A Working Guide to The Firearms Industry ATF Compliance

Transcription

1 A Working Guide to The Firearms Industry ATF Compliance Developed in conjunction with The Firearm Industry s Trusted Compliance & Operations Experts

2 Contents A Word on Operational Compliance / 4 The Gun Control Act of 1968 / 4 Having a Sporting Purpose (Importing Restrictions) / 6 ATF Compliance Inspection / 7 A&D Accuracy is the Cornerstone of Compliance. / 9 A&D Book Management / 10 Changes to the A&D Books and Notes / 17 Accurately Capturing Serial Numbers and Other Data / 19 Shipping and Receiving: Acquisitions and Dispositions / 20 SKU and Material Number Management / 21 Firearm Packing / 23 Controlling Scrap Dispositions / 25 Firearms Marking / 26 Marking Time Constraints and ATF Ruling / 32 Governance / 33 Class 3 Crash Course - Dealing with the NFA / 36 Common Errors and Issues Found in Retail Stores / 41 Common Errors and Issues Found in Manufacturers / 46 Staying Compliant / 50 Disclaimer By using this material, you agree that Orchid Advisors shall not be liable for any damages whatsoever. Orchid Advisors makes no representation as to the completeness nor legal interpretation of the content in its licensed materials. This should be used as an operational guide to enhance awareness and do not replace your responsibility for reading and complying with the law.

3 com pli ance (kəmˈplīəns) n. 1. the state or fact of according with or meeting rules or standards. It seems natural to begin any compliance guide with a definition of terms, a discussion of applicable laws, rules and regulations, then move on to the meat of the matter. Understanding the regulations is the first step to navigating them effectively. However in reality, compliance does not exist in a vacuum. It is not something that can be willed into being by ordering your employees, customers, or vendors to be compliant. Understanding the laws simply isn t enough. The laws will be discussed briefly, but statutory interpretation is lengthy and can be quite dull. More importantly, the regulations define the requirements for compliance, but they do little to advise how to be compliant. It s one thing to say record all A&D transactions in your book of acquisitions and dispositions in a timely manner or all serial numbers must be engraved on the receiver to a depth of.003 and be a minimum of 1/16 tall. It is completely another to evaluate how those processes will actually take place; what controls exist to ensure that they happen each and every time, and how you will evaluate and ensure that your facility is following the expectations of the law and regulation. This guide is not a legal treatise. It does not evaluate every nuance, loophole, contradiction or bright-line requirement of the regulations facing the holder of a federal firearms license. Nor is it a step-by-step guide on how to run a legally-compliant business. It is a discussion of the requirements of the law, along with some tested and effective potential solutions for ensuring the compliance health of your operation. Compliance is an element of business that is interwoven into all operations; it is not a standalone responsibility of a singular officer or department. Operational compliance, as a concept, is also extremely fluid the execution (e.g., the how ) varies as much as your business and your infrastructure does. Keep that in mind as you are considering the following topics, and in all cases, ask yourself: how can I adopt some of these strategies in my own business. 3

4 A Word on Operational Compliance Recordkeeping accuracy and inventory accountability are the primary indicia of a licensee s good compliance health, although these are not achieved simply by keeping good records and accounting for firearms. While a licensee could directly audit its A&D records and on-hand inventory daily, such a process would be prohibitively expensive, in terms of costs, resources and time. As volume scales up, a licensee s embedded processes and systems will be the primary driver of compliance or non-compliance. In fact, many of the actions that drive compliance are decidedly not compliance functions at all, but rather operational functions. Control over serial number application, accuracy of shipping records that flow to your A&D book, change management, limitations on access to electronic regulated records or adherence to security protocols are behaviors that, in and of themselves, do not appear to be related in any direct way to the GCA, NFA, AECA or EAR/ITAR. However, the goal of operational compliance at all levels is to develop processes and systems that will ensure an outcome wholly consistent with the requirements of the applicable regulations. The regulations are your blueprint for success; they are not the directions on how to build a compliant culture. True operational compliance is driven not by the knowledge of your compliance or legal departments, but rather the process and system integrity of transactions that affect a regulated transaction. The Gun Control Act of 1968 The Gun Control Act is the mother of modern firearms regulation. It is the primary legislative authority of the ATF, and examining the GCA will provide you with a significant understanding of the rules you re required to follow. Most, if not all of the GCA stipulations can be traced back to one common denominator: they all attempt to increase the regulation of the firearms industry by applying the Federal Government s power over the production, transfer, and operation of firearms. While some may argue the Government s role in the industry, that is not our intent here. Good, bad or ugly, we just want you to be aware of the rules of the road. This means that many of the restrictions fall upon the manufacturers, wholesalers, importers, and dealers of firearms, as these are the channels through which fire- arms are distributed. By increasing its ability to monitor firearms distribution, the Government sought to restrict inappropriate access. This mainly applies to the FFL and tracing requirements set out by the GCA. The prohibited person clause seeks to prevent inappropriate individuals from possessing firearms. As a general starting point, the GCA Creating the FFL System President Lyndon B. Johnson signs the Gun Control Act of 1968 into law. One of the cornerstones of modern firearms regulation is the Federal Firearms Licensing system, or FFL. This was founded in the GCA. The creation of the FFL system worked off of a fairly simple idea: that a process must be established to manage who has the ability to partake in the firearms industry, and that the process should allow those individuals to have their activities monitored. The result was the Federal Firearms Licensing system. 4

5 The system itself is pretty straightforward. If all you want to do is partake in the firearms industry as a consumer (e.g., purchase a gun) it is less applicable to you as separate and distinct rules govern the transfer of firearms to unlicensed parties. The FFL system concerns individuals who wish to conduct business in the firearms industry. Generally speaking, this includes those individuals who want to make, import, or deal in firearms as a profession. There are nine types of FFLs but suffice to say that each license provides the holder with the ability to participate in a particular component of the firearms industry. Some examples include a license to deal firearms as a pawnbroker, a license to manufacture ammunition, and a license to import firearms and ammunition. It is illegal for non-license holders to participate in the commercial activities granted to FFL licensees; non-licensees can participate in these activities as long as they are not intended for commerce. However, with the privileges of an FFL comes the responsibility of federal regulations. The GCA implemented some key requirements that apply to FFL holders (partial list): 1. Marking Requirements 2. Sporting Purpose Clause 3. Prohibited Persons Clause 4. Firearms Accountability 5. Record-Keeping 6. Conduct of Business Marking Requirements Whenever you produce a regulated firearm (which includes frames or receivers), certain markings must be engraved, cast, or stamped upon the firearm. Likewise, importers must verify that these markings are present, and supplement any absent information. The ATF requires certain marking requirements to be present upon a firearm when manufactured or imported into the United States before it is released into commercial circulation. Here is the information that must be conspicuously placed by engraving, casting, or stamping (impressing) on the firearm frame or receiver (18 U.S.C. 923(i) and 27 CFR , 26 U.S.C and 27 CFR ). If you re an importer, it s still your responsibility to make sure that your imported firearms present all regulated information in the required manner. If they do not, it is your responsibility to furnish any missing information within 15 days of release from Customs and Border Protection. Your additions must adhere to all aforementioned standards and pertinent record-keeping requirements. The intentional defacement, obliteration or removal of a serial number on a firearm is a felony charge, and bears with it all the implications of such a charge. 5

6 Business Processes Compliance Processes Systems Having a Sporting Purpose (Importing Restrictions) Effectively, the GCA reduces one s ability to import firearms in almost all situations. The only firearms or ammunition admitted for importation must be either (18 U.S.C. 925 (e)): For the purpose of scientific testing or research or for competition training (under the provisions of Title 10, Chapter 401); Unserviceable firearms (An unserviceable firearm is defined as one which is incapable of discharging a shot by means of an explosive and which is incapable of being readily restored to a firing condition (26 U.S.C. 5845(h) and 5852, 27 CFR and )); Of a type generally recognized as particularly suitable for or readily adaptable to sporting purposes ; Firearms or ammunition that were previously taken out of the United States by the person who is bringing in the firearms or ammunition; or, Non-sporting firearms qualifying as curios or relics. Of these exemptions, the principal one evoked is the sporting purposes clause, which is why the import restrictions of the GCA are often referred to as the sporting purpose restrictions. The ATF generally analyzes the physical features of the firearm to ascertain whether they believe it meets the necessary criteria to be considered a sporting firearm. Determinations are made by individual case, using various physical traits like appearance, design, and configuration to assess sporting purpose qualification. For example, its design should be primarily to support commercial, consumer use, and not be specifically configured for military applications (though many collectible ex-military firearms are imported as curios and relics, which is another exemption with its own set of rules. Handguns must also meet one the aforementioned exemptions. In addition, and unlike 6

7 conventional firearms, an ATF Form is required to evaluate a handgun s potential qualification as a sporting purpose firearm. Handguns undergoing this evaluation will be assigned a certain point value (rendering a classification status by ATF) before they will be approved for importation. Characteristics like weight, caliber, and dimensions will be used to assess this number. Federally-Prohibited Persons One of the stipulations of the GCA is the introduction of a prohibited persons clause. This, in essence, is a list of people who can t purchase, operate, transfer, or possess a firearm. The information below has been taken directly from ATF Form 4473(Firearms Transaction Form). The ATF prohibits the shipment, possession, transfer, or transport of firearms by an individual who is/has been: 1. Under indictment or information in any court for a crime punishable by imprisonment for a term exceeding one year; 2. Convicted of a crime punishable by imprisonment for a term exceeding one year; 3. A fugitive from justice; 4. An unlawful user of, or addicted to, any controlled substance; 5. Adjudicated as a mental defective or has been committed to any mental institution; 6. An illegal alien; 7. Discharged from the military under dishonorable conditions; 8. Renounced his or her United States citizenship; 9. Subject to a court order restraining the person from harassing, stalking, or threatening an intimate partner or child of the intimate partner; or, 10. Convicted of a misdemeanor crime of domestic violence. Just like most other components of federal regulation, some of these are subject to circumstance. For instance, convicted criminals who have had their records expunged or aliens who receive special permission from the Attorney General, can be exempt. ATF Compliance Inspection ATF Inspections Concept and Background ATF implements its FFL Inspection Program through its Industry Operations, a Regulatory Enforcement section under the Office of Field Operations, which also houses the Criminal Enforcement section. Industry Operations Investigators (IOI s) conduct compliance inspections to examine whether an FFL is in compliance with federal firearms laws and to verify that the FFL is accurately maintaining the required forms, an A&D Book, and other records. As a significant number of the applicable laws and regulations pertaining to a licensed firearms dealer or manufacturer deal with recordkeeping, a licensee s records (in particular the Book of Acquisitions and Dispositions) is often the primary focus 7

8 during a compliance inspection, and serves as the basis for both the determination of a licensee s state of compliance and risk for future violations. Once a compliance inspection is completed, an FFL can be deemed as either is in compliance, not in compliance, or at risk. In compliance means that an FFL has no violations or minimal violations that are outlined in a Report of Violations and do not require administrative action. Not in compliance means that an FFL has violations that require an administrative action. At risk means an FFL may face administrative action if it continues to be non-compliant. In all cases, subsequent violations of the same regulatory provision may be deemed willful, and any penalties attached to the violation of that regulation may be enhanced or accelerated. Generally speaking inspections tend to follow3- or 5-year cycle depending on whether the licensee is situated or not situated in a geographical region where an above-average number of firearms implicated in crimes originate from that particular geographic area. A licensee has little control over whether they are located in a source or nonsource state, as this determination is driven primarily by statistical analysis of National Tracing Center inquiries. Compliance inspections also can be initiated based on: (1) a set of criteria that identifies the FFL as high risk or a priority, such as results of prior inspections; or (2) a special request from ATF headquarters units or the ATF Criminal Enforcement section. If a compliance inspection reveals violations that can be corrected with education and improved record keeping, Industry Operations schedules a recall inspection. Recall inspections are follow-up compliance inspections that by federal regulation may be conducted no earlier than 1 year after the initiation of the deficient compliance inspection, unless an FFL agrees to an earlier inspection. Investigators can either conduct a limited scope recall inspection with a focus on the areas cited in the previous compliance inspection or expand the inspection to a full scope recall inspection to determine if the FFL improved its compliance or remains non-compliant with federal firearms laws. Although inspections apply to the broader pool of licensees, compliance inspections can often focus on high-risk FFLs, utilizing tracing data and other intelligence to determine which FFLs were at highest risk for violating federal firearms laws. These licensees are inspected separate and apart from the cyclical inspections. High-risk FFLs can be designated based upon a series of risk indicators, such as: 1. High number of guns that were used in crimes being traced to the licensee; 2. Multiple sales by an FFL to a single individual; 3. Theft or loss of firearms; 4. NICS denial ratios (ratio of NICS checks performed vs. number of returns received indicating the individual is prohibited from possessing firearms); 5. Location in a high-crime or border area; and 6. Tips and other intelligence from state and local law enforcement. The annual operating plans for Industry Operations, and other directives issued by ATF headquarters to the field divisions, describe the importance of prioritizing high-risk inspections. As part of its efforts to focus compliance inspections on high-risk FFLs, in 2004, ATF developed the Firearms Disposition Emphasis Inspection Program. The program focuses compliance inspections on specific areas of FFL business operations that may lead to the discovery of illegal firearms diversion and trafficking. For example, to determine if FFLs are violating federal firearms laws, ATF may direct Industry Operations 8

