Kenneth Carroll: ATF Audits Of Firearms Dealers

The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) is responsible for licensing persons engaged in manufacturing, importing, and dealing in firearms. ATF also ensures that those who are licensed to engage in those businesses do so in compliance with applicable laws and regulations. It is critical that federal firearms licensees (FFL) comply with the Gun Control Act (GCA) of 1968 and its implementing regulations in order to assist law enforcement efforts, prevent the diversion of firearms from lawful commerce to the illegal market, ensure successful tracing of firearms and protect the public. ATF industry operations investigators (IOIs) conduct inspections of FFLs to ensure compliance with the law and regulations and to educate licensees on the specific requirements of those laws and regulations. Additionally, IOIs review required records of the FFLs to determine and identify individuals potentially associated with diverting firearms to illicit markets or involved in other criminal activity.

During inspections, IOIs suggest voluntary measures that licensees can take to improve compliance with the GCA and help reduce violent crime and protect the public through partnership with ATF. If violations are discovered during the course of an FFL inspection, the tools that ATF has available to guide the FFL into correction of such violations and to ensure future compliance include issuing a report of violations, sending a warning letter and holding a warning conference with the industry member. Despite these actions, on rare occasions, ATF encounters a licensee who fails to comply with the laws and regulations and demonstrates a lack of commitment to improving his or her business practices. In such cases where willfulness is demonstrated, ATF’s obligation to protect public safety may require revocation of the FFL. There were 134,738 FFLs in fiscal year 2017. This includes firearm licenses for dealers, manufacturers, importers and collectors. During that time, ATF conducted 11,009 firearms compliance inspections. In 2017, less than half of 1% of FFLs were revoked. Part of ATF’s core mission is to protect the public from violent crime involving the use of firearms. The FFLs who willfully violate the laws and regulations preventing ATF from accomplishing its mission to protect the public are few. Willfulness is not defined in the regulations, but is defined by case law to mean the intentional disregard of a known legal duty or plain indifference to a licensee’s legal obligations.

In the case of an FFL who has willfully violated the law, has shown an intentional disregard for regulatory requirements or has knowingly participated in criminal acts, revocation often becomes the only viable option. It should be noted, however, that ATF does not revoke for every violation it finds and that revocation actions are seldom initiated until after an FFL has been educated on the requirements of the laws and regulations and given an opportunity to voluntarily comply with them but has failed to do so. Violations commonly cited in revocation cases include failure to account for firearms, failure to verify and document purchaser eligibility, failure to maintain records requisite for successful firearms tracing and failure to report multiple sales of handguns. If revocation is pursued, procedures are followed as specified under Title 27 Code of Federal Regulations Part 478. The licensee is provided with a notice of revocation that includes findings describing the reasons for pursuing revocation. The licensee has 15 days from receipt of the notice to request a hearing. The licensee may be represented by an attorney at the hearing and may bring employees and documentation to address the violations cited in the notice. ATF is generally represented at hearings by ATF counsel and the IOIs who conducted the inspection(s) resulting in the revocation recommendation.

What is an ATF Inspection (otherwise known as an FFL Compliance Inspection)?

An ATF Inspection Advisory applies to all Federal Firearms License (FFL) types including firearm manufacturers, firearm importers, firearm distributors and firearm dealers (otherwise known as firearm retailers).

What Happens During an ATF Dealer Inspection or ATF Manufacturer Inspection?

“During inspections, ATF industry operations investigators (IOIs) review records, inventory, and the licensee’s conduct of business. To assist in meeting and maintaining compliance, investigators also provide instructional and educational materials about the requirements of the law and regulations and best business practices.”

A major part of the inspection is what is called a Book to Physical or “Bi-Directional Serial Number Inventory.” During this audit step, the ATF performs a tracing of serialized assets found at your facility to the Book of Acquisition and Disposition (or Bound Book). Likewise, the test is performed in the reverse direction – Serial Numbers found in the Bound Book are traced back to the physical asset. Both steps are performed to ensure that the records properly match the serialized firearms under the control of the company. To learn more about conducting a leading Bi-Directional Serial Number Inventory in advance of an ATF Inspection, read the following whitepaper called Serialized Inventory Analysis for the Firearms Industry.

What are the Top ATF Compliance Inspection Violations?

Compliance failures, which constitute violations of law and regulation, commonly disclosed during the inspection process include those shown below.

What Happens After an ATF Inspection?

“When violations of the law and regulations are disclosed during an inspection, a Report of Violations is issued to the licensee that outlines the discrepancy and the requirements for corrective action. ATF also works to gain cooperation and compliance from FFLs by issuing warning letters and holding warning conferences. Despite these remedial actions, on rare occasions ATF encounters a licensee who fails to comply with the law and regulations and demonstrates a lack of commitment to improving his or her business practices. In such cases where willfulness is demonstrated, ATF’s obligation to protect public safety may require revocation of the federal firearms license. ATF investigators assist licensees in developing corrective actions when violations are identified and encourage licensees to constructively engage in the remediation process. In this way, ATF attempts to bring licensees into compliance before it becomes necessary to take administrative action against the licensee. When an ATF inspection results in a warning conference or potential revocation, the licensee is provided an opportunity to develop a written plan that details the steps taken to correct the problems identified and measures implemented to ensure future compliance.”

