AML obligations of used car dealers and pawnbrokers:

Many people associate Anti-Money Laundering (AML) mainly with banks and large financial institutions. In reality, however, the legal obligations in this area also affect seemingly ordinary businesses. For example, if you deal in second-hand goods - typically operating a used car dealership or pawn shop - you are one of the so-called obliged persons under the AML law.

Author of the article: JUDr. Jakub Dohnal, Ph.D., LL.M., ARROWS advokátní kancelář (office@arws.cz, +420 245 007 740)

This means that you must comply with a number of legal obligations aimed at preventing money laundering and terrorist financing. In the following article, we will explain who these obligations apply to, what specific tasks used car dealers and pawnbrokers must comply with, what new obligations were introduced by the amendment to the AML Act last year (including the upcoming obligation to notify a contact person by 3 March 2025) and what penalties there are if you fail to comply. We will use practical examples to show how the AML rules affect day-to-day trading (e.g. framework agreements between dealers or sales made through individuals). Finally, we will highlight why it is more advantageous for entrepreneurs to entrust the handling of AML obligations to experts - a specialized law firm that will ensure compliance with the law and minimize the risk of high fines. The topic is quite complex and constantly evolving, so it pays to have experts by your side; thanks to them, you can focus on your business while they oversee everything necessary in the AML field.

Who is an obliged person under the AML Act?

The AML Act (Act No. 253/2008 Coll.) lists a number of so-called obliged persons - i.e. entities subject to anti-money laundering measures. In addition to banks, investment companies or real estate brokers, this includes entrepreneurs in the field of trade in second-hand goods. Specifically, any person authorised to deal in second-hand goods, to broker such deals or to accept goods as collateral is an obliged person.

Car dealers (used car dealers), their brokers and pawnbrokers are therefore directly covered by the AML law. In practice, it doesn't matter whether you deal in cars, antiques or electronics - as long as you deal in second-hand goods as part of your business, the law considers you a liable person. Let us add that a business that does not primarily deal in second-hand goods but accepts a cash payment of EUR 15,000 or more (approx. CZK 360,000) from a customer can also become an obliged person; this also brings it under the AML regime. In short: anyone who professionally trades in second-hand goods or takes items as collateral must comply with the AML rules. 

Key obligations of second-hand traders

As an obligated person under the AML Act, you have several key obligations. These include identifying and screening clients, reporting suspicious trades, keeping records of clients and transactions, and establishing internal risk assessment procedures. Let's take a closer look at these:

Client identification and control

One of the fundamental pillars of AML is knowing your customer. In practice, this means that you must identify your customer whenever you enter into a transaction where the value is likely to exceed €1,000 (approx. CZK 25,000).

Identification means establishing and verifying the identity of the person - in the case of natural persons, typically by copying data from an ID card or passport, in the case of companies, by obtaining an extract from the commercial register, etc.

You also have to identify if you have a so-called business relationship with a client (for example, a framework agreement on repeat business) or if the business is suspicious - regardless of the EUR 1,000 limit.

In other words, even smaller transactions must be screened if they are suspected of money laundering or terrorist financing. In addition to establishing the identity of the client, the screening also includes other steps such as identifying the beneficial owner (if the client is a company), obtaining information on the purpose and nature of the transaction and assessing whether the client is a so-called politically exposed person or a person on a sanctions list.

If the client refuses to provide the necessary information or cooperation, you must not conduct business with them - such a transaction must be refused. In practice, therefore, every obliged trader must set up a process to verify clients - from one-off sales above a set limit to long-term relationships with regular partners.

Reporting suspicious transactions

Another key obligation is to look out for unusual or suspicious transactions and report them to the relevant authorities. If you become aware of a suspicious trade in the course of your business, you are obliged to report it to the Financial Analysis Office (FAO) without undue delay.

A suspicious transaction is a transaction that takes place in circumstances that raise suspicions of money laundering or terrorist financing - for example, when a customer makes an unusually large cash payment, distributes payments just below the identification threshold, refuses to disclose the origin of the money, or is found to be on sanctions lists.

The AML Act provides in §6 an exemplary list of signs that may indicate that a suspicious transaction is taking place. A suspicious transaction report (a so-called OPO) is filed directly with the FAU - either by data box, registered letter or orally on the record.

Importantly, the notification is legally confidential - the trader must not inform the client that he has reported his transaction. The authorities will then assess whether further investigation is appropriate. For the obliged person, this is the end of the matter when the reporting obligation is fulfilled - their job is not to prove criminal activity, but to be observant and note suspicious clues and pass them on. In this way, you contribute to the prevention of money laundering without having to act as an investigator yourself.

Record keeping and internal measures

You must properly document and retain all client identifications and checks made for possible review. The AML Act requires obligated persons to retain information and documents about the client and the transactions for which identification was made for 10 years after the transaction or termination of the business relationship.