9 investigators to conduct inspections of FFLs in a particular area that sell a high number of weapons known to be favored by criminals. A&D Accuracy is the Cornerstone of Compliance. Inspection Priorities Can Define Your Success and Risk Factors A licensee s Book of Acquisitions and Dispositions can be viewed as the foundation for your annual compliance inspection. Goals with respect to annual compliance inspections are discussed above, but include: 1. Ensuring the licensee is maintaining accurate required forms (e.g., Form 4473; Form 3; Form 4; Form 5; Form 9; Theft, Loss or Missing Inventory Reports; Reports of Multiple Sale, etc.); 2. Ensuring the licensee is maintaining an accurate Book of Acquisitions and Dispositions; 3. Maintaining the traceability of certain firearms, including where they were acquired from and to whom they were disposed; 4. Disposition reports (including reports of multiple sale) which may lead to the discovery of illegal firearms diversion and trafficking. Understand An Inspector s Goals to Define Your Success and Risks One of the best ways to ensure the demonstrable accuracy of a licensee s records during an annual compliance inspection than a complete bi-directional match between on-hand inventory and the A&D Book, and supporting documentation (when required) for disposed firearms. As you can see, the top focuses during the inspection process all center on information that is initially contained in three major sources: (a) Inventory on-hand; (b) A&D Records; and (c) supporting documentation and required forms. For Title I firearms (and even to a degree Title II firearms), an investigator will need a starting point from which to conduct their inspection. This starting point is the licensee s A&D Book. The accuracy of these records can make or break the success of an inspection with respect to verification of inventory and supporting required forms, as this information will be validated against information contained in the A&D Book. A&D accuracy is so critical to the inspection process that an important first step of most inspections will be for the assigned IOI to conduct a bi-directional inventory of the licensee s books and physical inventory. Although inspections may be conducted with slight variation, in practice, the process is as follows: 1. All physical firearms on the licensed premises and any off-site storage are compared to the A&D Book to ensure that all physical inventory is acquired; and 2. All open entries in the A&D Book are compared to physical inventory to verify there is a physical firearm for each open entry to ensure that no inventory is lost, stolen or unaccounted for. 9

10 Even after the inventory portion of the annual compliance inspection is complete, the A&D Book will still play a central role in the remainder of the inspection, as closed entries (dispositions) will be reviewed against other required forms (Form 4473, Reports of Multiple Sale, Form 3/4/5/9 for NFA dispositions or Missing Inventory/Theft Loss reports). A&D Book Management What is the A&D Book At its core, the Book of Acquisition and Dispositions (or A&D Book, Bound Book, or simply the Book ) is so named because, in its most basic form, consists of sheets of paper bound together to prevent tampering or removing or inserting record entries and contains records in accordance with ATF regulations. Historically, these records were kept on paper, but many business operations (both large and small) utilize an electronic version for purposes of efficiency. Additionally, electronic recordkeeping software often contains logic that includes built-in data validation features. The purpose of the Book of Acquisition and Disposition is fairly simple; it is a register that tracks the movement of a firearm through a licensed facility by the incoming and outgoing entries in the book. If, for any reason, a law enforcement agency needs to trace a firearm, they can do so by following the trail created by the transfers recorded in your Book. The A&D Book is the cornerstone of the ATF s tracing of firearms, and ensuring it is kept in a timely and accurate manner is a paramount concern to the industry s regulators. Every time a firm acquires a firearm, the FFL records acquisitions in its A&D Book, citing important and required information, such as the serial number and a general description of the firearm, date of the transaction and where it was acquired from. Likewise, every time a firearm is disposed of, similar information must be recorded. 10

11 The federal requirements for the information captured and the appropriate formats are discussed in greater detail, below. In all cases, bear in mind that the A&D Book is a critical piece of recordkeeping because of the regulatory requirements and its functional necessity during an annual compliance inspection. It is required by the regulations, and will serve as the starting point for your compliance inspections. It contains information you are lawfully required to provide on inquiry by the ATF with respect to trace requests. The layout and fields contained in the Book of Acquisitions are regulated, and it is required that you capture all mandatory data, as well as highly recommend that you not use the A&D Book to capture additional, non-regulated information. It is not a notebook or journal while those can be useful business tools, they should be maintained separate and apart from the A&D Record. Despite its importance from a regulatory perspective, using the A&D book is fairly straightforward, and with one exception, most of the information required to be provided is on the firearm you are acquiring or disposing. With the exception of type (e.g., rifle, shotgun, pistol, revolver, etc.), all the information required for each firearm is marked on the physical firearm and should be verified each and every time information will populate any field in the A&D record. Acquisition vs. Disposition vs. Neither In order to keep accurate records, the licensee must first understand what information must be captured, and what types of transactions must be recorded in the A&D Record. While the below examples do not take the place of the regulations, they should directionally guide you when reading pertinent laws. Note that the timing of these entries should be made in accordance with the specific rules of ATF Ruling Acquisitions An acquisition occurs when a licensee takes possession of (or finds itself in possession of) a firearm which it did not have before, or discovers that it is in possession of a firearm for which no prior regulatory records exist. Examples of when to acquire a firearm in your A&D Book include: At the point of firearm serialization (i.e., when it is created and marked in accordance with regulatory timing parameters); Receipt of firearm from a licensee or non-licensee when it has been formally transferred to you (see regulated definition of a transfer ); A to-be-repaired firearm that stays overnight in your facility; A firearm delivered for sale or consignment that stays overnight in your facility; When you find a firearm that was previously reported as scrapped (i.e., destroyed), stolen or lost. Dispositions A disposition is the opposite of an acquisition. A disposition occurs when a firearm leaves the possession of a licensee, or discovers that it is not in possession of a firearm for which no a regulatory record exists. Examples of when to dispose a firearm in your A&D Book include: 11

12 When you are unable to locate a firearm and have formally reported it as a Theft or Loss to the ATF; Firearm destruction (or scrap); Normal transfers to another licensee or non-licensee. Special Circumstances Simultaneous Acquisitions & Dispositions As you may know by now, firearms come in many forms. For example, the serialized component of a rifle is the receiver. When a receiver is assembled into a rifle, or disassembled back to a receiver, it is technically changing form. Such changes in form have different identities (as defined by the regulations), and require the creation of a new record to reflect the new configuration of the firearm. Therefore, changes in form will result in a self-disposition (e.g., recording a disposition to the licensee of a firearm in its former configuration, despite the firearm not leaving the licensed premises) and self-acquisition (e.g., recording an acquisition by the licensee of a firearm in its new configuration which is already on the licensed premises) that is recorded in the Book. Neither Acquisitions nor Dispositions Certain transactions can appear to meet the above definitions of Acquisition or Disposition, but are in fact, neither. The following transactions are not recorded in the A&D Book as acquisitions or dispositions: Temporary assignments to employees for bona fide business reasons as defined in ATF Ruling (and firearms returned by the employee which were previously temporarily assigned); Movements to an offsite warehouse that has legally been approved as part of an FFL per the regulations; Movements inside of a facility to change its storage location; Changing the value of a manufactured or purchased part; Change in part number, Stock Keeping Unit (SKU) or material number (unless the ATF characteristics also change). Note that some of these transactions would appear to warrant a disposition, however, if you understand how the ATF looks at each of these transactions from a traceability perspective, it becomes more clear why each is not a disposition. Temporary assignments to employees for a bona-fide business purposes are viewed by the ATF as still being in the custody and control of the licensee, and therefore should not be disposed (the firearm can still be traced to the licensee); Offsite storage locations are viewed by the ATF to be an extension of the licensed premises and are therefore still in the custody and control of the licensee; Internal movements inside the licensed premises are still retained by the licensee Changes in financial value, part number, material number or SKU do not change the regulated physical characteristics of a firearm and they remain in possession of the licensee. 12

13 Other Special Circumstances Timing and Circumstances Determine Whether an Acquisition or Disposition Escorted Company Firearms: Firearms leaving or entering the premises of an FFL while under the escort of an employee from that FFL for bona fide business purposes (ATF Ruling ) are considered Temporary Assignments and do not constitute an acquisition or disposition. This might happen, for instance, if a third party sends one of their employees to escort (fully under their control) a firearm while it is being camouflage coated at another business facility. However, if the employee doesn t maintain possession (i.e., control) of the firearm, or if it stays overnight out of their control, it will become an acquisition of that other facility and a disposition in yours. Personal Firearms: If an employee brought his or her firearm to work for a few hours, and, it was physically segregated (e.g., remaining under their control and ideally marked as such), an acquisition or disposition would not be required. However, if the employee fails to retain control, and comingles it with other company assets for an extended period of time, the ATF would argue that it was acquired (thus requiring an A&D acquisition entry) and require a NICS background check, 4473, and a formal disposition record upon the return of that asset to the employee. Clear as mud? Very good. Let s take a look at how the Bound Book is laid out. Layout of the Bound Book The bound book itself is a multi-page book comprised of many formatted, lined pages. Each firearm has one or many horizontal rows in your bound book (or electronic counterpart). The information in each row is divided into three sections information about the firearm, information about the party you acquired it from, and information about the party you disposed it to. The following image is a sample manufacturing FFL bound book. The layout and requirements vary by FFL type as provided in Sections 478 and 479 of the regulations. 13

14 Sample Manufacturing A&D Book (Note that the regulated form varies depending on the type of FFL held by the licensee; please consult the regulations for the regulatory requirements) Description of a Firearm Acquisition Disposition Manufacturer and/or Model Serial Number Type Caliber Date Name and Address or License No. Date Name Address or Licensee. No. if Licensee, or Form 4473 SN if Form 4473 Filed An example of a Manufacturing or Dealer FFL A&D bound book page. (Source: Orchid Advisors) The first set of information recorded in the bound book will be the regulated information for the firearm itself (as defined in 27 C.F.R or 27 C.F.R ), and includes the following information: Manufacturer/Importer: Every firearm should be engraved with a manufacturer s name per the regulations. In the case of imports, imported firearms should also be engraved with the importer s name, again per the regulations. Both must be recorded in the Bound Book. Country of Manufacture: This information should be engraved on every imported firearm (27 CFR (a)(1)(ii)(E)). Country of manufacture is only required to be entered in an importer s A&D records. If you are not the importer of a firearm, country of manufacturer is not recorded (but the foreign manufacturer and importer still must be recorded). Model: The model will be engraved on the firearm. If the model is unknown, (for instance a frame that has not yet been engraved), you may put UNKNOWN. Serial Number: Every firearm must bear a unique serial number. The firearm s serial number will be engraved conspicuously, per the regulations. Bear in mind that any process that permits entry of a serial number from any source other than the metal of the firearm introduces risk. In the event that pre-validated scan tags or labels are to be used, they should not contain a human readable serial number to avoid the ease of using an alternate means of serial verification, other than the actual metal of the firearm. In all cases, the metal is the truth. If you or a vendor mis-tags a firearm and you record it incorrectly, it is your error. 14

