BRIEFING NOTE AS GOOD AS GOLD?

MONEY LAUNDERING AND THE GOLD TRADE

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www.crime.financial T H E M I S INTRODUCTION

Almost a quarter of transactions detailed in the recent FinCEN Files investigation involved gold companies, comprising a value of roughly $514.9bn USD. The global prevalence of illegally sourced or traded gold should not be underestimated. Indeed, Reuters has reported on fraudulently stamped bullion being inserted into and laundered across the breadth of the international market, with tainted gold even gracing the vaults of JPMorgan Chase.

The most recent high-profile case study of gold laundering involved Dubai-based trader Kaloti, which operated a cash-for-gold business utilised by criminals the world over to launder illegally derived and conflict-soaked proceeds. Kaloti even purchased Sudanese gold linked to a militia group under investigation for genocide; gold which subsequently entered the supply chains of Apple, Amazon and General Motors, implicating millions of unwitting consumers in the funding of human rights abuses.

Fortunately, gold laundering prosecution is increasing. Last year, the sprawling Danske Bank scandal – dubbed the largest ever in Europe – exposed the laundering of $223bn USD, as part of which a select group of Russian clients was permitted to convert wealth into gold bullion for tax concealment purposes.

An estimated 190,040 tonnes of gold have been mined to date – almost 3,000 tonnes per year – and it is a precious metal that is traded and prized globally. Given its multiple uses as well as perceived cultural and aesthetic value, gold is a much sought-after commodity with considerable scope for both legal and illegal use.

02 ALL THAT GLITTERS: BTAHEC AKTTGRARCOTIOUNN OFD GOLD FOR LAUNDERERS

For centuries, gold has retained inherent value. This stability has seen gold ride out the fluctuations of other more volatile commodities and has unfortunately made it as attractive to criminals as it is to law-abiding citizens - and particularly so in the current, financially unstable climate. Its intrinsic worth also lends it versatility, or what the Financial Action Task Force (FATF) calls a “worldwide exchangeability”, as a global currency which transcends cultural and geographical borders. Gold represents a universally viable alternative to so-called ‘fiat currencies’ (which are paper-based and fundamentally valueless) and is as liquid as cash - an extremely useful feature for organised criminals.

Since the gold trade is largely cash-based, occurring anonymously and without record, authorities are often stymied by a lack of material evidence and so struggle to identify or prove source, intermediaries or purchasers - and by extension definite wrongdoing. Organised crime syndicates can utilise regulatory loopholes to create cash-for-gold businesses through which to integrate and comingle illicit with legal proceeds, and many jurisdictions, recognising gold’s stable and inherent value, even offer incentive programmes and tax relief to promote its trade.

In terms of physicality, gold is malleable and ductile, which means it can be easily manipulated or smelted into different forms as camouflage for customs evasion, often depriving gold source countries of sorely-needed taxes. For instance, Kaloti infamously imported Moroccan gold masquerading as solid silver by means of a coloured coating. Other gold shipments variously disguised as souvenirs, nuts, bolts and belt buckles have also been seized.

03 THE ILLEGAL GOLD TRADE’S BIANECXTKRIGCARBLOE LUINNKSD TO OTHER CRIMINAL ACTIVITY

Given criminal networks’ reliance on money laundering and gold’s suitability as a commodity, illegal trade clearly intersects with a range of criminal activity, especially the drugs trade. Gold and narcotics trafficking routes overlap due to the latter’s sheer number and the fact that much illegally-obtained gold comes from South American jurisdictions, which are also sources of cocaine and cannabis. With trafficking comes the inevitable exploitation of vulnerable individuals and communities. For example, a 2017 Reuters investigation reported that South African smugglers swallow unrefined gold amalgam in condoms.

High gold prices between 2000 and 2010 created a gold rush which coincided with a crackdown in cocaine trafficking, incentivising South American drugs syndicates to diversify their activities. In Colombia, gold has supplanted cocaine as the main source of income for organised crime networks, with violent paramilitary infiltrating supply chains, extorting prospectors and officials, and using gold-laundered money to fund conflict. In Peru, the world’s second-largest cocaine supplier, the illegal gold trade is now twice the size of narcotics.

A substantial portion of laundered gold is also illegally mined, with estimates in Columbia, for example, as high as 80%. Small-scale, artisanal mining accounts for a growing share of global mining (currently at about 12%) and provides a legitimate livelihood for developing and emerging economies. However, these practices, often carried out with simple mechanical equipment or hand tools, are difficult to monitor and have low barriers to entry, making them a prime target for criminal networks.

Unregulated mining destroys virgin rainforest and erodes land, whereas increased global demand for gold incentivises artisanal operations to utilise damaging machinery, explosives and toxic chemicals to boost yield. These chemicals leak, unchecked, into rivers, poisoning the often economically deprived communities and animals that rely on them, and leach into rocks and soil, damaging crops and wildlife. Mercury, known to cause multiple organ damage and failure as well as severe neurological disorders, is used to extract gold flecks from ore before being sluiced away into wild water supplies, whilst cyanide, the lethality of which was exploited in Nazi gas chambers, is frequently employed in Ghanaian mines, where it creates dust-based respiratory problems for miners and nearby communities.

05 THE ILLEGAL GOLD TRADE’S BIANECXTKRIGCARBLOE LUINNKSD TO OTHER CRIMINAL ACTIVITY

The lack of regulation, health and safety training or oversight in artisanal mines, particularly those scaling their operations, poses immediate health risks to miners themselves. The accident rate – though largely unreported and therefore unquantifiable – is high. Mine workers are often mistreated, exploited and trapped in debt bondage, if not forcibly enslaved, with rafts of documented labour abuses, including poor sanitation, high disease incidence, public dismemberment, beatings and killings conducted in the depths of the jungle, away from regulators’ line of sight. Illegal mines also act as hubs for child labour and sex trafficking, with demand for sex services generated by the migration of male miners into the area. One Peruvian mine contains 100 brothels housing 2,000 sex workers, 60% of whom are children (it is believed that sex with a virgin brings good fortune in the mines).