How Do I Pass an ATF Dealer Inspection or ATF Manufacturing Inspection?

There is no full-proof, secret answer to ensuring that you will pass your Dealer Inspection or Manufacturing Inspection with zero violations. But there are many things you can do to decrease the likelihood of receiving a violation. The most obvious answers are: know the regulations; and comply with them.

The following are a few recommended steps for minimizing your FFL inspection risk.

• Get educated on the latest in ATF Firearms Compliance. There are only a few very detailed programs available for firearm retailer compliance education and even less for firearm manufacturing compliance education. One of the most thorough programs available is called the Firearms Compliance University. The University is available on-line and offline and is designed for every employee of every FFL in the United States. Almost 100% of ATF inspection violations can be prevented with solid education.

• Hire an expert to help you implement good business processes. For example, team of Former ATF Industry Operations Investigators (IOI), former attorneys and FFL executives have performed countless ATF inspections of Firearm Dealers, Firearm Manufacturers and Firearm Importers.

• Practice your inspections before the big day.

ATF AUDITS AND REGULATIONS

It’s natural to get a little nervous when the ATF shows up at your store, but a little knowledge and perspective will help you stay calm. So we thought we would dedicate this post to describing what to expect during an ATF audit and what you should do.

ATF AUDIT – FIRST STEPS

An ATF IOI (Industry Operations Investigator) will arrive at your store and immediately ask for a manager or the owner. The agent will provide their identification, a business card, and inform you that he/she is there to conduct an audit. Sometimes the ATF agent will call in advance to let you know they are coming, but it is more common for them to simply show up. If you have a larger store, there may be multiple agents. Expect to begin with an opening conference during which they will explain everything they intend to do. They will ask for a space where they may work, and it’s in your best interest to provide them the best you have to offer a well lit space, a comfortable chair, reasonable temperature preferably away from your retail sales floor. The better their work environment, the faster they can work, and the faster they are out of your store.

REQUESTED DOCUMENTS

Here are the records the ATF IOI will likely request:
• Your bound book
• Forms 4473
• Multi-Handgun Sales (and long-guns if you’re in a border state)
• Reports of lost or stolen guns
• NFA registration document
• Commercial documents being kept in lieu of making certain required entries

ATF AUDIT PROCESS

Their first order of business will typically involve checking your physical inventory against your bound-book. In years past, the ATF conducted spot checks of your inventory, but that is no longer the case. Any audit the ATF now conducts will be a 100% audit. That means the following:

• They check the serial number on the steel of every single firearm in your store and look for an open acquisition for that firearm in your bound-book.

• They make sure all indisposed lines in your bound-book are physically present in the store. If not, you likely failed to record a disposition or the firearm was lost/stolen and not yet reported. Rapid Gun Systems helps your ATF agent conduct this check faster. You can print all of your open acquisitions for the IOI so he/she won’t have to sort through pages of disposed firearms when reconciling your inventory. Remember – the easier you make their job, the faster they will be out of your store.

• Next the ATF agent will review your 4473s – typically about 3 to 6 months’ worth. The IOI’s job is to determine if you’re being complete and diligent. It only requires about 8 to 10 seconds for anyone (including your IOI) to check a 4473 for completeness. You should have a “second set of eyes” policy whereby every 4473 is reviewed by the sales person and a second person before it is filed. This means you’re double sure your 4473s are complete before the ATF shows up. It is a simple form, but it is easy to miss a field. Rapid Gun Systems has an integrated electronic 4473 that helps assure that your customers do not omit a field. The firearm section is auto-completed, too. This avoids transcription errors with serial numbers, manufacturer, caliber, etc. Fewer 4473 mistakes result in a happier ATF audit.

The ATF will compare the information on your 4473 to the disposition records in your bound-book. He/She will also seek to identify any instances of multiple handgun purchases (and long-gun in border states) to assure you’re filing 3310s. The IOI will request a closing conference with you when the audit is complete. This is when you’ll be made formally aware of any violations identified.

The most important thing to remind yourself during the audit process is that the ATF does not revoke an FFL holder’s license on a whim. Their audit will help you identify what you’re doing well and what needs more attention. Hopefully you won’t have any problem areas, but if you do and you take quick action to make corrections, you’ll be just fine. Stores who run Rapid Gun Systems are in an even stronger position because of our built-in checks and focus on compliance. Ongoing education is included in your support contract with us – and we want you to use it so that we are all sure you’re using the system correctly. We can even help you conduct your own dry-run in-house audit.