15 Type: The type of firearm should reflect the type at the point of transaction to enter the acquisition or disposition into the book, not future or past configurations. This would include terms such as pistol, revolver, rifle, shotgun, frame, receiver, etc. Note: do not confuse Type with the firearm s action such as bolt, lever, semi, etc., as these are not required to be entered. Caliber or Gauge: The caliber or gauge is engraved on the firearm. If unknown, use the word UNKNOWN. After the basic information is recorded, you must input the information surrounding the acquisition transaction by which you are receiving the firearm. This will include the following information: Acquired Date: This is the date on which the firearm was physically acquired or manufactured. In the case of imports, it is the date released from U.S. Customs, not the date of physical receipt. Acquired From Name and FFL: This is the name and FFL number (if applicable) of the person or entity that transferred the firearm to you (the full 15-digit FFL number should be entered). If a firearm is received from an FFL holder, the Acquired Name should match the name listed on their FFL. Acquired From Address: This is the physical address from which the firearm came. Not surprisingly, the disposition record mirrors the logic of the acquisition record and requires the following information: Disposed Date: This is the date on which the firearm was disposed. Disposed to Name and FFL: This is the name and FFL number (if applicable) (the full 15-digit number should be entered) of the person or entity to whom you transferred the firearm. If the recipient is not an FFL holder or if they are not an exempt party (e.g., U.S. Government) per the regulations, a NICS/4473 transaction must occur. It is helpful to enter the Form 4473 transaction serial number (from the Form 4473) to assist in matching a disposition record to a Form If your Form 4473 s are not pre-serialized, it is acceptable to develop an in-house 4473 serialization standard, but be consistent. Also, the Form 4473 serial number does not replace the disposed-to address. Disposed To Address: This is the physical address to which the firearm was transferred. When entering Disposed to Name and Address for Sold To / Bill To transactions, be careful to accurately report the proper information. International and Domestic Transactions As it pertains to the A&D Book, there are some, albeit not too many, differences between domestic transactions and international transactions. The following is a summary of those differences, but ATF regulations cited in 27 C.F.R. 478 et seq. and 27 C.F.R. 479 et seq. should be fully understood. Additionally, international transactions (particularly dispositions to non-united States entities) may implicate additional laws 15

16 Sample Manufacturing A&D Book (Note that the regulated form varies depending on the type of FFL held by the licensee; please consult the regulations for the regulatory requirements) Description of a Firearm Acquisition Disposition Manufacturer and/or Model Serial Number Type Caliber Date Name and Address or License No. Acme Mfg. A Revolver.38 12/1/15 ABC Wholesaler, 123 Main Street, Anytown, State Date Name Address or Licensee. No. if Licensee, or Form 4473 SN if Form 4473 Filed A Sample Acquisition Entry in the A&D Transaction Record. (Source: Orchid Advisors) and regulations, including the Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR), the Arms Export Control Act (AECA). Although not discussed in this guide, and although these regulations to not implicate a licensee s obligations to maintain acquisition and disposition records, it is critical for an importer or exporter to fully understand these additional requirements, laws and regulations. Imported firearms are marked with an Importer of record, which is also to be recorded, along-side the Manufacturer of record (27 CFR and ); Whereas most transfers to license and unlicensed parties result in an acquisition or disposition denoted with the physical date of exchange, import acquisitions must use the date of release from U.S. Customs into the United States (see 27 CFR (d)); Records of Acquisition and Disposition relating to international entities will not include a Federal Firearms License (FFL) number. Foreign entities are not governed by U.S. agencies and do not hold FFLs. Therefore, that field should be left blank on the A&D Book (see 27 CFR ). Timing of Acquisition and Disposition Entry In general, it is a best practice to record your firearms as soon as acquired or disposed of. However, this is not always possible and/or practical. There are three basic time restrictions, and these are critically important items to communicate throughout your organization (see 27 CFR (e) and (g)): Manufacturers have 7 days to record acquisitions and dispositions; Any FFL involved in importing has 15 days to record acquisitions pertaining to the import itself; Importers holding an Import FFL have 7 days to record all other (domestic) acquisitions and dispositions; 16

17 Retail (or dealer) acquisitions upon first receipt must be recorded no later than the close of the next business day. If commercial records of firearms received contain all acquisition information required by the bound book, the dealer may for a period not exceeding 7 days delay making the required acquisition entry into their bound book. Dealers have 7 days to record their dispositions. Again, with the exception of original import acquisitions, every other acquisition and disposition must reflect the date of the actual event. In all cases, the 7 or 15-day delays are only windows to permit the licensee time to record the information in your A&D Book. In all cases, the multi-day allowance is for administrative processing only. The actual date used should reflect the date of the physical event, not necessarily the day that you got around to making the entry. Note that for imported firearms, the date of the physical event is the date the firearms were released by U.S. Customs and Border Protection, not the date they arrived at your facility. Changes to the A&D Books and Notes Your records are required to be kept accurate, and up-to-date. However, sometimes new information comes to light, changing the nature of your records. It is recommended that corrections be kept to a minimum. If you find yourself consistently correcting your existing records (in accordance with the regulations), you should consider implementing stronger record-keeping controls. If you must make a correction to your electronic records, the rules are clearly stated in ATF Ruling The ruling states, verbatim: The system must retain any correction of errors as an entirely new entry, without deleting or modifying the original entry (e.g., macro created to track changes). Alternatively, the system may allow for entries in a notes column to 17

18 explain any correction and/or track changes i.e., what was changed, who made the change, why the change was needed). ATF suggests that the record-keeping system be capable of blocking fields from correction (e.g., protect workbook function). If you need to make corrections to your paper bound book, remember to make a single line through the error (no eraser or white-out). Then initial and date the change made. In cases where electronic records are maintained, a permissible ATF Rul correction requires that a note be made on the record, and an audit trail preserves the original data. If your system does not have this capability, it is an option to make a correction either to a pen-and-paper record or an electronic record by making a self-disposition of the incorrect record, immediately followed by a self-acquisition of the corrected record. In that case, the incorrect data will be retained as required under ATF Rul In the firearms industry, core regulatory requirements for record-keeping are contained in Title 27, Code of Federal Regulations (CFR , (a), (a), (e), (f), 27 CFR , various ATF Rulings, amongst other laws and regulations.). On a very high-level, these regulations delineate the responsibilities of businesses operating within the firearms industry to maintain accurate, current, and organized records of selected firearm transaction activity (e.g., Acquisitions and Dispositions). In the wake of increased movement towards electronic record-keeping, the ATF released Ruling and later Ruling , (superseding ) 1. A few core features of include: It clarifies the necessary methods of correcting records. It defines that your electronic records system must retain any correction of errors as an entirely new entry, while keeping an unmodified original entry. Alternatively, it allows for (and in some cases requires) entries in the notes section of your software system to explain corrections. This should include things like what was changed, by whom, when, and why the change was necessary. It infers permission to use Microsoft Excel (or similar spreadsheet/database oriented tools), but Excel is not a recommended primary solution unless it is well controlled. It states that the system cannot rely upon invoices or other paper/manual systems to provide any of the required information. It states that the system must back-up the firearms acquisition and disposition records on a daily basis to protect the data from accidental deletion or system failure. It states that the system must allow queries by serial number, acquisition date, name of the manufacturer or importer, name of the purchaser, and address of purchaser or other transferee. It states that a business electronic records must be stored on a server owned and operated solely by the person who holds the respective Federal Firearms License. In addition, it poses that this server must be located within the United States. It states that a licensee must be capable of printing (or downloading) his or her records within 24 hours of request from the ATF. Additional requirements are also stated therein. Please refer to the ruling for full details. This said, there is an important area in to note about servers. While we live 1 The full Ruling may be found here: 18

19 in the cloud age today, where businesses like Dropbox, Google Drive, and Microsoft OneDrive thrive through the use of cloud-based storage, it can sometimes be unclear whether a rented or shared server in the cloud is owned and operated by the licensee. This is important to note for any company considering electronic A&D record-keeping. Any business considering implementing an electronic A&D system that utilizes the cloud should be aware of the requirements stated in A Final Note about Notes Use care when making a note entry when performing an A&D Record correction under ATF Rul Your notes field should capture the information required under the ruling, but be careful not to make statements which would otherwise be deemed to be legal admissions in a non-privileged document, such as your A&D Record. Accurately Capturing Serial Numbers and Other Data Dual-Blind Entry and Double Verification The following concept was given its own section not because it is directly related to compliance, but rather because it is directly related to operationalizing your compliance. The concept of double-blind data entry can be deployed in many different compliance-related functions, such as shipping, receiving, packing, A&D data entry, scrap and destruction and records correction. Its value to driving down errors has been demonstrably effective in numerous different scenarios. As you are considering your legal and regulatory obligations in each area (and hopefully how to optimize your compliance with respect to each), consider the use of Dual-Blind Entry or double verification for each. Dual Blind Entry technology operates upon a simple idea: it s unlikely you ll make the exact same mistake twice. Consider, for a moment, setting up a password on any modern computer system. You must type in your prospective password twice. Both times, the information is hidden from you (the information is blind because the characters appear as dots). By requiring the two passwords to match, the only potential for error is if a mistake is typed the exact same way twice. This same strategy can be repurposed to maintain your bound book. Typically, information is entered either by hand key, 1D/2D barcode scans, or Optical Character Recognition (OCR). In any form, single instance entry likely increases your risk of error. So, operationalizing Dual Blind Entry technology is simply a matter of duplicating the data entry procedure. In other words, in addition to your conventional means of data keying, you should consider: (a) a second, independent entry by another human; or (b) a second, independent method that includes scanning or OCR. Let s look at this in practice. Let s say that whenever you pack, receive or ship a pallet of goods, the serial information is hand key-recorded by one of your employees. This is a common practice, but is not recommended by itself. After all, a single error made by this lone individual may bring potentially serious consequences. However, add an additional step say, you have a second employee to hand key the 19

20 information separately again and the procedure becomes drastically and statistically more reliable. If the two employees hand keyed information does not match, the discrepancy is inspected before the transaction is completed. This is a relatively simple example most scaled operations would likely implement OCR or bar code scanning technology over hand keying but it certainly makes the concept easy to understand! Doubling the entry points for data entry and making both parties blind and independent will make your record-keeping process much more than twice as reliable. Obviously, this carries the concern of adding labor cost and time to the operational process. But searching for serial numbers, correcting wrong-gun in box situations, reconciling records and responding to regulatory compliance violations comes with a cost too. Evaluate your options and design a well-balanced process that maintains operating margins while significantly decreasing your operating risk. The ultimate solution will vary by company, business model, technology capability, budget, staffing, and other factors; but it all starts with solid data integrity controls like Dual Blind Entry. Shipping and Receiving: Acquisitions and Dispositions A brief discussion on shipping and receiving functions is warranted, not because the areas present particularly unique compliance risks, but because errors in acquiring and disposing firearms are among the most commonly-cited violations facing both manufacturer licensees and retail licensees. The solutions for addressing these issues are addressed elsewhere in this document, but all relate to accurate treatment of the A&D book, maintaining control over your processes and systems (and the embedded data that drive those systems). Nevertheless, there are specific considerations to address. Timeliness of Entry The greatest compliance risk for acquiring or disposing firearms is that transactions are not recorded (either acquisitions or dispositions) by the end of the next business day 20