Gold also provides significant opportunity for untraceable terrorist financing. Burkina Faso has banned small-scale mining in districts where known al Qaeda-linked Islamists are active; politico-military and jihadist groups run gold mine security across the Sahel; Nigeria suspended mining in its Zamfara state last year, citing an intersection between armed bandits and illicit miners; and Columbian dissident and narco- terrorist groups are known to be active in the running of Venezuelan mines, violently extorting site ownership and using their profits to purchase munitions.

05 REGULATION OF THE BGAOCLDK INGDRUSOTRUY ND

Although there is no overarching global regulation for gold, many aspects – especially exploration, sourcing and mining – are governed by a patchwork of national rules, international standards and voluntary codes. These include: The EU’s Conflict Minerals Regulation which imposes due diligence obligations to ensure that gold mining and production do not fund conflict; The United States’ Bank Secrecy Act which requires precious metals dealers to establish anti-money laundering (AML) programmes; The London Bullion Market Association’s (LBMA) Global Precious Metals Code, Responsible Gold and Silver Guidance, and Good Delivery Standard which all draw on Know Your Customer (KYC) principles; The OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High Risk Areas, which has been operationalised by the World Gold Council, the LBMA and the Responsible Jewellery Council for their respective sectors.

Gold is also covered by the updated FATF International Standards On Combating Money Laundering And The Financing Of Terrorism & Proliferation, whereas the EU’s Fifth Anti-Money Laundering Directive (5AMLD), transposed in January 2020, introduces an amendment requiring firms to take into account additional high-risk indicators, enhanced due diligence (EDD) and transactional level monitoring for precious metals.

IDENTIFYING AND TRACKING THE ILLICIT GOLD TRADE

Although artificial intelligence is increasingly helping global investigators and companies analyse data to identify suspect financial transactions, the physical and anonymous nature of the gold trade leaves little, if any, electronic trail.

Customs data can, however, form a useful basis for identifying anomalies and detecting illicit trade. In 2016, for example, the United Arab Emirates (UAE) imported $15.1bn USD worth of gold (446 tonnes) from Africa, yet the bulk of this gold was not recorded in equivalent African export data, signifying huge smuggled volumes. Furthermore, dominant commercial mining companies including AngloGold Ashanti, Sibanye- Stillwater and Gold Fields claim not to send metal to UAE refineries, indicating that the majority of imports have been sourced from artisanal mines, which are more likely to be embroiled in corrupt or violent activity.

05 RED FLAG INDICATORS OF GOLD BLAAUCNKDEGRIRNGOUND

The FATF has produced a library of red flag indicators to assist financial institutions and other businesses in identifying and reporting suspicious financial activities associated with the gold sector. These include:

05 BPAROCTKECGTINRGO YOUUNR DBUSINESS

In 2019, Reuters reported on billions of dollars’ worth of gold being smuggled out of Africa annually, primarily through the UAE, on its way to global markets (gold trading accounts for almost a fifth of the UAE’s GDP). Many Western companies avoid the direct handling of artisanal African gold as they are aware of its role in funding conflict and human rights abuses.

However, importing gold from the UAE may be just as risky.In addition to implementing specific red flag indicators, companies should:

Assign a default high-risk rating to material risks involving gold and incorporate transactions into control frameworks. Thoroughly self-assess gold risk based on size and profile. Outsource EDD for larger and higher-risk clients and jurisdictions, and scrutinise clients’ own EDD processes. Factor in human rights abuse risks as part of gold mining, refining and transportation processes. Invest resources in continual organisational education and clarify responsibilities. Share information with each other: the more qualitative and quantitative data is circulated the better equipped companies will be to identify suspicious activity.

Metal refinery Elemetal is a cautionary tale for those that do not invest in these controls. In 2018, the company pleaded guilty to its failure to maintain an adequate AML programme in relation to gold and was subjected to a resulting $15m USD forfeiture, five years of probation, and a five year ban from purchasing precious metals outside the United States. Although Elemetal maintained a written AML policy and had a designated compliance officer, it “wilfully” failed to tailor its AML programme to the specific risks it faced, accepting gold from suppliers despite publicly available information indicating the illegal sourcing of the gold.

05 CONCLUSION

The illegal gold trade poses a significant threat to Get in touch with one of our team to find out more the financial industry. As a stable and inherently and discuss your specific requirements. valuable commodity that is difficult to trace, easily disguisable and usually involved in transactions of Sandeep Sroa an anonymous nature, gold facilitates money Associate Director laundering, fraud, tax avoidance and corruption [email protected] across the world. Its trading also has significant +44 (0) 7786 236 774 human rights and environmental impacts, which we all have a duty to address. Henry Williams Under 5AMLD and FATF standards, compliance Head of Investigations teams in the financial sector should already have [email protected] assigned appropriate risk to the gold industry. +44 (0) 7780 746 290 However, an increase in KYC protocols is required to manage risks effectively - as is an integration of tailored red flag indicators and a Dickon Johnstone blanket assignment of high risk to gold. Themis CEO, Themis can support you in developing effective [email protected] compliance protocols and indicators, and has an +44 (0) 7968 537 954 experienced team of investigators who can help meet your enhanced due diligence needs.

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THINK TANK | COMMUNITY | ADVISORY | TECHNOLOGY | OUTSOURCING

www.crime.financial T H E M I S