Stay in Compliance

Do you
have a
plan to deal with an ATF Inspection?
 

You are in the firearms business. Although you may have gotten into the business of selling firearms because of your love of firearms and the shooting sports, now it is your livelihood. You are in the business to support yourself and your family, and you look forward to many years of sales and service to the firearms-owning consumers in your area.
As a firearms dealer, you know that, since 1968, anyone in the business must comply with the Gun Control Act (GCA). The ATF is the Federal agency that administers the GCA.
The GCA, among other provisions, requires persons engaged in the business of manufacturing, importing or dealing in firearms to be licensed and keep records. It also authorizes the Attorney General to revoke “any license issued under this section if the holder of such license has willfully violated any provision of this chapter (the Act) or any rule or regulation proscribed by the Attorney General under this chapter.” Finally, the GCA authorizes the Attorney General to inspect your records and firearms inventory once every year. (See “Know Your Rights,” in the August/September 2008 issue, for a detailed account of the ATF’s inspection authority.) To stay in business, you need to comply with the ATF’s rules and regulations.

Dealer Decline
The Brady Handgun Violence Reduction Act of 1993 and the Violent Crime Control Act of 1994 have raised license fees for dealers, required more rigorous licensee background checks, mandated compliance with all state and local laws and established the National Instant Background Check System (NICS). Another consequence of these laws was a dramatic reduction in the number of Federal Firearms Licensees (FFLs). According to ATF data, from a high in the 1990s of an estimated 285,000 FFLs and 250,000 dealers, today there are fewer than 55,000 retailers and 112,000 total licensees.
When there were more than 250,000 dealers, the chances of any one being inspected were not particularly high, as ATF inspectors (now investigators) also covered the alcohol, tobacco and explosives industries. In 2003, Congress moved the ATF (with its firearms and explosives regulatory mission) from the Treasury Department to the Department of Justice (DOJ). The alcohol and tobacco regulatory mission remained with Treasury.

inspections On the Rise
Since 2003, the ATF has added some 200 investigators, for a total of about 600. As a consequence, the odds of being inspected have increased greatly. According to ATF data, there were 7,200 firearms compliance inspections conducted in Fiscal Year 2006, and just over 10,000 were conducted in Fiscal Year 2007. At the same time, the number of FFLs being revoked, while remaining a small percentage of those inspected, has risen fivefold—from about 20 per year in the late 1990s to an estimated 100 per year.
Licensees facing revocation receive a Notice of Revocation and have an opportunity for a hearing before such action can take place. They know that their FFL is in jeopardy. Hundreds of other FFLs are inspected and cited for violations, for which they receive a “warning letter” from the ATF or a letter to attend an “ATF warning conference” to discuss the violations. Licensees who receive a warning letter or who attend a warning conference need to take the word “warning” to heart. They must understand they will be targeted for re-inspection; if the violations they were cited for recur, they will likely receive a Notice of Revocation.

Four Factors
ATF officials take several factors into account in deciding whether to issue a Notice of Revocation. First, they note which violations were cited and under what circumstances they occurred. Second, they assess evidence of whether the FFL has willfully violated the GCA. Third, they consider the licensee’s apparent concern, or lack thereof, about correcting and not repeating the cited violations. Finally, they determine whether the FFL’s continuation in business would pose a threat to public safety.
Recently, ATF officials have discussed the idea of a licensee-developed Compliance Plan as an extra step that could be taken to assuage concerns about future compliance and public safety. This plan would be submitted to and reviewed by the ATF as part of the negotiations to settle a licensing action, and the FFL is bound to follow it. I am not certain if this development is a result of concerns expressed to the agency about the increase in revocations, although it has been used to resolve cases that might earlier have resulted in a revocation action.
In my consulting practice, I have been involved in several cases in which I developed a compliance plan for a retailer client that subsequently was used to settle a revocation case and allow the retailer to remain in business. In other cases, I have developed a compliance plan after a warning conference. In any event, and notwithstanding the fact that many of these have been prepared as part of a case settlement, the development and submission of a compliance plan has proven to be an effective and efficient process for a licensee to organize and record its internal controls, procedures, business practices and internal audits in such a way that substantial future compliance with ATF regulations is just about guaranteed—as long as the plan is followed.
So, at-risk licensees can submit a plan to the ATF to demonstrate both their seriousness about achieving and staying in compliance and their desire to work with the ATF to promote public safety and thereby possibly remain in business.
What about the FFLs who had violations cited on their last inspection, received a warning letter or attended a warning conference? Do they need a compliance plan? In my opinion, they do. Why wait until you are in trouble with the agency that can put you out of business to develop internal controls and standard procedures? Establishing and following a compliance plan before you are inspected might well prevent you from getting into trouble in the first place. To be clear, this plan need not be submitted to ATF.