21 (for retailers) or within seven (7) days (for manufacturers). The requirements for proper A&D recordkeeping are discussed in detail in previous sections. Firearms which are not acquired or disposed in the allowable period are a violation of the regulations in and of themselves, and the longer time goes by before the transaction is properly recorded, the greater the chance of a compounding error the existence of off-book (received, not acquired) firearms; the appearance of lost firearms driven by inaccurate A&D recordkeeping (shipped, but not disposed and still showing acquired). As time goes by, many of these losses become irreconcilable, and therefore uncorrectable. Segregate Discrete Operations Weak material flow and insufficient segregation will adversely impact both shipping and receiving functions, which, in turn, will adversely impact the accuracy of the data flowing to your A&D and other records. For example, staging all shipments in a singular area, including ones ready to ship with others waiting approval makes it more likely the wrong pallet or package will be sent outbound. To address these risks, evaluate segregating both shipping and receiving duties, as well as further segregating responsibilities within each area, such as picking and packing, or receiving and error resolution for received foods. Shipments or receipts should be separated by carrier and date of arrival and/or expected pickup. All Other Best Practices Stand Training, processes and systems that are effective in other areas can and, if possible, deployed to your shipping and receiving areas, as well. While each are discussed in greater detail throughout this guide, things like dual-blind data entry, double verification, and training employees to validate all information off the gun, never the box will provide compliance benefits. SKU and Material Number Management In all cases, the ideal (and required) regulatory end state is for your A&D Book to match the characteristics and markings on the physical firearm. We discussed in the A&D Records second the importance of verifying all required information (make, model, caliber) off the metal of the firearm to ensure A&D accuracy; that the markings on the gun in front of you is the ultimate truth. However, if any sort of automation is used, if there is not alignment between the accuracy of the data used to populate fields and the physical firearm, you will find yourself in a situation where the packaging, A&D Record and product do not align. This may show itself as incorrect manufacturer, model, caliber or type (and ultimately become a wrong-gun-in-box scenario), or cause incorrect disposition or acquisition information to populate the A&D Record. Unfortunately, A&D errors are not the extent of the issues that can be seen. Packaged NFA firearms may be transferred or disposed without completing the requisite ATF National Firearms Act forms or approvals, or you may inadvertently dispose a firearm with particular physical characteristics to a state where those characteristics are prohibited under state law often with criminal implications in addition to regulatory implications. Finally, although not regulatory in nature, these inaccuracies can give rise to financial variances, which could be detrimental to the fiscal health of the licensee. 21

22 Ideally, your material management systems should rely on pulling master data from a centralized location to fill SKU descriptions, define material numbers and populate fields in the A&D Record. Reducing these risks should be addressed with preventative controls, including: Requirements to maintain one piece flow during build and assembly; Eliminate Reprinted Labels or Packaging, or significantly restrict access to reprinted materials; Limit inventory access and system access to decrease the likelihood of changes to master data or product data files; The firearm contains the ultimate truth all firearms transactions should be off the firearm, never the box; Prohibit entry of SKU or part number of cheat sheets. Regulated data should flow from a singular controlled source, never from notes maintained in operational areas. Data Setup and Control Preserving the accuracy and integrity of master data or product data files is critical to maintaining control over SKU and material number setup. While having a singular point of contact with the permissions and abilities to ensure controlled and restricted changes to data accomplishes this outcome to a degree, it can present other liabilities for example, if that person is out, on vacation, or suddenly resigns, you will find yourself overly constrained by the policies. Additionally, having one individual with access only ensures that only one individual has access, not that the information is configured correctly. Instead, consider the following alternate options: Product data should be set up, reviewed and/or approved by multiple departments (compliance, engineering, information technology, accounting and production); All data is accompanied or directly attributable to a verifiable source document, such as an engineering drawing or written specification; Compliance approval is required for setup of all information that flows to a regulated record; and A&D Records are only populated based on computer data, not by direct manual entry. It should be noted that, with respect to the final point, just because that A&D Records are populated from computer data does not mean that the same rigors for validating the data is true, accurate and correct are not required. You must still verify all information off the metal of the firearm. 22

23 Firearm Packing Pack Accuracy and Avoiding Wrong-Gun-In-Box Accuracy in the outgoing product labeling process at a manufacturer can be a significant issue. While not directly illegal it s not illegal to have the wrong gun in the wrong box inside your factory; it is a driver of both lost firearms and incorrect data in a licensee s A&D Records. Upon shipment of a wrong gun in box, your bookkeeping likely does not properly reflect the actual serial numbers involved, particularly if post-packing transactions are based off of the box serial number, and not the serial number on the firearm contained within. As an example of the potential failure, consider the following: Before a firearm leaves your manufacturing plant, it is first packaged. The packing not only protects the firearm when in transit, but also serves a marketing purpose when at its ultimate retail location. When it is ready for departure from your plant, some indicator on the box is checked to make sure that it matches your records. This is a necessary component of the dispositions process. Unfortunately, Wrong Gun in Box transaction errors can occur. A WGIB violation happens when the bar code, label, or some other indicator on the packaging doesn t match the physical firearm inside of the box. In other words, while the packaging picture, title, and barcode might suggest that the firearm inside is a hunting rifle, some error in the manufacturing process accidentally placed a sporting shotgun in the wrong box, or a gun of similar physical and regulatory characteristics but labeled the packaging with an incorrect serial number. Unexpected Consequences WGIB transaction errors will not only impact your legal risks, but your reputation and consumer opinion. When you mislabel the product, consumers are receiving something that they didn t purchase even if it is the exact same model, just with a different serial number. Unfortunately, buyers are notoriously capricious, and a single error is often all it takes to turn a client away from your business. This buyer may spread the word, and you may find your firm having a reputation for delivering the wrong firearm. By shipping out a different firearm than the one you intended, the odds are overwhelmingly likely that you ve shipped out a different firearm than the one recorded in your bound book. This means you have also violated one of your most important responsibilities as a manufacturer of firearms, and are potentially subject to legal repercussions. ATF has been known to get calls from buyers asking how to properly record these wrong serial numbers, looking for guidance while unfortunately throwing you under the bus at the same time. Improving Packaging Accuracy Internal control strategies will substantially reduce the likelihood of labeling error and, as a result, considerably mitigate your legal and consumer risks. Ensuring packaging accuracy is an area that a licensee is better served by deploying preventative, rather than detective controls, as wrong gun in box is often a lagging indicator of a compliance 23

24 problem; a wrong-gun-in-box may not be discovered until more than six months have passed from the time of the original error. By then, given the time that has gone by, the inaccuracies in the A&D Record have become irreconcilable or present themselves as ghost firearms firearms that physically left your facility, but remain on the A&D record because the disposition information was incorrect. Weight Checks Implementation of product weight checking in addition to your Dual Blind Entry strategies will further reduce wrong gun in box errors from the outgoing end of operations. By checking the product weight as a final checkpoint, you will guarantee a match between the firearm and the box: if the packaged firearm isn t the anticipated weight, then you ve packaged the wrong firearm. One Piece Flow Not Just for Manufacturing In addition to this triple-check disposition system, box labels should only be printed one at a time. This process should also involve heavy user access controls around the reprint label process, thereby limiting or restricting the ability to print duplicate labels. This will reduce the occurrence of mislabeling from incoming end of disposition operations. The implementation of these three operations strategies, in concert, will dramatically reduce the errors in your product/label consistency. By reducing errors, you will increase the reliability of your disposition process, reduce your legal risk, and increase consumer faith in your organization. Repairs and Returns The bulk of your packing operations may occur at the end of your production flow. However, the same controls need to be implemented in other areas where a firearm are packed or unpacked when an alternate or diversionary process is made. Non-standard processes such as repair, particularly if firearms are unpacked from their boxes during the process, are one such example. As a general rule, anytime a firearm is placed in a box, controls to ensure correct packing (double verification, weight verification, etc.) should be used. The same is true when a firearm is re-packed. Do not assume that that the firearm will make its way back into the correct box. If the physical barrier that ensures the correct firearm is in the box should be breached (e.g., the box itself), re-packaging or re-labeling that box should use equally stringent controls. 24

25 Controlling Scrap Dispositions Production fallout is inevitable in a manufacturing environment. Regardless of the cause, all manufacturers (and many gunsmiths) will find themselves in a situation with an irreparable firearm unfit for rework. When this happens, best practices dictate a need or want to discard and destroy, or scrap, the firearm(s). The scrapping process is heavily governed by compliance regulation. Unfortunately, errors here pose compliance risks for your company, and are a frequent driver of lost firearms. Note that many of these firearms are not lost, per se. Rather, a recordkeeping or data error will fail to disposition the scrapped firearm, leaving the licensee with an open acquisition in the A&D Record with no corresponding firearm. Photo credit: Newsweek In just about every industry, scrap is an area of operation open to theft/loss. The firearms industry is no exception. While strong security controls typically exist during the manufacturing process, especially after the creation of an adaptable receiver, the scrap process is often disregarded for controls, arguably because what is usually there is broken. In the eyes of industry professionals, products unfit for rework have lost any value to the company. However, they still retain a tremendous value in that they pose a significant risk to your company. Firearms assigned for destruction and scrapping are still legally firearms, and must be disposed of as such. Thus, any inaccuracy or error in the disposition of a to-be-scrapped firearm is treated just as severely as any indiscretion in the disposition of a normal firearm. Additionally, the ATF has recently expressed concerns regarding the traceability of scrap. According to one Special Agent of the ATF, the street value of an unserialized, scrapped firearm is approximately four (4) times higher than a similar, serialized firearm. In addition to the regulatory and recordkeeping risks, scrap areas should be secured to avoid pilferage, which may lead to diversion to the criminal element. Strong internal controls and strict segregation of duties must be considered and implemented when designing your scrapping process. For instance, no one individual should be able to independently scrap a firearm and dispose of it from your bound Book of Acquisition and Disposition. This is not only due to the potential for error in any singular process, but any employee or sovereign agent acting independently is also significantly more subject to impulse, negligence, and general corruption. To mitigate these risks, establish a strong segregation of duties in your scrapping process. For example, one employee would record the serial number into the system and place the firearm into a locked cage. You might then only allow access to this locked cage by an independent compliance counsel, who might check it on a daily or weekly process. When the locked cage is checked by this independent party, he/she might 25

26 re-enter or re-verify the serial number at the point of destruction. This dual entry or dual validation will, hopefully, create a system match and a disposition into the bound Book of Acquisition and Disposition. If a match is not created, you will have the information and authority to investigate it internally and remove any corporate liability. This is just an example of how you might employ internal control and establish segregation of duty. By doing so, you both reduce personal liability on the part of your employees and ensure a more robust and reliable scrapping process. Scrap as routinely as possible, and do not allow scrap to accumulate. The longer it sits around, the greater the risks of loss, data mismanagement or pilferage can be. Additionally, consider retaining proof of destruction for all scrap transactions. While time consuming, and in no way a substitute for adherence to the regulations, having access to a secondary reference of destroyed firearms can be extremely beneficial in reconciling records and physical inventory. Firearms Marking Firearms Marking General Regulations A licensed manufacturer or licensed importer of firearms must legibly identify each firearm by engraving each firearm with both a serial number and important supplementary information (27 CFR ). How do I engrave a serial number upon a firearm? By engraving, casting, stamping (impressing), or otherwise conspicuously placing or causing to be engraved, cast, stamped (impressed), or placed on the frame or receiver thereof an individual serial number. The serial number must be placed in a manner not susceptible of being readily obliterated, altered, or removed, and must not duplicate any serial number placed by you on any other firearm. For firearms manufactured or imported on and after January 30, 2002, the engraving, casting, or stamping (impressing) of the serial number must be to a minimum depth of.003 inch and in a print size no smaller than 1/16 inch. How do I engrave a firearm with the necessary additional information? By engraving, casting, stamping (impressing), or otherwise conspicuously placing or causing to be engraved, cast, stamped (impressed), or placed on the frame, receiver, or barrel thereof certain additional information. This information must be placed in a manner not susceptible of being readily obliterated, altered, or removed. For firearms manufactured or imported on and after January 30, 2002, the engraving, casting, or stamping (impressing) of this information must be to a minimum depth of.003 inch. The additional information includes: The model, if such designation has been made; The caliber or gauge; Your name (or recognized abbreviation) and also, when applicable, the name of the foreign manufacturer; In the case of a domestically made firearm, the city and state (or recognized abbreviation thereof) where you, as the manufacturer, maintain your place of 26

