Money Laundering Bulletin, 12 February 2023
Precious, fungible, transportable, accept everywhere – gold is made for laundering. Paul Cochrane, in Pietermaritzburg, considers the challenge for regulators and some attempts to meet it.
The precious metals and stones sector is increasingly under the spotlight for money laundering (ML) and terrorist financing (TF). Fungibility, complexity of supply chains and varying levels of oversight worldwide makes gold, especially, the precious metal of choice for launderers.
Ancient scarcity
Popular as a medium of exchange since antiquity, in part due to its scarcity, just 205,238 tonnes of gold has been mined throughout history, according to the World Gold Council (WGC). That is the equivalent of a 22 square metre cube – the size of a single car garage.
Around two-thirds of all gold has been mined since 1950, with 4,314 tonnes extracted over the past decade, of which 51% (2,215 tonnes) has been used to make jewellery, 26% (1,136 tonnes) for bars and coins, and 8% for technology (337 tonnes). (1)
Last year (2022), demand for gold surged by 18%, its highest in a decade, driven in part by central banks acquiring 1,136 tonnes, double that of 2021. Retail demand also rose, hitting a nine-year high at over 1,200 tonnes, with the rally driven by high inflation, the war in Ukraine spooking financial markets and diversification away from the US dollar, according to the Financial Times. (2) In the last quarter of 2022, the average value of gold trade at the London OTC precious metals markets, the oldest and biggest financial market for gold, hit US$228.88 billion according to the London Bullion Market Association (LBMA). (3)
“Gold is a safe haven mineral, so people tend to rely on it and continue to do so in times of economic turmoil,” said Lakshmi Kumar, policy director, at Washington DC-based Global Financial Integrity (GFI), a think tank.
Out on its own
“Gold is deserving of the attention it gets. Silver is not mined as widely or as profitable, and platinum needs a high level of expertise to process and is not as high risk,” said Marcena Hunter, thematic lead on extractives and illicit flows at the Switzerland-based Global Initiative Against Transnational Organised Crime. In the last quarter of 2022, the average weekly turnover in silver traded on the London OTC precious metals market was US$5.57 billion and palladium US$5.16 billion, according to the LBMA. (4)
“More work could be done on coloured gemstones, but due to the value of stones the sector doesn’t seem to pose the same risks as gold, and is not as fungible or easily exchanged. Diamonds are also not as fungible. In the mineral class, gold certainly poses the biggest vulnerabilities and risks by far,” she said.
Irresistible luster
For criminal activity, gold has long held its allure, with a high value to weight ratio: a Troy ounce (31.1 grams) was worth US$1,864 in February 2023, according to the World Gold Council (WGC) – gold is only sold as Troy ounces not by the regular ounce or 28.35 grams. It also offers near perfect obfuscation, being easy to melt down to remove all traceability.
“Gold is an inherently really difficult commodity to regulate due to the ease of hiding origins and ownership, how it continues to be easy to smuggle, and how it is used as a financial vehicle in exchange for value nearly everywhere in the world. There is a lot about gold that makes it attractive to criminals and illicit networks, and this has not changed (over time),” said Hunter. “As new actors in the compliance and regulatory space get more interested in gold and what is happening, the more they realise how complex it is and why gold is so difficult to regulate. The complexity of the sector really continues to be a challenge,” she said.
In the loupe
As a result, it is not surprising that gold has come increasingly under the AML/CFT spotlight over the last few years, driven in part by exposes by the media and civil society into “conflict gold”, smuggling, and illegal mining. The 'FinCEN Files' leak in 2020 revealed that a quarter of all suspicious transaction reports submitted to the UK financial intelligence unit (FIU), equivalent to US$514.9 billion, involved gold companies, according to the International Consortium of Investigative Journalists (ICIJ). (5)
There has also been impetus by international organisations, such as the United Nations Office on Drugs and Crime (UNODC), to include trafficking and the illegal mining of gold and precious metals as environmental crimes. In January (2023), the UNODC released guidance on Illegal Mining and Trafficking in Metals and Minerals, which recommends UN member states to “introduce offences related to the possession of and trafficking in metals and minerals of illicit origin”. (6)
Law and regulation – some, finally
Some countries have already responded. In 2022, Switzerland introduced new legislation requiring due diligence and reporting obligations relating to conflict minerals (including gold), while the Monetary Authority of Singapore (the central bank) issued new AML rules for financial institutions involved with precious metals and stones. The United Arab Emirates (UAE) last year introduced new rules on responsible sourcing of gold imports.
Kumar commented: “All the years of reporting and exposing the issue is leading to legislation and governmental action to rectify the situation. These are positive steps we shouldn’t discount or ignore, such as by the UNODC. The UNODC is also looking at how gold moves through free trade zones. But we are now in a waiting period to see how these new measures take effect, and what it will look like. Will gold drop off the radar, and no longer be a shiny objective, like what happened with diamonds?” she asked.
Kumar is referring to the decline in concern about the illicit diamond trade - ‘conflict’ diamonds in particular - in the years since the Kimberly Process (2003) was inked to better regulate the sector. Indeed, the Financial Action Task Force ‘s (FATF) last guidance on diamonds was in 2013. (7)
More action is needed on gold. There has been work on reducing criminal engagement in the sector in sub-Saharan Africa, but developments have been slow, Kumar said. The US Treasury, in March 2022, sanctioned Belgian businessman Alain Goetz and his network of companies, accusing them of aiding the smuggling of gold from the Democratic Republic of Congo (DRC). Targets included the Goetz-operated African Gold Refinery, in Uganda.
