Precious metals: The ‘gold standard’ in money laundering

Despite significant regulatory attention on emerging financial crime risks related to crypto assets, one of the oldest and most sought-after physical 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 refineries were being inserted into the international market to launder smuggled or illegal gold. It alleged that some of these bars had even ended up 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 to date, 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 offers benefits 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, an increase 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 transposed in 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 consider precious metal risks at a transactional level may be a long overdue addition, especially given that laundering involving gold is not a new phenomenon.

The last report from the Financial Action Task Force (FATF) specifically in relation to risks related to gold was published in 2015. The report 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 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 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 Hakan Atilla, a Halkbank executive, who was convicted in the United States for his role in facilitating international gold trader Reza Zarrab’s complex money laundering and sanctions busting scheme. Zarrab and others were charged in 2016 for conducting transactions worth hundreds 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, provided intimate 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 United Arab Emirates against purchases of gold from Venezuela as it would only be supporting Nicolas Maduro, president of Venezuela, in his raids 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 purchases to 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 a meeting 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 higher value of gold imports, in the billions, from some African states than these states had reported in their export figures. This suggests that undeclared and/or illegal gold can make its way to even the most legitimate of places, hence the need for extra due diligence and vigilance 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 locally in Cayman Islands, involved a man named Kody Zander, who was the fifth person to be charged in Cayman Islands as part of a continuing investigation into the alleged money laundering of millions of dollars’ worth of gold. Zander and four others are alleged to have had various roles in the importation of gold worth $4million using a private jet, in which $135,000 in cash was also found hidden under 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. He detailed how, during his days undercover, he had met with a director of a Panama bank who was a friend of Panamanian general Manuel Noriega. The director revealed how a Swiss bank at the heart of a money laundering operation had arranged for regular delivery of gold via private jet to a remote airstrip in Colombia. The gold was unloaded from the plane in exchange for cash, with the gold sold to traffickers at 15% below market rate. The jet flew to several haven countries in the Americas to deposit the cash, which was later transferred back to Switzerland. The traffickers melted the gold and sold it as locally mined gold to the Colombian Central Bank in exchange 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, but when one looks at the major precious metals money laundering-related scams, I think it is clear that not much has changed,” Mazur said. “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 larger accounts in the precious metals business, there is no substitution for what I consider to be ‘real EDD’. When I say that I mean the type of EDD that a specialised outside resource can provide”. External due diligence reports provided by specialist vendors can provide intelligence 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 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:

• 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 the client’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.