27 business; and, In the case of an imported firearm, the name of the country in which it was manufactured and the city and state (or recognized abbreviation thereof) where you as the importer maintain your place of business. For additional requirements relating to imported firearms, see Customs Duties at 19 CFR Part 134. A firearm frame or receiver that is not a component part of a complete weapon at the time it is sold, shipped, or otherwise disposed of by you, must also be marked as required. Allowable Timeframe for Marking A frame or receiver must bear all required markings. In practice, since the frame or receiver is the core of the firearm, this is typically the first thing marked. This is especially true when acquired from a third party manufacturer. Additionally, a completed firearm must be marked. This can vary by manufacturer depending on their manufacturing operations. Once it is deemed regulated and before it enters commerce, it must be fully marked per the regulations. For official determination on whether a firearm is complete or regulated, a prototype may be sent down to ATF s Firearms Technology Branch for analysis. The allowable timeframe for the marking procedure can be found in the ATF Ruling The Ruling essentially states that for completed firearms (including finished frames and receivers to be sold, shipped, or disposed of separately), markings must be made within 7 days from the date of completion and must include the make, serial number, city and state of manufacturer, and model or caliber/gauge (when known) (27 CFR ). For imported firearms, you have 15 days for marking from the time the firearms clear Customs, and must include: the model, if such designation has been made; caliber or gauge; name of the importer; name of the foreign manufacturer; country in which the firearm was manufactured; city and state (or recognized abbreviation) where the importer maintains its place of business. If the imported firearm has some, but not all of the necessary markings, you have 15 days to complete the markings per above ( pdf). A firearm frame or receiver not built into a complete weapon when sold, shipped, or otherwise disposed of, must still be legally marked in accordance with the same regulations and rulings. Bear in mind that the same regulations apply to engineering samples/prototypes and firearms made out of alternative materials during the research and development process. Marking Variances Manufacturing circumstances sometimes create the requirement for marking by more than one distinct entity. This is often the case when a firearm is subject to additional manufacturing processes by a third party. Since the regulations require each manufacturer to mark the firearm, the potential exists that multiple sets of markings would be applied and confuse customers and law enforcement personnel during the tracing process. As an alternative, licensees may submit a request for a marking variance to the ATF s Firearms Industry Programs Branch that permits the subcontractor exception to the 27

28 marking rule. This essentially allows either the subcontractor to mark the firearm with the manufacturer s marks (previously assigned and approved through the variance) or if the firearm was already marked by the manufacturer, it exempts the subcontractor from also having to place his markings on the firearm. According to the ATF, all of the following information should be submitted, along with a letter of application for a marking variance, to the Firearms Industry Programs Branch: Identify the maker of the firearm receiver: Name Address, including City and State Federal Firearms License number Identify the recipient of the firearm receiver: Name Address, including City and State Federal Firearms License number Identify any other participant in the manufacturing process: Name Address, including City and State Federal Firearms License number Manufacturing process to be completed In addition, the ATF requires that you identify: The model of the firearm The type/style of the firearm The make of the firearm The caliber or gauge of the firearm The serial number scheme to be used The ATF recognizes that some manufacturers may have proprietary concerns disclosing, in a single marking variance request, all parties involved in the manufacture of a particular firearm. As such, the ATF has set forth a procedure for preventing the disclosure of the identity to secondary process manufacturers, should that be a concern to your manufacturing business: If the ultimate manufacturer of the firearms has any proprietary concerns regarding disclosing the identity of any of the participating secondary manufacturers to all of the other secondary manufacturers contracted or subcontracted to perform work on the firearms, the ultimate manufacturer can submit individual letters of request to ATF indicating each of the secondary manufacturers separately who are participating in the manufacturing process. ATF will address each request in a separate marking variance approval so the identity of the secondary manufacturers is kept proprietary (Open Letter to All Federal Firearms License Holders Regarding Marking Variances An Alternative to Marking Variances ATF Rul In 2009, the ATF promulgated additional rulings regarding the use of non-marking variances (e.g., when a manufacturer seeks to omit placing their regulated information on a firearm). Previously, if a licensed manufacturer was engaging in secondary process manufacturing and sought to omit their regulated information from the firearm, a non-marking variance was required, or such specific authorization was required to be disclosed in the original marking variance request. Owing the change to a number of 28

29 specific inquiries on this subject, the ATF stated in ATF Rul that, in certain instances, a secondary process manufacturer does not need to mark its relevant regulatory tracing information of firearms of which they are a secondary process manufacturer, if the following conditions are met: Licensed manufacturers who perform a manufacturing process on firearms for, or on behalf of, another licensed manufacturer need not place their serial numbers and other identification markings on firearms as required by 27 CFR (a) and (a), provided the following conditions have been met: (1) The manufacturer is receiving the firearms, including frames or receivers, from another manufacturer. (2) The manufacturer is performing a manufacturing process on the firearms as directed by another manufacturer before distributing those firearms to another manufacturer or into the wholesale or retail market. (3) All manufacturers involved in the manufacturing process possess a valid Federal firearms manufacturer s license issued by ATF and are performing only the manufacturing processes authorized under that license. (4) The firearms, including frames and receivers, are already properly marked with a serial number and all other identifying markings in accordance with 27 CFR (a) and, if applicable, (a). (5) Prior to engaging in the manufacturing process, the manufacturer desiring not to mark must submit to ATF the following information: (a) The manufacturer s name, address, and license number, and the name, address, and license number of the manufacturer for which the manufacturing process is being performed; (b) A copy of the license held by each manufacturer; (c) A description of the type of manufacturing process to be performed by the manufacturer desiring not to mark; (d) The model(s), if assigned, of the firearms subject to the manufacturing process described; (e) The serial numbers of the firearms in sequential order; (f) The calibers or gauges of the firearms; and (g) Any other information concerning the firearms manufacturer(s) or manufacturing process that ATF may require. (6) The manufacturer desiring not to mark must maintain copies of its submission to ATF of the information required by this ruling with its permanent records of manufacture. The manufacturer availing itself of this ruling should retain proof of its submission to ATF (e.g., certified return receipt mail or tracking number). This proof of submission should show that it was sent to ATF s Firearms Technology Branch, or any other office that ATF may designate as the proper recipient of such information. Additionally, the manufacturer must allow ATF representatives to inspect such documents upon request at any time during business hours without a warrant. 29

30 (7) All manufacturers involved in the manufacturing process must maintain all records required by Federal law and regulation. Once the manufacturer has submitted the necessary documentation to ATF pursuant to this ruling, and provided the manufacturer has complied with all other conditions set forth in this ruling, no non-marking variance approval from ATF is required, and the manufacturer may engage in the manufacturing process for, or on behalf of, another licensed manufacturer without placing its identifying markings on the firearms in accordance with 27 CFR (a) and (a). As a secondary effect of ATF Rul , ATF has been extremely reluctant to approve so-named non-marking variances, and expects secondary process manufacturing to be conducted in a manner consistent with this ruling. In fairness, the ruling provides a greater degree of flexibility to the primary manufacturer, in that certain operational constraints are no longer an issue (e.g., a manufacturer can engage a alternate or additional secondary process manufacture without obtaining prior approval from the ATF, provided the requirements of the ruling are met.) Other Considerations Regarding Tractability and Markings In some instances, manufacturers utilize serialized metal inserts in their polymer firearms. Although it is not a regulated item, it is advisable to control the serialized asset similar in nature to a completed firearm to assist with record-keeping practices. ATF Ruling authorizes licensed manufacturers and licensed importers of firearms, and makers of National Firearms Act (NFA) firearms, to adopt the serial number, caliber/gauge, and/ or model already identified on a firearm without seeking a marking variance, provided all of the conditions in this ruling are met. Implementing Firearm Marking Controls Marking control primarily relates to manufacturers and those who conduct manufacturing processes. These will help you ensure that your organization meets all of its necessary marking requirements. Engineering: An industry best practice, and way to help maintain your federally-mandated marking requirements, is to define marking parameters in your engineering drawings. Purchasing: If serialized items are to be manufactured by a third party, or if a third party is to perform an operation on a firearm (for example, melonite), the engineering drawings and marking requirements should flow through to purchase orders and inspection plans. 30

31 Inspection: The in-bound inspection process is an important monitoring tool for identifying third party markings that may not be correct. If your organization does not use this system, you might consider doing so. Receiving and Shipping: Points of material flow (e.g., receiving, shipping, or security points) should have a formal responsibility for ensuring that no firearm leaves the facility without proper marking. Checks should be made to ensure that no serial number has been obliterated, tampered with, or otherwise compromised. If optical scanners are to be used to read serial numbers, the serialization process should be designed so that the reading is done with a high degree of integrity. Production: Ideally, production would be responsible for measuring the depth and height of markings. While the regulations specify the legal minimums for height and depth to be, the ATF has not offered specific guidance on the technology or methodology to be used, be it mechanical gauging, laser profile scanning, non-contact vision measurement or the like. Measurement of marking depths must be done from the flat surface of the firearm to the bottom of the engraving, and not from any beads of material that may develop from the marking process. In addition, any surface applications, such as hydra-dip, cerakote, or powder coating are to be considered in any depth determination. Another important role in production would be to ensure that someone consistently track and review marking variances to remain compliant with the terms of the variance. The serial number schemes must be adhered to; manufacturing outside of these approved schemes could cause your product to be subject to destruction, or revocation of the marking variance. It is important for someone to assess the volume needs associated with the variance and predict the need for future variances or increased serial number blocks that may be used. At times the variance approval process can take months so planning ahead is crucial. Inventory Management: Marked and unmarked firearms should be physically separated and stored on shelves that are labeled appropriately. Unmarked firearms (works in progress that are pre-serialized) should be stored on staging shelves with visible dates that permit operations to identify any delays in the process. Customer Service: Customer Service and its warranty or replacement operations serve as a monitoring control to ensure that customers have not modified markings or obliterated serial numbers. Security: Points of material flow (receiving, shipping, security points) should have a formal responsibility for ensuring that no firearm leaves or enters the facility without proper marking. Checks should be made to ensure that no serial number has been obliterated. Legal, Compliance and Audit: A written policy should be generated that specifies the marking requirements for the organization. Periodic audits should be performed to identify unmarked firearms that have delayed beyond the ATF s expectation. 31

32 Marking Time Constraints and ATF Ruling ATF Ruling specifies the updated, clarified time-constraints for firearms manufacturers and importers seeking to mark their firearms. The appropriate excerpt, defining all the time restrictions of the marking process, reads as follows: Under the regulations, section , firearms required to be marked at the time of manufacture include both complete weapons, and complete frames or receivers of such weapons that are to be sold, shipped, or otherwise disposed of separately. Because identifying firearms is an integral part of the manufacturing process, and sections 923(i) and do not specify a time period in which to identify firearms, licensed manufacturers are required to mark them during the manufacturing process. Reading the marking requirement for complete weapons in section (a) together with the seven day record-keeping requirement for complete firearms in section (a), ATF concludes that it is reasonable for a manufacturer to have seven (7) days following the date of completion (to include a firearm in knockdown condition, i.e., complete as to all component parts, or a frame or receiver to be sold, shipped, or disposed of separately) in which to mark the firearm and record its identifying information in the manufacturer s permanent records. Further, because firearm frames and receivers to be sold, shipped, or disposed of separately do not have a barrel at the time they are marked, pursuant to (a)(2), all of the information required by (a) (1) must be placed on the frame or receiver, unless an alternate means of identification is approved (i.e., a non-marking variance ) under section (a)(4). The model designation and the caliber or gauge may be omitted without a variance if that information is un- known at the time the firearm frames or receivers are marked. Nonetheless, ATF recognizes that a manufacturer may require more than seven days to finish the manufacturing process from beginning to end with the required markings, depending on the nature of the process involved. Some firearms may take more time due to differences in the type and capability of the firearm, materials and components, and complexity of the assembly and finishing processes. ATF also recognizes that the equipment necessary to identify the firearms must be available and in working order. However, once the entire manufacturing process has ended, manufacturers must ensure that the firearms have been marked in the manner required by section To facilitate inspection and ensure that ATF can determine that a licensed manufacturer has not unreasonably held completed firearms (to include finished frames and receivers to be sold, shipped, or disposed of separately) after seven (7) days from the date of completion without their required markings, licensees may take the following steps: (1) Maintain a copy of the current, active license of all contracted licensees; (2) Maintain records of firearms production; (3) Maintain work orders, contracts, and related instructions for services rendered that describe the various firearm manufacturing processes; (4) Maintain orders for firearm parts that have yet to be received; and (5) Maintain invoices to repair non-functioning machines. 32

