employers and the genuine operational challenges of applying formal compliance frameworks to markets that have long operated on the basis of personal trust and handshake transactions. FATF mutual evaluations of these jurisdictions have, in several cases, identified the DPMS sector as an area requiring strengthened supervision.

Practical Compliance for Gem Dealers and Jewellers

For a gem dealer or jeweller operating in a FATF-compliant jurisdiction, the practical requirements of an adequate AML/CFT programme typically include the following elements:

• Written risk assessment: A documented assessment of the money laundering and terrorist financing risks specific to the business, taking into account its customer base, geographic reach, transaction types, and products handled.
• Policies, controls, and procedures: Written internal policies governing how CDD is conducted, how records are kept, how suspicious transactions are identified and reported, and how staff are trained.
• Customer due diligence: Verification of customer identity (and, for legal entities, beneficial ownership) before or during the establishment of a business relationship or the execution of a transaction above the applicable threshold. For higher-risk customers or transactions, enhanced due diligence — which may include source-of-wealth and source-of-funds enquiries — is required.
• Sanctions and PEP screening: Checking customers and beneficial owners against relevant sanctions lists (including those maintained by the UN Security Council, the EU, the US Office of Foreign Assets Control, and the UK Office of Financial Sanctions Implementation) and identifying politically exposed persons, who require enhanced scrutiny by definition.
• Record-keeping: Retaining copies of CDD documentation and records of relevant transactions for the prescribed minimum period (typically five years from the end of the business relationship or transaction).
• Suspicious activity reporting: Filing reports with the relevant FIU when a transaction or customer gives rise to knowledge or suspicion of money laundering or terrorist financing. In most jurisdictions, the obligation to report arises independently of any threshold and is accompanied by a tipping-off prohibition — the dealer must not inform the customer that a report has been made.
• Staff training: Ensuring that relevant staff understand their obligations, can recognise red flags, and know the internal escalation procedures.
• Independent audit: Larger businesses are typically expected to subject their AML/CFT controls to periodic independent review.

Red Flags Specific to the Gem and Jewellery Trade

FATF guidance and national supervisory authorities have identified a number of transaction patterns and customer behaviours that should prompt heightened scrutiny or, where suspicion cannot be allayed, a suspicious activity report. These include:

• A customer who is reluctant or refuses to provide identification, or who provides documentation that appears inconsistent or implausible.
• Payment in cash, particularly in large denominations or in amounts just below reporting thresholds (so-called structuring).
• A customer who appears indifferent to price, quality, or the specific characteristics of the stone or jewellery being purchased — behaviour inconsistent with a genuine collector or investor.
• A transaction involving a jurisdiction subject to FATF countermeasures or known to be a source of conflict minerals.
• A customer who is identified as a PEP, or who is acting on behalf of a PEP, without a plausible legitimate explanation for the transaction.
• Requests to split a single transaction into multiple smaller ones, or to invoice at a value different from the agreed price.
• Payment by a third party with no apparent connection to the transaction.
• A customer who is the subject of adverse media coverage relating to financial crime, corruption, or sanctions.

Impact on Trade Practice and Market Structure

The progressive implementation of FATF standards has had measurable effects on the structure and conduct of the gem and jewellery trade. The most immediate impact has been on cash transactions: in jurisdictions with effective supervision, large cash purchases have become significantly less common, as dealers who accept them face both compliance obligations and the risk of regulatory sanction. Major auction houses handling jewellery — including Sotheby's, Christie's, and Bonhams — have developed sophisticated AML compliance programmes that include pre-sale CDD on bidders for high-value lots, a practice that would have been unthinkable in the industry two decades ago.

The requirements have also accelerated consolidation at the retail end of the market, as the compliance costs associated with maintaining adequate AML programmes — staff training, screening software, legal advice, regulatory registration fees — represent a proportionally greater burden for small dealers than for large ones. Trade associations including the World Jewellery Confederation (CIBJO) and the Responsible Jewellery Council (RJC) have developed guidance and training resources to assist members in meeting their obligations, and RJC certification now includes AML/CFT compliance as a component of its due diligence standard.

The intersection of FATF standards with the Kimberley Process Certification Scheme, the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, and national conflict minerals regulations (such as Section 1502 of the US Dodd-Frank Act) has created a complex, overlapping compliance landscape for gem traders dealing in stones from politically sensitive origins. A dealer in coloured gemstones sourcing material from, for example, the Democratic Republic of Congo, Myanmar, or Zimbabwe must navigate not only FATF-derived AML obligations but also a range of supply-chain due diligence requirements that may affect the legality of the transaction itself.

Criticisms and Ongoing Debates

FATF's approach to the DPMS sector has attracted criticism from several directions. Industry representatives have argued that the threshold-based approach — focusing compliance obligations on transactions above USD/EUR 15,000 — is poorly calibrated to the gem trade, where a single fine stone may be worth many multiples of the threshold while a parcel of commercial-quality material may fall below it, and where the relevant risk is not necessarily correlated with transaction value. Some have argued for a relationship-based rather than transaction-based approach, focusing compliance resources on ongoing business relationships with higher-risk customers rather than on individual transactions.

Academic and civil society commentators have questioned whether the FATF framework, designed primarily with the banking sector in mind, is well suited to the fragmented, informal, and relationship-driven structure of the gem trade, particularly in developing-country producing regions where formal documentation of identity and beneficial ownership may be genuinely difficult to obtain. There is also an ongoing debate about whether FATF's standards, as implemented, are effective in practice: the volume of suspicious activity reports filed by DPMS businesses remains low relative to the sector's assessed risk in many jurisdictions, suggesting either that the risk is lower than estimated, that compliance is inadequate, or that the reporting mechanism is not well understood by the industry.

FATF itself has acknowledged these tensions and has committed to ongoing engagement with the private sector in refining its guidance. The organisation's 2023 review of its DNFBP framework signalled a continued focus on ensuring that the risk-based approach is genuinely calibrated to the specific characteristics of each sector, rather than applied mechanically.

Further Reading

• FATF, Guidance for a Risk-Based Approach: Dealers in Precious Metals and Stones (fatf-gafi.org)
• FATF, The FATF Recommendations (fatf-gafi.org)
• Responsible Jewellery Council, RJC Standards (responsiblejewellery.com)