How gold trading continues to trouble AML investigators

As a commodity synonymous with exuberant sums of money, gold has long been a glittering opportunity for financial criminals. Not only an attractive proposition at face value, digging deeper it’s also noteworthy that the trafficking of gold is, remarkably, profitable due to the industry having many exploitable holes.

Seemingly under-licensed and able to ‘legitimise’, the process of money laundering through gold is becoming increasingly problematic. A worldwide operation, sharing much in common with trade-based shipment cases, the illegal transfer of gold remains a problem for authorities, businesses, financial institutions and governments to handle. Not only this, but recent news indicates the further extent to which gold money laundering also brings other heinous crimes into play. So how can companies best equip themselves to investigate holistic supply chains of gold?

From production to trade

Straight from the mining process, once the commodity has been taken out of the ground, there is nothing that can classify if it has been produced legitimately or not, until it is then used to be made into jewellery, parts for technological devices, or into bars or coins to be traded by financiers or investors in gold ETFs, for example. The ease with which gold can be melted down and converted into different forms also mirrors its malleable opportunity for criminals.

Gold can be produced on a large scale through known mining companies, but illegitimate activity is more easily conducted through unregulated mining operators. Known as ‘artisanal small-scale mining’, individuals or small companies can still dig for gold to sell and trade, and their sporadic and untraceable nature opens up the possibility for money launderers to take advantage of the precious metal that they produce. One attraction of these commodities for money launderers specifically is their utilisation in trade-based money laundering (TBML) operations, which masks illicit activity through the worldwide trade of materials.

For instance, TBML practitioners can manipulate invoices of fake gold or diamonds that cover the expense of other offenses caused, posing as the legitimate selling of these precious minerals. Criminals can easily over or under-value the purity, weight or origin of traded gold on customs declaration forms, all this data being difficult to gain and trace. Anti-money launderers have to be wary of gold traders in regards to where gold is being shipped to, or from, high risk jurisdictions (often multiple of these), or to known offenders.

Going global

The expansive trading of gold increases the difficulty of tracking illegitimate funds. In 2012, PwC outlined the significant order of gold producers in the world which still identifies the far-reaching extent to where cross-border TBML can occur: China, Australia, the United States, Russia, Peru, South Africa, Canada, Mexico, Indonesia, Ghana, Uzbekistan, Brazil, Papua New Guinea, Argentina and Tanzania.

The Financial Action Task Force (FATF) has put together a useful resource into real-life global cases studies of how gold is utilised by criminals in multiple ways, including the payment of gold to drug syndicates, the making of gold into common objects to convert the earnings from drug sales, and one case in Belgium identified how multiple transactions of gold – from the seller to the purchasers – can be conducted completely anonymously, with no record of this illicit trading available to investigators. Another strong example of gold’s ability to mask devious shipments are media reports of its trafficking from North to South America disguised as American souvenirs. Gold is, quite frankly, the master of disguise.

The wider worries

The above examples highlight exactly why gold trading is such a prevalent problem for the US, but they also demonstrate how the commodity is used to cover funds gained from the illegal drug industry. Unfortunately, that is just one example. In 2001, during the invasion of Afghanistan, the Taliban and al-Qaeda used the couriering of gold bars to smuggle their money out of Pakistan to the Gulf Region; an estimated $10 million of gold and cash in a three week period.

Flash forward almost twenty years, and activity by high-profile wanted organisations continues, in connection to the gold trade. Venezuela, as a country under sanctions from the US, has been able to transfer 74 tons of gold for refinement to Uganda. President Trump’s administration continues to monitor the country’s trade moves, with sanctions placed on Venezuela’s president Nicolás Maduro and his family.

In very recent news still, US officials seized 81 cars, worth a combined total of millions of dollars, in Miami. Investigators allege that a high-profile Venezuelan businessman is in charge of the operation, and on the US’ most watched lists due to connections to money laundering activities. Since 2017, $450 million of illicit funds traced back to the country have been seized, along with luxury items and properties. Money laundering, through gold or otherwise, remains a struggle between the two nations.

‘40 Recommendations’

This is a problem that needs to be reduced while gold imports instead increase. The latest US Census Bureau data notes that the first four months of 2020 has seen a 407.17% increase in imports of gold compared to the same timeframe in 2019. This now totals $11.19 billion.

Given all of the aforementioned examples, financial institutions need to make sure that their due diligence and AML detection is accurate in order to not facilitate the funding of criminal organisations or governments that are under sanctions. The FATF outlines six recommendations in monitoring behaviour, particularly aimed at the precious metals sector, including taking a risk-based approach, defining ‘dealers’ from producers, buyers and brokers, and detecting cross-border transactions. You can find all ‘40 Recommendations’ here.

The 5AMLD introduced the risk carried by precious metals at a transactional level, albeit rather late. Due diligence into UBOs and relationships in supply chains are keys to tracking illicit funds masked by the production and trading of gold – a practice easier said than done. But the risk posed by the front of gold in money laundering processes has long been successful for opportunists; it is time that financial companies are ready to tighten their procedures to halt the flow of illicit cash through this covert crime.