Elements of a Compliance Plan
Though I am not aware of any ATF internal directives or standards on the matter, I can outline some of the components that have been in the compliance plans that I have helped to develop. Keep in mind that your needs may vary and that you may wish to hire a consultant to assist you.
1: There should be standard operating and record-keeping procedures. First and foremost, these must address, in detail, procedures that will prevent the recurrence of previously cited violations. For example, if an FFL repeatedly failed to report multiple handgun transfers, the plan must address this deficiency.
2: The standard operating procedure portion must address all record-keeping and reporting procedures. For example, who orders firearms, how are firearms received and by whom, and what internal records are maintained? Who is responsible for maintaining the bound book? How are Form 4473s prepared and double-checked? Are duties separated, so that one employee is not solely responsible for ordering, receiving and recording dispositions of firearms? NFA procedures should also be part of the plan for an NFA dealer.
3: There should be written firearms-inventory procedures and regular serial number–based inventories. Although the ATF cannot require FFLs to take a firearms inventory, the fact remains that the ATF will take a firearms inventory on any compliance inspection. For this reason alone, I have always advised FFLs to take regular inventories. Additionally, firearms are a tangible asset; it only makes sense that an FFL would want to keep track of valuable property.
4: Procedures for employee training need to be included, such as training for new employees and retraining for veteran employees after an inspection
or when new ATF forms or regulations become effective.
The compliance plan should
also include training on straw purchaser awareness and prevention. The joint ATF-NSSF “Don’t Lie for the Other Guy” program would be quite useful for this. For retailers in Southwestern border states, the ATF Project Gunrunner pamphlet should be required reading for all employees.
5: There needs to be an internal audit component to any compliance plan. Someone needs to check that employees are performing their tasks as directed. The plan also needs to provide for the creation and maintenance of internal audit records.
6: The compliance plan should include a section on employee disciplinary procedures. The licensee is responsible for the actions of employees, whose errors could put the license at risk.
7: Some FFLs have retained an outside consultant to conduct a mock inspection and to verify that the compliance plan is being properly used.
The above lists the general elements of a compliance plan. The plan can be incredibly detailed (or not, depending on circumstances), but it must cover all conduct of business and record-keeping requirements that the ATF will inspect. If you have received a warning letter from the ATF, or attended an ATF warning conference after your last compliance inspection, you should be developing a compliance plan now. Even if you have not been inspected in years, I recommend you consider such an effort. Doing so could not only save you a lot of trouble, it might just save your business.   
Walfred A. Nelson recently retired after a 33-year career with the Bureau of Alcohol, Tobacco, Firearms and Explosives. He now brings his experience as an ATF inspector, manager and executive to the private sector.

 MOST FREQUENTLY CITED FIREARMS VIOLATIONS

Citation              Violation Description                                                                     RANKING       
27 CFR 478.125(e)    Failure to timely record information in bound record [A&D record]    1    1    1
27 CFR 478.124(c)(1)    “Transferee did not properly complete Section A, F 4473”    2    2    2
27 CFR 478.21    “Failure to complete forms as indicated in instructions” [this violation is often cited when the licensee failed to properly complete a form, but there is not a separate regulatory citation addressing the omitted or misdocumented item]    3    3    3
27 CFR 478.124(c)(3)(iv)    Licensee did not record on F 4473 the date on which NICS was contacted    5    4    4
27 CFR 478.124(c)(3)(i)    Licensee failed to obtain and/or document purchaser’s ID    4    5    5
27 CFR 478.124(c)(5)    Licensee did not sign and date F 4473    6    6    6
27 CFR 478.126a    Licensee failed to report multiple handgun sales    7    7    7
27 CFR 478.124(c)(4)    Licensee failed to properly identify firearm on F 4473    8    8    8
27 CFR 478.124(c)(3)(ii)    Licensee failed to require proper evidence of residency of lawful alien    9    9    9
27 CFR 478.102    “Failure to contact NICS and wait stipulated time prior to transfer of firearm, or to record NICS Transaction Number”    10    12    10
27 CFR 478.129(b)    “Licensee failed to retain records for required time” [this varies from 5 to 20 years, depending upon record]    13    10    11
27 CFR 478.124(a)    Failure to have ATF F 4473 completed prior to disposition of firearm    15    11    12
27 CFR 478.99(c)    Licensee disposed of firearm to a person he had reasonable cause to believe was prohibited    14    12    13
27 CFR 478.124(b)    Licensee failed to retain F 4473 in proper order    16    15    14
27 CFR 478.102(a)    Licensee failed to contact NICS and wait stipulated time prior to transfer of firearm [this citation is more specific than 478.102, above]    17    14    15
27 CFR 478.124    ATF F 4473 not properly completed (general)    12    15    16
27 CFR 478.124(c)(3)(iii)    Licensee did not obtain documentation from nonimmigrant alien establishing exception or waiver from prohibition    11    N/A    17
    Total Number of Inspections    7295    10122    7968