“Some governments are still trying to figure out how gold is involved in money laundering, despite a lot of the techniques being known and understood. In the interim, some illicit gold-related activity will continue to flourish if there is not the political will to tackle it,” said Kumar.
Guidance still holds – FATF
Yet while there is more high-level discourse on gold and illicit finance, FATF has not issued any new guidance on ‘money laundering and terrorist financing risks and vulnerabilities associated with gold’ since 2015. (8) A FATF official told MLB: "The methods described are still relevant today. FATF hasn’t done any further research on these topics since then.”
Hunter said the FATF 2015 report still serves as a good primer on why gold is inherently attractive, but thinks an update would be valuable, to highlight more recent money laundering techniques.
Integration risks
One growing concern is the spread of the gold and narcotics nexus from Latin America, where there is a connection between mines, refineries and organised crime. Hunter said cases in Europe and Asia show this typology is spreading. Gold has also been used to evade sanctions, with risks that Russia may be exploiting the trade as part of its financial strategy for the war in Ukraine.
Concentrate
“If there are any ways to smuggle gold that are creative, and allows the movement of money, I’m sure criminals will find it, and we are starting to hear of gold concentrate as one of those methods,” said Hunter. An estimated 12 percent of global gold production stems from concentrates, according to precious metals consultancy Metals Focus, in which it is found mixed with other metals and minerals, and must be separated out. (9) There is scope to pass off a concentrate as some other mineral(s) depending on the percentage of gold present. “There has been less work done on gold concentrates and illicit crime, yet we are seeing large exports and it’s a US$50 billion industry. It is an area with a lot of opacity and secrecy,” said Kumar.
Africa to Dubai
As for major hubs for illicit gold sales, the UAE’s Dubai continues to be a major destination, notably for smuggled African gold, said Hunter. The UAE has been under scrutiny since being grey-listed by FATF in 2021, with its gold trade cited as a vulnerability. “Dubai is engaging more around the issue than it has in the past, whether because of FATF or increasing pressure with sanctions on Russia. It is giving the appearance they are taking the issue more seriously,” said Hunter.
Farai Maguwu, director of the Centre for Natural Resources Governance (CNRG) in Zimbabwe, said Dubai is the prime destination for smuggled gold and diamonds from the country, with an estimated 60 kilogrammes of gold flown from this southern African country to the Emirate every month. Zimbabwe plays host to 100 industrial gold mines, according to the International Crisis Group, and an unknown number of artisanal mines.
“Dubai’s policy is to take advantage of corrupt African regimes by getting their minerals and laundering them in Dubai and re-selling them. I don’t think they are sincere [in cleaning up] and are just pretending to be transparent,” Maguwu told MLB.
Zimbabwe's experience points to interconnected problems with gold and crime, corruption and weak governance. The country’s sole buyer and marketer of gold - Fidelity Printers and Refiners (FPR) – receives between 25 to 30 tonnes a year of locally mined gold, yet CNRG estimates around 100 tonnes a year is flowing out of the country, with the other gold either sourced locally from artisanal miners or smuggled from surrounding countries. (10)
“Zimbabwe is an easy country for smuggling minerals, being a transit route, as well as for drugs. We have a very big governance difficulty, with the country’s leadership involved in smuggling,” said Maguwu.
Artisans – left with no option?
The country is also illustrative of the challenges around regulating the gold supply chain. Heightened focus on the sector led the European Union following the adoption of Regulation 2017/821, effective January 2021, on supply chain due diligence on gold in line with the five steps of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. (11) As a result, major gold refiners engaged derisked smaller, especially artisanal miners, said Hunter (12), but it has proved an “ineffective approach.”
Disengagement has merely increased criminal influence. “Gold is a livelihood issue, and when governments crackdown on mining, or give concessions to foreign-owned mining companies, this can disenfranchise the population as it undermines livelihoods (dependent on gold mining),” she said.
Pressure to clean up the gold trade is also coming from international traders: “We are seeing the likes of the London Bullion Market Association (LBMA) encourage banks and refineries to lean in and engage with the gold mining sector to improve practices rather than disengaging or stopping sourcing, which we saw in the past. It is a developmental issue. It is not just regulatory efforts that are needed to support the development of responsible sectors. We need some outside of the box thinking to bring in new innovative strategies and approaches,” said Hunter.
The LBMA told MLB: “Money laundering is a criminal offence and the responsibility for investigating allegations, and, as appropriate, preferring charges [sic], is in the hands of law enforcement agencies not LBMA. Clearly, however, any member of LBMA or any good delivery list (GDL) refiner, convicted of being involved with money laundering, will lose their LBMA membership or GDL accreditation.”
NOTES:
1) https://www.gold.org/about-gold/market-structure-and-flows
2) https://www.ft.com/content/ef6ed550-422a-4540-a8af-41ff2ac30e67
3) https://www.lbma.org.uk/prices-and-data/lbma-trade-data
4) https://www.lbma.org.uk/prices-and-data/lbma-trade-data
5) https://www.icij.org/investigations/fincen-files/fincen-files-investigations-into-the-gold-trade-from-around-the-world/and https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3758442
9) https://www.ausimm.com/bulletin/bulletin-articles/gold-concentrate-marketing-101/
10) Zimbabwe's disappearing gold. The case of Mazowe and Penhalonga. https://www.cnrgzim.org/_files/ugd/e33f9c_c5efdb731bef475fbab6c05672b37fdc.pdf?index=true
11) https://www.oecd.org/corporate/mne/mining.htm
12) See report: Lessons learned on managing the interface between large-scale and artisanal and small-scale gold mininghttps://www.gold.org/esg/artisanal-and-small-scale-gold-mining
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