In other words, if you sell a used vehicle and identify the buyer, you must keep the buyer's identification data (a copy of the ID card or data record) for another ten years. The same period applies to records of any suspicious transactions and other checks carried out. These records may be required by the supervisory authorities (the FAU or the Czech National Bank for entities under its supervision) to verify compliance with AML obligations.

In addition to archiving records, the law requires you to have an elaborate internal system to prevent money laundering risks. Each obliged person must conduct a risk assessment - to assess what money laundering or terrorist financing risks may be present within its business and clientele.

Within 60 days of becoming an obligated person, you must prepare a written risk assessment relating to your business.

This document (AML programme) should describe the procedures you have in place to assess the riskiness of clients and trades and the internal control measures you have in place.

This includes, for example, when to refuse a trade on the grounds of risk, how to carry out enhanced screening of risky clients, etc. You are also required to regularly train your employees (at least once a year) on how to recognize suspicious trades and comply with AML rules.

Therefore, even a smaller car dealership or pawn shop should have an "AML officer" who oversees compliance with these procedures, trains staff and monitors legislative changes. In practice, many companies have their internal guidelines (AML program) developed by an external specialist to ensure that they meet all the requirements of the law. It is also important to keep these procedures up to date - responding to new types of risks and amendments to legislation.

New obligations under the amended AML Act: contact person notification (2025)

The AML legislation is undergoing continuous amendments and the latest amendment, which came into force in 2024, introduced several new features for obliged persons. The most significant of these is the obligation for each obliged person to designate and notify the Financial Analysis Authority of a so-called contact person. From 1 February 2025, obliged persons are required to report to the FAO who their contact person is for communication on AML matters. The contact person is to be a specific individual from the company who has sufficient knowledge of AML issues - his/her task will be to communicate with the FAO and to deal promptly with any queries or calls from the Authority. The contact person may be a member of the statutory body or an employee of the obliged person (typically the entrepreneur himself in the case of sole traders); the law does not explicitly allow this function to be outsourced outside the company. The data to be reported include the name of the contact person, his/her position, telephone number, email and the hours during which he/she is available (usually the company's business hours). The FAU has established an electronic form for this notification, available on its website, which is submitted via a data mailbox. Existing obligated persons (i.e., those already in business) must make the notification no later than March 3, 2025. Should there be a change in the contact person or their details, the change must be notified within 15 days.

This new obligation has been introduced so that the FAU has an up-to-date contact to a competent person for all obliged entities and can react faster, for example, when investigating suspicious transactions. It is really important not to underestimate the notification of the contact person - the deadline is the beginning of March 2025 and failure to comply carries a significant penalty, which we discuss in more detail below.

Sanctions and penalties for failure to comply with AML obligations

Failure to comply with AML obligations can lead to significant penalties that can be devastating for smaller businesses. The AML Law classifies breaches of obligations (for example, failure to identify a client, failure to report a suspicious transaction, failure to keep records or now failure to notify a contact person) as administrative offences - misdemeanours.

Fines of up to CZK 10,000,000 can be imposed for these offences. For example, if you fail to notify the FAU of your contact person by 3 March 2025, you could be fined up to CZK 10 million. CZK 10.

However, similarly high penalties may apply to other AML violations. For minor infractions (formal deficiencies in record keeping, etc.), fines are in the lower range of hundreds of thousands to millions, but for serious misconduct (repeatedly ignoring obligations, concealing suspicious transactions, etc.), the authority may go to the upper limit. In addition to financial penalties, companies may also face reputational damage or other measures (e.g. revocation of the trade licence in extreme cases). Clearly, it is not worth the risk of ignoring AML regulations. In recent years, the FAA has been inspecting more and more obliged persons in various sectors, not only banks - it is the car dealerships, pawnbrokers or real estate agencies that are coming to the fore, as they have historically been underestimated by compliance. Thus, if someone intentionally or negligently fails to comply with AML obligations, they run a real risk of a hefty penalty.

How AML obligations affect business as usual (practical examples)

The theory of obligations may seem abstract, so let's look at some model situations from the practice of used car dealers and pawnbrokers:

• Framework agreement between used car dealers: Imagine that a larger car dealer (dealer A) has a framework agreement with a smaller regional dealer (dealer B) from whom it regularly buys used cars for its warehouse. It might seem that when the deal is B2B between two companies, there is nothing to deal with - the opposite is true. Dealer A must, as part of his customer check, identify dealer B as a business partner (i.e. find out its registration number, its registered office, verify the existence of the company, find and verify the identity of the person acting for B, or check the real owner of B). Similarly, dealer B, as the obliged person, had to identify each natural person from whom he originally bought the vehicles (as the transactions were usually above EUR 1 000). Both of them have to keep records of these identifications and assess the riskiness of the business relationship between them. In practice, therefore, even transactions "between professionals" are subject to the AML regime - companies often include in their contracts a provision that both parties are obliged to comply with the AML law and undertake to fulfil the relevant obligations (e.g. to prove to each other on request that they have identified the original suppliers, etc.). We cannot rely on the "counterparty" to perform the obligations for us - each trader is responsible for meeting the AML requirements in its part of the transaction chain.
• Selling a car "through a natural person": some used car dealers use a model where they formally act as an intermediary in the sale and the car is supposedly sold by the original owner (a natural person). This practice has sometimes been used to limit liability for latent defects to buyers (allegedly a sale between citizens). However, from an AML perspective, such a sale constitutes brokering a second-hand trade - and thus falls under the obligations of the AML Act.
• Therefore, the car dealership as an intermediary must identify both the seller (the original owner of the car) and the buyer. It must not be satisfied that it has 'merely connected two individuals' - this is how it fulfils the definition of an obliged person (intermediary). In practice, this means keeping records of both parties to the transaction, or assessing whether the transaction shows any suspicious features (e.g. a large cash payment from the buyer). Therefore, selling through a commission agent is not an AML solution to avoid obligations either - on the contrary, it puts the commission agent in the role of an obliged person with all the legal requirements.
• A pawn shop customer with an atypical request: if you run a pawn shop, most clients will come in with common items of relatively low value. However, there may be a client who wants to pawn a very valuable item (e.g. a luxury watch, a work of art) for hundreds of thousands of crowns in cash. Such a transaction clearly already exceeds the identification limit of €1,000 - so you must make a thorough identification of the client and write down the details of the item to be pawned. At the same time, beware if the client insists on paying out the money in cash, for example, and breaks the pledge into several amounts below the limit - this could be assessed as suspicious. Similarly, if several different people come to pawn similar items and appear to be acting in a coordinated manner, increased caution is in order. Pawn shops are inherently riskier in cash transactions, so they should have internal procedures in place for assessing the value and provenance of pawned items. For example, require proof of acquisition if the item is a new product in large quantities (it may signal that the items are from criminal activity). Thus, good pawnbroking practice combines both AML requirements and anti-theft promotion regulations (verification that the item is not stolen), which go hand in hand.

These examples show that AML obligations are actually reflected in the day-to-day operations of traders. It is necessary to be aware of them and to incorporate them into the firm's operating procedures so that identifying a client or filling out a form for the FAO is as commonplace as issuing an invoice. This can be challenging for business people who are not used to bureaucracy - but it is possible to set up the whole system in such a way as to cause as little inconvenience to honest business as possible while still complying with the law.

Why it pays to entrust the AML agenda to experts

It is evident from the above that the money laundering agenda is quite complex and formally demanding. For the owner of a car dealership or pawnshop, it represents an additional layer of obligations for which he or she does not normally have the expertise or capacity. Keeping track of constant legislative changes (such as the aforementioned amendment with a contact person), properly assessing risks, keeping documentation 10 years in the past, training employees - all of this can distract the entrepreneur from his or her core business, which is selling goods and serving customers. Moreover, any misconduct carries a heavy fine, so mistakes made out of ignorance cannot be afforded in this area.

That is why many companies use the services of specialized law firms or consultants who focus on AML. AML experts can help you set up your internal procedures to comply with the law and to be as efficient as possible (e.g. they will prepare a clear step-by-step manual on how to conduct client identification). They will prepare the mandatory documents for you - such as the written risk assessment and internal regulations required by the FAU in the event of an inspection. They will train your staff to know how to recognise suspicious situations and what to do in such cases. They can also keep you up-to-date with changes in legislation and alert you to new obligations (for example, reminding you to report the contact person in time so you don't miss a deadline). In the event that you get in contact with the FAU (for example, a query comes in about a notified trade), the lawyers can communicate with the authorities on your behalf and ensure that everything is done properly.

Overall, by delegating the AML agenda to experts, you can be sure that your company is doing everything it should and minimize the risk of penalties. At the same time, you will free your hands for your business - you won't have to study paragraphs and worry whether you will be "found out" during an audit. Investing in a legal audit and managing AML obligations is clearly worthwhile compared to the potential fine of millions of crowns. Keep in mind that the AML landscape is constantly evolving and professional oversight will help you keep up. In conclusion, whether you run a small pawn shop or a large car dealership, having an experienced AML law firm by your side is key to running a calm and safe business today. Not only will you be complying with the law, but you will also be contributing to the fight against money laundering, which benefits the entire company.

Conclusion

The AML obligations of second-hand goods traders are certainly not to be taken lightly. This article has shown that they apply to segments where the layperson would not expect them to, and that they involve a number of administrative steps - from identifying customers to reporting suspicious transactions to establishing internal rules and now notifying a contact person. It is often inefficient and risky for a business to try to manage everything on its own. Working with experts allows them to meet legal requirements correctly and on time, avoid penalties and focus on what matters - their customers and their business. If you are unsure whether you are meeting all your AML obligations correctly, do not hesitate to contact a specialist law firm - prevention is much cheaper and easier than dealing with the subsequent problems.