Blog: Precious metals: The ‘gold standard’ in money laundering (2024)

Published on Nov 08, 2019

Despite significant regulatory attention on emerging financial crime risks related to crypto assets, one of the oldest and most sought-afterphysical assets — gold — remains a prevalent money laundering risk.

A recent Thomson Reuters Regulatory Intelligence article detailed how gold bars fraudulently stamped with logos of major refinerieswere being inserted into the international market to launder smuggled or illegal gold. It alleged that some of these bars had even endedup in the vaults of JPMorgan Chase & Co.

With multiple uses, ranging from components in mobile phones to medicine, an estimated 190,040 tonnes of gold has been mined todate, and 2,500-3,000 tonnes are mined each year.

As a result, it remains a commodity which is very much in demand and which has considerable scope for legal and illegal use. It offersbenefits to both criminals and investors: it is a bearer instrument, easily traded and typically maintains a stable price.

Although many in the anti-financial crime compliance industry already assign a risk to the gold industry, and to clients in the sector, anincrease in know-your-customer (KYC) protocols and assignment of high risk is required if they are to manage risks effectively.

EU Fifth Anti-Money Laundering Directive and FATF

There has been widespread coverage of the changes which the Fifth Anti-Money Laundering Directive (5MLD), due to be transposedin January 2020, will introduce with regards to beneficial ownership registers, politically exposed persons (PEPs) and virtual assets.

One element which has received rather less coverage is that 5MLD also introduces a small amendment in relation to gold under the“precious metals” category of risk.

5MLD now introduces the following under Point “(f)” in Annex III, Point 2 – Product, service, transaction or delivery channel risk factor:

“(f) transactions related to oil, arms, precious metals, tobacco products, cultural artefacts and other items of archaeological, historical,cultural and religious importance, or of rare scientific value, as well as ivory and protected species”

With the operative word being “transactions”, the scope for risk considerations will increase under 5MLD. Notably, the Fourth Anti-Money Laundering Directive (4MLD) made no direct references to precious metals. The specific introduction under 5MLD to considerprecious metal risks at a transactional level may be a long overdue addition, especially given that laundering involving gold is not a newphenomenon.

The last report from the Financial Action Task Force (FATF) specifically in relation to risks related to gold was published in 2015. Thereport said 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.

Furthermore, gold is a form of global currency and acts as a medium for exchange in criminal transactions. Investment in gold providesreliable returns, and gold is easily smuggled and traded. The report set out some “red flags” and concluded that the characteristics ofgold make it both attractive for, and vulnerable to, exploitation by criminal organisations that need to legitimise assets.

Prevalence of gold in financial crime

One of the most prominent recent cases involving gold transactions culminated, in part, in 2018 with the conviction of Mehmet HakanAtilla, a Halkbank executive, who was convicted in the United States for his role in facilitating international gold trader Reza Zarrab’scomplex money laundering and sanctions busting scheme. Zarrab and others were charged in 2016 for conducting transactions worthhundreds of millions of dollars on behalf of the Iranian government and entities.

The two diagrams Zarrab drew for the court, included as exhibits on pages 27 and 28 of court documents from February 2018, providedintimate detail on the complex network of transactions involving front companies and banks.

The focus on gold-related risks has intensified during 2019. In February, Marco Rubio, a U.S. senator, warned Turkey and the UnitedArab Emirates against purchases of gold from Venezuela as it would only be supporting Nicolas Maduro, president of Venezuela, in hisraids on the country’s gold reserves. Turkey’s imports of gold from Venezuela were reported to have amounted to £688 million in 2018.

In April this year there were unconfirmed reports that the FATF had recommended that Pakistan track all gold sales and purchasesto manage its money laundering and terrorist financing risks. In the United States, although a U.S. State Department official declined to comment on record, it was reported, also in April, that State Department officials had informed industry groups and companies at ameeting in New York that jewellery businesses must know and declare where all their gold originates from.

Against the backdrop of these reports, an investigation this year found that in 2016 the United Arab Emirates reported a much highervalue of gold imports, in the billions, from some African states than these states had reported in their export figures. This suggeststhat undeclared and/or illegal gold can make its way to even the most legitimate of places, hence the need for extra due diligence andvigilance from those in the anti-financial crime compliance field.

There have also been a number of gold-related financial crime cases during 2019 and one of the most recent, reported only locallyin Cayman Islands, involved a man named Kody Zander, who was the fifth person to be charged in Cayman Islands as part of acontinuing investigation into the alleged money laundering of millions of dollars’ worth of gold. Zander and four others are alleged tohave had various roles in the importation of gold worth $4million using a private jet, in which $135,000 in cash was also found hiddenunder a compartment.

Expert insight: Robert Mazur

Robert Mazur, who worked undercover to infiltrate Pablo Escobar’s Colombian Medellin Cartel and now provides consulting services,has shared his insights into gold laundering.

The Cayman Islands case bore striking similarities to the use of gold in money laundering which Mazur witnessed many years. Hedetailed how, during his days undercover, he had met with a director of a Panama bank who was a friend of Panamanian generalManuel Noriega. The director revealed how a Swiss bank at the heart of a money laundering operation had arranged for regulardelivery of gold via private jet to a remote airstrip in Colombia. The gold was unloaded from the plane in exchange for cash, with thegold sold to traffickers at 15% below market rate. The jet flew to several haven countries in the Americas to deposit the cash, which waslater transferred back to Switzerland. The traffickers melted the gold and sold it as locally mined gold to the Colombian Central Bank inexchange for pesos.

Despite the changes in focus in managing money laundering risks related to gold, it remains a difficult area to address.

“The fact that precious metals dealers are, under U.S. and some other countries’ laws, financial institutions, has certainly helped, butwhen one looks at the major precious metals money laundering-related scams, I think it is clear that not much has changed,” Mazursaid. “I have witnessed laundering through precious metals businesses first hand since the 1970s, for roughly the past 45 years.Abusing this industry to move illicit funds may be new to some, but not for me.”

In practical terms, Mazur said, anti-financial crime professionals can do more to manage risks. While standard enhanced due diligence(EDD) methods may work for smaller accounts involving gold, larger accounts require special attention. “When it comes to largeraccounts in the precious metals business, there is no substitution for what I consider to be ‘real EDD’. When I say that I mean the typeof EDD that a specialised outside resource can provide”. External due diligence reports provided by specialist vendors can provideintelligence not widely available in the public domain.

Considerations

Gold has intrinsic value, is easily smuggled and can be traded worldwide anonymously. Reports, investigations and first-hand insightsall 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-financialcrime professionals and financial institutions should factor in a number of considerations when a connection to the gold sectoris present:

• Material risks involving gold require a high-risk rating.
• Focus above and beyond standard KYC is required, for example: how clients source their gold; the client’s customer base; and theclient’s own 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 5MLD 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.

Originally published by Thomson Reuters ©️Thomson Reuters

Dev Odedra is an independent anti-money laundering and financial crime expert. He has over a decade of experience in managing financial crime risk in the retail, corporate and investment banking sectors. His expertise covers investigations, advisory and controls implementation and improvement.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.