33 Governance Although federal regulators are tasked with enforcing the continued compliance of businesses, being compliant starts at home with your own staff and own Compliance Program. In order to maintain both your business compliance and a responsible relationship with the ATF, self-governance and transparency is essential. Self-Governance Establishing a reliable, efficient monitoring process may save you a considerable amount of time and money down the road. In addition, without an established monitoring system, it will be incredibly difficult to maintain a long-term compliance initiative. Establishing a compliance monitoring program, and defining what metrics will be monitored and reported on is critical to success. Perhaps more importantly, the Federal Sentencing Guidelines list monitoring activities as a key expectation for meeting the federal standards for an effective Compliance Program. Monitoring is a key component of demonstrating to the Government that your company takes compliance seriously. Considerations Before Establishing Your Monitoring Process Before establishing your company s compliance monitoring program, you should give thought to some of the following considerations: The tools that will be used for measuring and reporting, such as audit processes, reports derived from other sources and escalations from operations; The terminology that will be used for measuring and reporting; and, The fact that monitoring should be limited exclusively to operational fact without an interpretation of the law. Monitoring should generate a completely quantitative output, despite the qualitative and/or interpretative nature of the law and regulations. Methods for Self-Monitoring While the particular process of self-monitoring should be tailored specifically to your business, there are some general methods we recommend for implementation: Develop a common set of ATF compliance metrics. It is recommended that you track instances which could result in a report of violations by the ATF. However, be sure to consult with your legal counsel before documenting your errors. There are appropriate ways to handle this so that it provides constructive benefit for your organization. Examples of possible metrics include: Wrong-gun in box; Acquisition and disposition errors, including firearms shipped not disposed and received not acquired. ; Delays in acquisition and disposition entries; 4473 processing errors; Multiple sales form errors; 33

34 Import processing and form filing errors. When defining metrics, understand your underlying processes and systems and use that information to best define what information you want or need to capture. Capturing data for the sake of reporting is not effective you must capture data in such a way that you can identify and implement a solution to errors. While every traceable metric should flow back to a potential citable violation (e.g., 4473 processing errors), the metrics specific to your organization will vary based on processes that drive those errors. Organizations with an internal audit function should perform periodic (quarterly, semi-annual, or annual) reviews on major process areas. Such areas might include: shipping, receiving, and point of sale transactions. Where identified, deeper evaluation in known problematic areas can be performed under an attorney/client privilege. It is highly recommended that your organization perform periodic, bi-directional book-to-physical audits of its firearms. Tracing should be made from inventory to the Book of Acquisition and Disposition and vice versa. A discussion of physical audits is described in the Staying Compliant section of this guide. Individuals who control the inventory and process transactions should not be responsible for performing the physical inventory audits unless they are independently monitored. The data obtained from such audits should be captured in detail and used to further identify process anomalies. While it may seem like the ultimate goal is to identify lost inventory, the supporting inventory reconciliation can be used to identify other problems such as: scrapped, not dispositioned, or received, not acquired. Reporting Monitoring Results When the monitoring of your operations results in a detected issue, it is vital that you have a clear procedural guideline for how this discovery is to be reported. Reporting results of monitoring activities is a key communication tool that can be used to drive behavior. Reporting options include: Reporting alongside operational and financial performance dashboards; Reporting at employee meetings, with a corresponding reward for departments with positive trends; Reporting at the periodic meetings of the organization s governing functions, including committees like the Firearms Transaction Team and Firearms Compliance Management Committee. Enforcing and Monitoring Results Not all errors are intentional violations. Some reportable items are simple mistakes and others are discrete process issues or educational issues. The extent of enforcement or discipline should be documented in the organization s human resources policies so that the treatment is standardized, repeatable, and fair. Positive reinforcement can often be more effective than negative reinforcement. Employees who go out of their way to com- 34

35 ply or who consistently demonstrate leadership should be publicly rewarded. Negative reinforcement should follow an escalation sequence, unless the instance of non-compliance is willful and severe. In other words, unless an employee did something patently illegal, like knowingly sell a firearm to a felon, then his or her punishment should be based on job performance patterns. However, something severe as selling a firearm to a felon should be considered as immediate grounds for termination. Transparency In regulated activities, make it clear what you are doing throughout the process. Transparency should be maintained both internally and externally (with legal guidance). Encourage transparency both between your own employees and between your business and third parties (like your suppliers or customers). Transparency is an attribute of a well-governed organization and will help spread your company s reputation of honesty and integrity. In addition, companies demonstrating transparency will be more capable of defending themselves by demonstrating their commitment to compliance should the need ever arise. Exception Management No matter how solid and efficient your compliance program and internal controls are, problems will occur. Whatever the issue is, you have to have an exception management process to identify the problem, catalog the problem, track the problem, and resolve the problem. Think of exception management as continuous improvement. There are three main responsibilities for your exception management process/ department: 1. To legally correct any incorrect records; 2. To find out the root cause of the error, mistake, or violation; and, 3. To improve the flawed process, monitor behavior, and, if necessary, allocate necessary reprimand. Compliance Oversight Your exception management processes should be aligned closely with your compliance oversight. Although they describe two difference concepts, one should not operate without the other. In terms of compliance and business operations, oversight means management and supervision. Oversight typically resides at middle to upper levels of management, but should be present at all layers of the organization. When thinking of compliance, oversight means that individuals or assigned groups are presiding over the compliance activities of those over whom they are tasked to watch. Ideally, these groups communicate with one another to discuss important compliance issues. Examples of possible operationalized compliance oversight are provided here, but what you decide to use will depend upon the size of your company and its particular circumstances: Firearms Compliance Management Committee (FCMC): A Firearms Compliance Management Committee could be tasked with the company s ultimate ATF compliance 35

36 efforts. It would be comprised of executives with enough authority to reassign company resources as needed. Key points of interest for the FCMC should include things like the monitoring of compliance metrics, ATF interaction, changes in regulations, status of improvement efforts, and problem resolution. Firearms Transaction Team (FTT): The purpose of a Firearms Trans- action Team is to identify errors or suspicious anomalies in transaction activity, assign responsibility for handling the anomaly, and treat the suspected root causes. The FTT, or a team like it, can gain critical insight into developing transaction issues (e.g., shipping a firearm in the wrong box or to the wrong customer) and bring the issues to closure quickly. Subject Matter Experts (SME): An SME might be a single employee or department designated as the go-to party for questions and answers related to compliance. Given the ambiguous rules, appointing multiple SMEs can lead to conflicting messages that are based upon personal interpretation and experience. ATF Regulatory Liaison: Kind of like the SME, an ATF Regulatory Liaison is an employee or department who should be designated as the organization s point person for contact with the ATF. Any official or unofficial guidance should be maintained by that liaison. The implementation of these committees, or committees like them, will go a long way towards demonstrating your commitment to compliance and greatly increase your ability to respond to compliance issues effectively. Additionally, ensure that any issues identified and corrected follow the other considerations provided in this section, including exception management, transparency and reporting. Class 3 Crash Course - Dealing with the NFA National Firearms Act firearms, including Short Barrel Shotguns, Short Barrel Rifles, Machine Guns, Destructive Devices, Silencers and Any Other Weapon (AOW s) are a class of more heavily regulated firearms governed under the recordkeeping and other regulations previously discussed, but also under the provisions of the National Firearms Act. While this section is designed to familiarize you with the handling, taxation and transfer of NFA firearms, contact your compliance professional or legal counsel for a full breakdown of all elements of the NFA. Registering and Transferring Selected NFA Items There are essentially two ways that an individual can legally obtain selected NFA firearms. He or she can either a) obtain an NFA firearm by legal and pre-approved transfer (like buying it from an NFA dealer) (27 CFR and ), or b) legally 36

37 manufacture the firearm himself or herself (after obtaining prior approval from the ATF to make NFA firearms). NFA Firearms That You ve Manufactured Before you as a business, not an individual are even allowed to manufacture NFA firearms, you must obtain federal permission to do so. To do this, you must obtain the applicable GCA Federal Firearms License, pay the occupational tax, acquire the necessary tax stamp, and secure approval from the ATF. You must also register yourself with the U.S. Department of State, as it has the responsibility of enforcing the provisions of the Arms Export Control Act (AECA) in relation to firearms and defense articles. You must do this even if you don t plan on exporting firearms. This process, in general, is the same for prospective GCA and NFA firearms manufacturers; the main difference is the occupational tax and tax stamp, which are exclusive to NFA manufacturers. You must register the manufacture of any NFA firearms you create. You must do this by filing an accurate notice of the production through ATF Form 2, Notice of Firearms Manufactured or Imported, which you must file with the NFA Branch of the ATF within 24 hours of creation. This form will identify the name and address of the manufacturer (you), the type, and model, length of barrel, overall length, caliber, gauge, identifying marks, serial number, and place of storage for your produced firearm, as well as other elements required on the form. All of the firearms that you manufacture during a single day should be included as a single batch on Form 2. As noted, this filing must be made no later than the close of the next business day. The ATF requires that you keep the form in duplicate, filing the original with the NFA Branch and keeping the copy for your own records. In addition, you ll need to engage in all the necessary requirements of firearms manufacturing as set out by the GCA, including accurate record-keeping in the bound book and firearm serialization. NFA Firearms That You Haven t Manufactured If you have an unregistered NFA firearm, the firearm is most probably illegal. It is unlawful to possess any unregistered NFA firearm. If you believe you are in possession of an unregistered NFA firearm (that is to say that it has never been registered), you are required to contact your local ATF office and surrender it. Currently, there is no provision for registering any unregistered NFA machine gun or amnesty from the government. If you do not, you face the criminal charges with which the unlawful possession of an NFA firearm is associated (26 U.S.C. 5861(d)). Transferring NFA Firearms The other means of legally obtaining an NFA firearm is by an approved transfer. For this, there are some transfers that aren t allowed under federal protocol. Furthermore, when transferring an NFA firearm, there is a long list of regulations by which you must abide. Let s talk about a few of these now. The first thing you need to ensure before conducting the transfer of an NFA firearm is that the firearms in fact, registered. The transfer (and possession) of any unregistered 37

38 NFA firearm is illegal. It is also illegal to transfer an NFA firearm across state borders if the recipient is not an FFL holder, and explicitly approved to receive an NFA type on ATF Form 3, 4, 5, or 9. And the only NFA machine guns that can be transferred to civilians are those originally manufactured before 1986; newer machine guns can only be sold to government or law enforcement agencies. How to Transfer an NFA Firearm The necessary paperwork for transferring an NFA firearm depends upon the licensing of both the transferring and receiving parties. Depending on this, either an ATF Form 3 or an ATF Form 4 should be filled out accordingly. ATF Form 5 is for transfers to a government entity and the ATF Form 9 is for international transfers (permanent export). ATF Form 3: ATF Form 3 (5320.3) should be filed between two Federal Firearms License holders/special Occupational Taxpayers. In other words, ATF Form 3 is to be filed during business transactions between two accredited businesses. This form will allow the transferring party to legally register the firearms to the transferees. In these transactions, transferors do not have to pay the transfer tax. This form must be approved by ATF before the transfer is made. ATF Form 4: ATF Form 4 (5320.4) is to be filled out when either one or both parties involved are not Federal Firearms License holders (and, thus, Special Occupational Taxpayers). These transfers are subject to the NFA transfer tax (unlike ATF Form 3), and the appropriate payment must be included with the filing. In addition, the application should include the transferees fingerprints and photographs on FBI Forms FD-258. The acceptance of this form involves a rather extensive back- ground check. Furthermore, the individual transferee must procure your Chief Law Enforcement Officer (CLEO) to certify the form. It is the CLEO s prerogative to reject a signature on your application for a variety of reasons. Like ATF Form 3, ATF Form 4 must be approved by the ATF before the transfer is made. ATF Form 5: ATF Form 5 (5320.5) is to be filled out by transferors of NFA firearms to government entities (state, federal, or local). In these transactions, the transferor is not required to pay the transfer tax. In addition, ATF Form 5 is used to transfer unserviceable firearms, transfer firearms to FFLs for repair, and for the distribution of estate firearms to their lawful heirs. Like ATF Forms 3 and 4, ATF Form 5 must be approved by the ATF before the transfer is made. ATF Form 9: ATF Form 9 (5320.9) is the application and permit for permanent exportation of firearms. It is to be filled out by transferors of NFA firearms who wish to permanently transfer NFA firearms to entities outside the U.S. without payment of the transfer tax. If the applicant wishes to transfer the firearm(s) tax free to another person who will export the firearm, the applicant must submit ATF Form 9 (5320.9) with documentation that the transfer is a part of the exportation process. This form must be approved by ATF before the transfer is made. In all instances, transactions are subject to local and state regulations as well. For example, for ATF Form 4, some state or local laws require the transferee to include a state or local permit to possess the firearm in the application. Please check your lo- 38

