Special ACFCS/GFI Webinar Series: Inside the Illicit Gold Trade – Using Financial Tools and Public Policy to Fight Money Laundering
August 4, 2020
By Brian Monroe, VP – Content Development, Association of Certified Financial Crime Specialists
This piece was originally published on July 6th, 2020 by the Association of Certified Financial Crime Specialists and is reposted with permission.
When it comes to financial crime and compliance, all that glitters may not be gold – because if you look closer at the gleaming precious metal, you may see the fingerprints from a wide array of illicit entities, political power brokers and sanctions evaders.
“What makes gold particularly vulnerable to abuse by organized criminals, armed groups, corrupt oligarchs are the nature and size of the market and anonymity it provides,” according to Lakshmi Kumar, Policy Director at Global Financial Integrity (GFI), a trade and transparency watchdog group.
“Gold is a cash intensive business with limited oversight and licensing processes,” she said. “Furthermore, once gold has been mined, there is nothing in its condition to indicate if it was produced legitimately or otherwise.”
This makes tracking the origins of gold “exceedingly difficult but also highly attractive to illicit actors wishing to hide, move or invest their illicit proceeds,” Kumar said.
“The complex and inter-connected nature of the global financial system and trade system further compounds these problems as does the abuse of anonymous and complex corporate ownership structures to skirt global anti-money laundering (AML)/trade-based money laundering (TBML) efforts,” she said.
The FATF highlights gold, precious metals and criminal connections:
The last report from the Financial Action Task Force (FATF) specifically in relation to risks related to the gold sector was published in 2015.
The report noted that gold “remained a vehicle for money launderers and set out the vulnerabilities.
It pointed out that the gold market is cash-intensive, that gold can be traded anonymously, and that transactions are difficult to trace and verify,” according to longtime compliance thought leader and consultant, Dev Odedra, in a report on financial crime and precious metals.
Furthermore, gold is a form of global currency and acts as a medium for exchange in criminal transactions.
Investment in gold provides reliable returns, and gold is easily smuggled and traded.
The report set out some “red flags” and concluded that the characteristics of gold make it both attractive for, and vulnerable to, exploitation by criminal organizations that need to legitimize assets, Odedra wrote.
Gold has intrinsic value, is easily smuggled and can be traded worldwide anonymously.
Reports, investigations and first-hand insights all affirm that risks in this sector are not new and remain as prevalent as ever and are likely to exist for the foreseeable future.
Anti-financial crime professionals and financial institutions should factor in a number of considerations when a connection to the gold sector is present, Odedra said, including:
- Material risks involving gold require a high-risk rating.
- Focus above and beyond standard know-your-customer (KYC) is required, for example: how clients source their gold; the client’s customer base; and the client’s own enhanced due diligence (EDD) processes in managing industry risks.
- Making use of external EDD for larger/higher-risk clients and situations.
- How the addition of transactions connected to precious metals under the FATF’s Fifth Anti-Money Laundering Directive can be built into the control framework.
- Factoring in human rights abuse risks as part of the mining, processing and transporting processes within the gold sector.
Gold can do more than cleanse ill-gotten gains, it can also evade sanctions:
But what makes the illicit trade and money laundering of gold particularly interesting is that the dangers to US financial system from the global trade and exports of gold are not always immediately obvious.
At times, trends can only come to light analyzing trade data.
Engaging in such an exercise, however, reveals that Venezuela, a country under US sanctions, was able to move 7.4 tons of gold to Uganda for refining.
Uganda in turn exported it to the commodity trading hubs of Switzerland and Dubai, with the US in turn importing the gold from Switzerland. Forthcoming analysis from GFI analysis shows that Uganda exports its gold to Dubai and Dubai exports it to Switzerland. This raises the risk that the Venezuelan gold could be making its way back into the US.
Addressing the supply chain due diligence challenges and the AML risks is key to ensuring that the US financial and trade system does not accidentally fund criminal governments that are under US sanctions.
Similarly, in Colombia, gold mining has been tied to financing non-state armed groups and narcotraffickers within the country, as well as large scale money laundering schemes involving the use of anonymous companies.
As discussed in GFI’s report on Colombia and Illicit Financial Flows, Colombia’s second largest gold exporter was found to have used 6,000 gold “registered” suppliers (90 percent of their suppliers) that simply did not exist, were owned by deceased persons, or operated small informal shops that were not even involved in gold transactions.
The company also confirmed they had bought millions of dollars’ worth of gold from Los Urabeños (recently renamed as Cartel del Golfo), one of the largest drug trafficking organizations in the country, thus confirming the links between narcotraffickers and the gold industry.
US imports of gold have increased 407.17 percent from US$2.21 billion to US$11.19 billion through the first four months of 2020 when compared to the same period the previous year, based on an analysis of the latest U.S. Census Bureau data.
Historically, the largest of the US imports of gold have come from countries like Switzerland and Colombia, therefore making an analysis of the trade all the more imperative.
The webinar builds on GFI’s expertise on identifying and estimating the risk from illicit trade in the natural resource sector and GFI’s ongoing work examining the gold trade in Sudan, Uganda and Colombia.
Recordings of the webinar are available upon demand:
The first part of webinar looked at the use of trade data and other financial tools to examine how the illicit trade in gold can be more effectively understood and tracked. Through a combination of the country and company level export data, the webinar demonstrated investigative techniques to identify TBML risks, as well as other red flag indicators of heightened money laundering risks.
Part Two – Illicit Gold Trade and TBML Policy Options
The second part of the webinar discussed the policy options for the US government and the private sector to address the risks of TBML in the illicit gold trade and the effectiveness of ongoing policy measures.