39 cal and state regulations regarding NFA firearms transferences before you engage in a transfer. Transfer/Manufacture Tax The tax on making any NFA firearms is $200 (27 CFR ). The transfer tax imposed is at the rate of $200 for each firearm transferred except that the transfer tax on any firearm classified as any other weapon shall be at the rate of $5 for each such firearm transferred (27 CFR ). This tax is per firearm, and is payable as a money order (cash) or check made payable to the ATF. In the event you are manufacturing the firearm, you should attach this payment to the application forms for registration. This tax generally will only apply to individuals without FFLs, as FFL holders who wish to deal in NFA firearms will pay a yearly occupational tax that relieves them of their duties to pay this tax. Special/Occupational Tax and Tax Stamps As the name suggests, the occupational tax is a tax levied by the NFA Branch of the ATF to individuals wishing to import, manufacture, or deal in NFA firearms. This tax can be paid for by filing ATF Form Special Tax Registration and Return to the NFA Branch of the ATF. The amount of the tax depends on the activity you wish to partake in, but range from $500 to $1, per year. Once you ve paid for your occupational tax, the ATF will issue you a special tax stamp as a receipt of sorts. This tax stamp will show the Tax Year for which you ve paid, the industry activity for which you ve paid, and the identity of the taxpayer (you). This tax stamp can be used to verify that you ve paid the necessary taxes to the NFA Branch for your activity. Your tax stamp is valid from July 1 to June 30th. Don t forget to reapply each year! In terms of taxation, you must pay the occupational tax associated with the activity in which you wish to participate. In other words, an importer must (in addition to applying for the proper licensing and permission) pay for the manufacturing tax if he or she wishes to manufacture firearms as well. However, neither importers nor manufacturers have to pay the Class 3 dealer occupational tax in order to deal in NFA firearms (27 CFR ). Tax Exemptions The six most common exemptions that you can apply for when transferring, dealing in, and/or manufacturing, NFA firearms (26 U.S.C , 27 CFR , and ) are below: 1. The transfer and registration of an NFA firearm is tax-exempt if made between two special (occupational) taxpayers. This transaction will require ATF Form 3 (5320.3). 39

40 2. The manufacture of an NFA firearm is tax-exempt when produced on behalf of a federal or state agency. This will require ATF Form 1 (5320.1). The transfer and registration of an NFA firearm, when on behalf of a federal or state agency, is also tax exempt. This will require ATF Form 5 (5320.5). 3. A licensed manufacture under a U.S. Government contract to make NFA firearms may be granted exemption from his/her requirement to pay the special (occupational) tax. He/she may also be exempt from all other NFA provisions (except those relating to importing), with respect to the firearms made for that particular contract. This exemption may be obtained by requesting directly from the ATF and getting approval in writing from the NFA Branch, stating the contract number(s), and the expected date of termination. This exemption must be renewed on a yearly basis and no later than July 1 of each year. 4. The transfer and registration of an unserviceable firearm which is being transferred as a curio or ornament is tax-exempt. This may be transacted through ATF Form 5 (5320.5). 5. The transfer of an NFA firearm to a lawful heir is tax exempt under ATF Form 5 (5320.5). 6. Any specific court order or other operation of law that specifically with- draws your obligation to pay a specific tax will result in your exemption. Use Caution Violation of the NFA Can Be Criminal Any violation of ATF policy regarding NFA regulations is viewed as very serious. The mere possession of an unregistered NFA firearm can result in fines of not more than $250,000 and imprisonment of not more than ten years, or both. The truthfulness of your reports to the ATF regarding your activity in NFA firearms is expected under penalty of perjury. Failure to pay the necessary NFA tax will be result in liability for the tax, the appropriate interest, and additional financial penalties (26 U.S.C and 6651). Furthermore, such person may be liable for criminal penalties under 26 U.S.C. 5871, including fines of up to $250,000, imprisonment of no more than ten years, or both. 40

41 Common Errors and Issues Found in Retail Stores Failure to Properly Complete Section A of ATF Form 4473 The topmost issue uncovered during ATF inspections is an error in Section A of the ATF Form Per 27 CFR (c)(1), the transferee/buyer is required to complete Section A of ATF Form This includes entering, among other things, their name, sex, address, date and place of birth, and other vital information. (See Appendix 1 for information about Form 4473) However, the transferee may glance over such required information as ethnicity and race (which are required not optional fields). Believe it or not, the most common error (and one that is most easily fixed) is the failure of the customer to enter his or her middle name completely in Box 1 of the 4473 Firearms Transaction Record form. In this field especially, your retail associates should be conscious that if the customer abbreviates his or her middle name, or only provides a middle initial, this not an acceptable entry. If the customer truly has no middle name, the instructions on the ATF Form 4473 indicate that users should make the entry of NMN (for No Middle Name ) in the box. In addition to not entering all this vital information, transferees/buyers do not always answer completely and correctly the questions asked in Section A. These are the questions that help determine if the individual is prohibited from possessing and/or receiving a firearm. Other common places where form fillers trip up are when an individual answers Yes to the question regarding being dishonorably discharged from the Armed Forces when they should really answer No since they actually received a general discharge. Another common mistake is when they answer, Yes to renouncing their United States Citizenship when in fact, they became a United States citizen and renounced their citizenship of their country of origin. By sufficiently training your staff and implementing a regular double check process (say at the end of each day) of your 4473 s, you will soothe your mind and potentially avoid material bumps that you may encounter during an ATF inspection. Remember, the more eyes that check your documents over the better. 41

42 Failure to Sign Form 4473 on Transactions Denied by NICS Another common error that has been identified and which could be considered one of the easiest to resolve is failure to sign denied 4473 forms (27 CFR 124(c)(5)). Often, with a denied transaction, the buyer may be upset and the associate may forget to sign the form because the sale was not completed. In addition to those occasions where the transaction was denied/cancelled based upon a response from NICS, sometimes the ATF Form 4473 is simply not signed at all in a regular, no-issues transaction. At the end of completing ATF Form 4473, the licensee is required to sign and date the form (27 CFR 124(c)(5)). Generally, the person who transferred the firearm must sign and date the form. Failure to Have a Separate File for Forms 4473 When No Firearm Was Transferred Another common error: Failure to have a separate file for Forms 4473 for which NICS/ POC checks were completed but no firearm was transferred (27 CFR (b)). With the volume of firearm transactions that your store may be executing, it is important to make sure that you are not only thorough but also well organized. Situations that result in non-transferal include delayed response by NICS (so the buyer goes elsewhere) and outright NICS denials or cancellations (so the purchase does not proceed). When a customer seeks to purchase a gun and the 4473 form is filled out, both the seller and buyer sign the form. In a delayed transaction the buyer signs twice, to recertify that the information is still true. The last signature that occurs is the retail clerk s signature on the date of transfer. When a customer decides to buy elsewhere, the forms sometimes don t get finished. But no matter the reason, the end result is the same: the buyer never took possession of the firearm so the transfer was not completed. It does not matter who cancelled the transaction. Filing the above mentioned scenarios separately from your completed form 4473 s will not only help you to ensure that the correct serial numbers were logged as dispositions, but will also help with being able to provide ATF requested information in a timely manner. There is a common misconception that the form does not need to be retained if the transfer doesn t go through. That is incorrect: the ATF Form 4473 must be kept in a separate folder for 5 years, while those successful transfer forms must be retained for 20 years. Failure to Timely Record Information in the A&D Record Licensees are required to properly maintain their Acquisition and Disposition (A&D) records (27 CFR (e)). In addition, these entries are required to be made timely. For licensed dealers/pawnbrokers, they have until the close of the next business day to following the date of acquisition to record the required information. However, if commercial records are available and they contain all the required information, the dealer/pawnbroker may delay entry of this information for up to seven days following the day of acquisition (27 CFR (g)). Likewise, licensees are required to enter the sale/disposition information no later than seven days following the date of sale/ disposition. 42

43 In order to reduce the risk of this violation, licensees are urged to develop proper processes and procedures that have supporting checks to make sure they are followed. One of the processes Orchid suggests is to have a routine time for entering firearms transactions into the bound book. For example, set aside the last hour or two of every day to record in any shipments received that day. Failure to Record on ATF Form 4473 the Date on Which NICS Was Contacted As part of the process of completing a firearms transaction, licensees, when applicable, are required to conduct background checks on the transferee/buyer. This involves contacting NICS with the transferee/buyer s information and waiting for a response. The date that NICS was contacted is required to be entered on ATF Form 4473 at Item 21a (27 CFR (c)(3)(iv)). This date is pretty straight-forward and simple. However, this date is not entered some times, often likely due to the employee getting involved in talking to the customer about one thing or another, completing the sale, and overlooking this piece of information. It is important to enter this information, if for no other reason than it will show to the ATF representative that NICS was contacted and that it can be verified, if necessary. As such, it would benefit a licensee to ensure all NICS related information, not just the date, is timely and properly entered. Failure to Contact NICS and Wait the Stipulated Time Prior to Transfer of Firearm As part of the process of selling/transferring a firearm to a non-licensee, a background check normally has to be conducted (27 CFR (a)). However, licensees fail to contact NICS (when applicable) due to a variety of reasons. In addition, even if NICS is contacted, the licensee can fail to wait the stipulated time period (three days) for a response from NICS on whether or not the transferee/buyer is prohibited from possessing and/or receiving a firearm (certain states have waiting periods longer than three days). Again, this might be due to an oversight on the part of the licensee. ATF considers NICS violations to be some of the most serious violations. The background check can be what prevents a firearm from getting into prohibited hands. Take an extra minute to ensure all of the NICS information is properly documented every time. It is an area that is heavily scrutinized during inspections. Failure to Obtain and/or Document Purchaser s Identification As part of the process of completing the firearms transaction, a licensee is required to verify the identity of the individual who is acquiring the firearm (27 CFR (c) (3)(i)). This involves examining the individual s valid government-issued photo identification and documenting this fact on ATF Form 4473 in item 20a (and 20b and 20c, if applicable). This verification is critical in order to ensure that the person acquiring the firearm is who they say they are and that the proper information is provided to NICS when conducting the background check. In most cases, licensee employees do verify the identity of the transferee/buyer, but failed to document it as required. This could be due to a distraction at the time of the sale, glancing over the form too quickly, etc. 43

44 Failure to Halt Disposition of Firearm to a Prohibited Person One of a licensee s primary responsibilities is to ensure the person acquiring a firearm from them is allowed to possess and receive it (27 CFR (c)). This prohibited check by the seller is performed in Section 11 of the 4473 form. If a non-licensee answers Yes to any of the prohibitive questions, the licensee should not complete the transaction. However, sometimes, the employee of the licensee does not see the answers entered on the form by the non-licensee. As a result, when these forms are reviewed by ATF, the licensee is cited since the firearm was transferred despite the fact that the non- licensee answered Yes to a prohibitive question. Whether or not the non-licensee answered the question truthfully or misread the question, the licensee still should not have completed the transaction without first asking the non-licensee for more specific information in order to determine if the sale should be completed. This is a pretty straightforward (and frustrating) error. If it says, Yes on one of these Section 11 questions (with the exception of question 11a or potentially 11l), you can t proceed as a normal sale. Employees need to be trained on the importance of these questions and what steps to follow if they see a Yes. In addition, review of completed forms by another pair of eyes will go a long way to reducing the risk of this violation happening in your store. Failure to Enter Firearms Left for Repair into the Bound Book in a Timely Manner It is important to remember that any firearm that is left in your possession from one business day to another must be recorded as an acquisition in your bound book (27 CFR (e)). Similarly, once the customer comes to pick up his or her firearm a corresponding disposition must occur. Failure to Report Multiple-Handgun Sales Properly A multiple handguns sale is not complete until it is reported to the ATF and the Chief Law Enforcement Official (CLEO) in your area. (27 CFR a). The firearms regulations are very specific on the reporting requirements of multiple handguns sales: Each licensee shall prepare a report of multiple sales or other disposition whenever the licensee sells or otherwise disposes of, at one time or during any five consecutive business days, two or more pistols, or revolvers, or any combination of pistols and revolvers totaling two or more, to an unlicensed person. An exception to this is when the handguns are returned to the person from whom they were originally received. The form used to report multiple sales is ATF Form In most instances, if the two or more handguns are delivered to an unlicensed person on the same day, the form is properly completed, we ve seen. The problem arises when the unlicensed person takes delivery of the firearms over the five business days. ATF representatives, during the course of their review of the A&D records and ATF Form 4473, will come across these situations and the licensee may not even be aware that they occurred. 44

45 Failure to Complete Multiple-Handgun-Sale Form The regulations require that transfers to a customer are considered multiple handgun sales when an unlicensed person acquires two or more pistols or revolvers or any combination of pistols or revolvers totaling two or more at one time or during five consecutive business days (27 CFR a). Generally speaking, this form is not required to be filled out when the pistols or revolvers are returned to the same person from whom they are received. As always, we recommend that you formally review the regulation to understand the full requirement. Failure to Properly Identify Firearm on ATF Form 4473 While completing ATF Form 4473, licensees are required to record the following firearms information that the non-licensee acquired (27 CFR (c)(4)): 1. Manufacturer and/or Importer, 2. Model, 3. Serial Number, 4. Type; and, 5. Caliber or Gauge. In addition, this information should match corresponding information in the A&D records. However, licensees do not always enter all the required and correct information on ATF Form If the firearm is imported, they are required to enter both the manufacturer and importer, if they are different. Serial Numbers have a tendency to either get transposed or incomplete information is entered. Failure to Record Proper Entities for Imported Firearms Another common one for importers: Failure to record, in the case of imported firearms, the name of the foreign manufacturer and the U.S. importer in the bound book and on the Form 4473 (27 CFR (e) and (c)(4)). To avoid this issue is to train your associates to write down exactly what is written on the firearm in both your bound book and on the form By emphasizing the importance of taking the manufacturer, importer (when applicable), serial number, model, and caliber from the actual firearm and not from the box or the customers memory of what it may be will ensure that not only will your book be accurate but you will decrease the risk of a wrong gun in box scenario as well. Failure to Have a Trained Back-Up Record-Keeper Your compliance record- keeper cannot be a single source of failure in your ATF record-keeping process; you need to have someone shadow this person and be able to step in whenever needed. Train more than one person, and enough to cover each shift with multiple people. This is your responsibility having an FFL. 45

46 Failure to Complete Forms as Indicated in Instructions Licensees are tasked to completely fill numerous forms during the course of conducting business under their FFLs. These forms have instructions on how they should be completed. Licensees run afoul of the regulations when they don t follow the instructions, or the instructions are ambiguous and they interpret the instructions incorrectly. Sometimes, different regulations apply to the same form, and that can be a little confusing when the ATF cites them. The ATF Form 4473 is a great example of this. The 4473 requires the transferee/buyer to enter their name and address in Section A of the form. Failure provide required identifying information is a violation of 27 CFR The licensee is also required to enter their trade name and licensee number in Section D on the 4473; however, it is not mentioned specifically in the regulations so it is covered under 27 CFR (a). This would essentially be a violation for not following the instructions on the form versus a violation of a regulation specifically. Common Errors and Issues Found in Manufacturers Failure to Acquire/Dispose or To Do So in a Timely Fashion One of the most common errors found is failure to acquire or dispose of serialized inventory or to do so in a timely fashion. Being aware that this is a common issue will begin to raise the awareness in your company. The ATF recognizes that certain circumstances may arise that prohibit you or your shipping department from disposing of an order of firearms or the receiving department receiving a customer repair on the date of actual shipment or delivery. The regulations allow you, the licensee, a seven (7) day window to acquire or dispose of firearms in your bound book. The key item to remember is that the date that the goods physically arrive or leave your premise is the date that must be recorded in your records. 46

47 Failure to Properly Secure or Record Scrap Within every facet of a manufacturing industry, whether it be firearms or electronics, there are and will always be quality issues. How you handle your quality issues (scrap) is critical to staying compliant. Remove the to-be scrapped item from the assembly floor, vault, or wherever it may be located and store it in a secured isolated area. By securing the to-be-scrapped goods, you are preventing damaged products from making their way back to the floor. Securing is the first step; properly recording your scrap is the next. If you are physically destroying a firearm, you must make the disposition record at the time of destruction. Why take the risk of disposing a firearm from your records where the item has yet to be destroyed, leaving the risk of a theft or destroying a firearm but not disposing of it from your records all of which can negatively impact your inventory. Bottom line: You have a damaged good destroy and dispose of it simultaneously. Failure to Properly Complete ATF Form 6/6A Failure to properly complete ATF Form 6 is a common error that can be corrected with simple housekeeping. Ensuring that your team has accurately filled out ATF Form 6 (Application and Permit for Importation of Firearms, Ammunition and Implements of War), and ensuring that all items being imported into the country match what is listed on the license is a start. The next hurdle is not only ensuring that the same items that were previously listed on your Form 6 are represented correctly on ATF Form 6A (Release and Receipt of Imported Firearms, Ammunition and Implements of War), but also that correct acquisition date is reflected in your bound book and finally returning your completed Form 6A back to the ATF within 15 days of release from customs, not from the date when the firearms arrived at your factory. Failure to Properly Account for NFA The regulations surrounding National Firearms Act devices follow a zero tolerance policy, in fact violations of NFA firearms are often considered criminal in nature. If your company is currently selling in the NFA market or thinking about it, it is critical that you understand the strict regulations surrounding manufacturing, distribution, importing and dealing in NFA devices. Failure to comply with NFA regulations is a big offense and is treated as such. Therefore, take note of the following requirements that are sometimes either misunderstood or forgotten: A Form 2 must be filed within 24 hours of manufacturing an NFA device. NFA devices cannot be transferred without having a Form, 3, 4, 5, or 9 on file. There are specific rules surrounding the destruction (or scrap) of NFA firearms. These scrap rules extend beyond the scrap requirements of a GCA firearm. Failure to Report Theft/Loss in a Timely Fashion Failing to report a theft or loss of a firearm is another area where the ATF has taken a 47

48 zero tolerance stance on delayed reporting of firearms that are discovered to be missing. In 2013, 44,962 firearms (ATF, SHOT Show, Industry Operations Inspection Results presentation) were missing in inventories. It is your responsibility to notify the ATF and your local authorities of an inventory theft loss within 48 hours after you have reasonably determined that it is truly missing. A verbal notification must be made to the ATF hotline and then followed up with ATF Form , Federal Firearms License Theft/Loss Report within the same 48-hour window. It is better to over report than under report. If for any reason you believe that a firearm may be lost or stolen, we advise you to report it as soon as possible. Failure to Mark in Accordance with Specifications Failure to mark firearms in accordance with specifications is the yet another error that has been observed by the ATF in the manufacturing part of the industry. If you are a manufacturer, ensuring that your organization understands ATF Ruling and ATF Ruling , will help you stay compliant and avoid any unneeded headaches during an ATF inspection. In essence, ATF Ruling says that in accordance with 27 CFR and 27 CFR , identification of firearms, armor piercing ammunition, and large capacity ammunition feeding devices, the terms conspicuously and legibly as used therein mean, respectively, that the markings are wholly unobstructed from plain view and that the markings contain exclusively Roman letters and Arabic numerals. In accordance with 18 U.S.C. 923(i) and 27 CFR , Ruling says: all firearms manufactured, to include firearm frames and receivers that are to be sold, shipped, or otherwise disposed of separately, must be identified by a licensed manufacturer in the manner and with the markings required. It is not enough to just mark a firearm, but to also ensure its integrity throughout the whole assembly and production process. One of the issues that can creep into the marking arena is when post assembly coatings are put on the weapon, such as a camouflage paint job. These can fill in the markings and make them out of compliance. Failure to Provide Proper Trace Responses Tracing of firearms is something that some companies take lightly and some even may see as a nuisance. This is why another common error in the industry is failure to provide proper trace responses. A firearm has come to the attention of law enforcement and your company is being contacted by ATF agents because the firearm is marked with your company s name. It is critical that the information that is requested (i.e., disposition name, date, FFL and often times invoice number), are true and accurate. Once your response is given, the agent then traces the firearm through its lifecycle, manufacturer to distributor to dealer to end user. Responding to trace requests within the required 24 hour period of time helps agents and even law enforcement agencies with their investigation. 48

49 Failure to Report Change in Control The ATF has strict guidelines on timeframe of reporting such a shift in control. The regulation requires that the FFL give written notification of the change in responsible persons, to the Chief, Federal Firearms Licensing Center, within 30 days of the change. Failure to report such a change can not only become a hassle come inspection time, but the regulation also states that such a notification is executed under the penalties of perjury talk about something that shouldn t be missed. You should put a note in each Responsible Person s employment file that if they are terminated, then you need to file with the ATF about the termination. The same goes for adding responsible people. Failure to Adhere to Ruling , Temporary Assignments A common issue that has been identified has been the failure to adhere to ATF Ruling , Temporary Assignments. It has been reported that confusion surrounds when an acquisition or disposition should occur and when it shouldn t. Uncertainty can result in incorrect record-keeping. It is important for any licensee that allows for temporary assignment of firearms to understand and know the difference between a firearm that is being sent to a writer for an article to be written, and a firearm that is being sent or transported with your employee on a bone a fide business trip. Since the writer is not an employee of your company, a disposition and then subsequent acquisition when the firearm is returned, must occur. In the instance where a firearm is with an employee of your license (whether the firearm was shipped from or walked out of your facility), for a bona fide business purpose (increase sales or company relationships), neither a disposition nor acquisition should take place. An important differentiation to note is that, if your company s policy allows for an employee to use a firearm for a hunting trip or for a non-bona fide business purpose, a proper disposition and subsequent acquisition must occur. Failure to Adhere to Variance Conditions If your company obtains a variance with a range of serial numbers specific to the model, caliber, and type specified on the variance approval, then the ATF expects that only those serial numbers and those alone are to be engraved on the specified model, etc. The conditions for a variance are spelled out in the approval you get from the Government. Firms that seem to avoid this problem of variance adherence have built internal controls into their processes, so that all requests for items under variance are compared to, and decremented from, an online variance tracking profile. This makes it extremely hard to exceed the limits of the variance when using the electronic systems. If you are found to not be in compliance with your issued variance, the ATF can rescind it, requiring you to follow the initial, strict interpretation of the regulation. Before submitting any variance applications, make sure that they are checked and rechecked to ensure that the information being submitted is accurate. Stopping an issue before it happens is the first step to avoid encountering this error in your business. 49

50 Staying Compliant Inspect Yourself Like the ATF Will Inspect You There is no better way to ensure the demonstrable accuracy of a licensee s records during an annual compliance inspection than a complete bi-directional match between on-hand inventory and the A&D Book, and supporting documentation (when required) for disposed firearms. As you can see, the top focuses of the ATF during the inspection process all center on information that is initially contained in three major sources: (a) Inventory on-hand; (b) A&D Records; and (c) supporting documentation and required forms. For Title I firearms (and even to a degree Title II firearms), the ATF will need a starting point from which to conduct their inspection. This starting point is the licensee s A&D Book. The accuracy of these records will make or break the success of the inspection with respect to verification of inventory and supporting required forms, as this information will be validated against information contained in the A&D Book. Photo credit: Gunsforsale.com A&D accuracy is so critical to the ATF s conduct of the annual inspection that the first step of nearly every annual compliance inspection will be for the assigned IOI to conduct a bi-directional inventory of the licensee s books and physical inventory. Although every IOI may conduct the process slightly differently, in practice, the process is as follows: 1. All physical firearms on the licensed premises and any off-site storage are compared to the A&D Book to ensure that all physical inventory is acquired; and 2. All open entries in the A&D Book are compared to physical inventory to verify there is a physical firearm for each open entry to ensure that no inventory is lost, stolen or unaccounted for. Even after the inventory portion of the annual compliance inspection is complete, the A&D Book will still play a central role in the remainder of the inspection, as closed entries (dispositions) will be reviewed against other required forms (Form 4473, Reports of Multiple Sale, Form 3/4/5/9 for NFA dispositions or Missing Inventory/Theft Loss reports.) By conducting regular bi-directional inventories prior to an annual compliance inspection, a licensee can ensure the accuracy of their A&D Records, ensure the accountability and accuracy of their inventory and verify the accuracy and presence of required forms. 50