News & Press: Money Laundering

Anonymity and limited supply chain oversight making gold increasingly attractive to criminals

Friday, July 24, 2015  
Posted by: Brian Monroe
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An international watchdog group is warning anew of the financial crime risks tied to gold, highlighting that illicit groups are more aggressively ingratiating themselves in the mining, refining and distribution process to evade stronger controls in the formal financial system.

The Paris-based Financial Action Task Force (FATF) Monday released the 42-page report after querying bodies across the gold supply chain – small and large scale mining operations, smelting businesses and recyclers and retailers – and concluding that the metal in demand since time immemorial has again become the coin of the realm for money launderers, terror groups and corrupt kleptocrats.

The group, which sets the global anti-money laundering (AML) agenda, has boiled down the three main points that make gold, like other high-value commodities such as diamonds, so valuable to such a wide array of international criminal syndicates: its anonymity, portability and convertibility.

The report should also prod financial institution compliance teams to review their roster of such businesses and see if they have instituted financial crime compliance programs – or at the very least collect details on customers, such as identities or fingerprints. In the US, gold operations must have AML processes if they buy and sell more than $50,000 annually, an obligation since 2006.

FATF gave special attention to the seemingly ubiquitous “cash for gold” businesses that have sprung up in recent years as gold’s value has surged. The report stated they can be easily set up by criminal groups, can transact with customers in cash, and disappear before investigators or examiners can find them, even if they are technically subject to the panoply of AML program requirements.

Gold’s ‘lower visibility’ is boon for illicit actors

“Gold is an extremely attractive vehicle for laundering money,” according to the FATF. “It provides a mechanism for organized crime groups to convert illicit cash into a stable, anonymous, transformable and easily exchangeable asset to realize or reinvest the profits of their criminal activities.”

As well, alluring to criminal operations is the “anonymity generated from the properties of gold which make tracking its origins very difficult to do,” according the report. It also noted gold is a “universally accepted currency that has remained stable in spite of fluctuations in global financial markets.”

What has changed, though, to give gold more luster in recent years is that internationally enforced AML measures are “influencing a shift in criminal behaviors towards methodologies with lower law enforcement visibility,” according to the report, noting that gold can even be used to pay for drugs and pay mules and lower-ranking smurfs, along with make a corruption-tinged transaction nearly undetectable because it doesn’t touch the banking system.

To understand gold customers, know sector trends

“Gold is easily transportable, easy to smuggle, has global value and you can buy it without certificates of origin,” making it an ideal commodity for money launderers, corrupt influence peddlers and terror groups, said Nikos Passas, a professor at Northeastern University in Boston, who has also created reports on money laundering through trade.

The only thing causing some criminals pause is the drop in gold, down from a peak of just more than $1,900 in 2011 to a recent five-year low of around $1,000, he said, noting that in itself could be a red flag if a gold buying, smelting or producing operation is seeing steady or rising profits apart from the seasonality around religious holidays, festivities or weddings.

For institutions, spotting red flags related to gold hinge on understanding the origin, destination and transit points of the gold supply chain – such as miners, smelters, recyclers and sellers – and matching that up with where transactions are taking place, where are they coming from and going, Passas said.

Institutions must “map the market and know the centers of activity. If gold or funds are going to different centers of activity, that is a red flag,” he said, noting that significant under and over-pricing differentials are a telltale indicators as well.

“For instance, if someone is paying a price for scrap gold that is higher than the market price for pure gold, then you have to ask, why would someone pay over-market for things that are impure when they can get them in market for a much lower price.”

How well do you know the trends by criminal actors exploiting the gold trade, and compliance responses? Take our short quiz here to find out!

Red flags aplenty, from bullion to trade

The FATF detailed dozens of red flags tied to the gold trade, mirroring many classic laundering patterns around unexplained business and transactional increases or inconsistent or unexplained entities or regions involved, including:

Tied to bullion:

  • Established customer (including bullion dealers) dramatically increasing his purchase of gold bullion for no apparent reason
  • Foreign nationals purchasing gold bullion through multiple transactions over a short time period.
  • Bullion transferred among associates using bullion accounts (including family members) for no apparent commercial purpose.
  • Occupation inconsistent with customer’s financial profile. For example, the customer may list their occupation as ‘student’ or ‘truck driver’ yet transfer large values of funds to bullion accounts.

Company question marks:

  • Numerous sole proprietorship businesses/private limited companies set up by seemingly unrelated people (proxies) but controlled by the same group of people. False addresses are used to register such businesses.
  • Use of a corporate structure of shell companies located across the jurisdictions.
  • Significant number of companies registered to one natural person.
  • Commercial activities are not easy to track as the companies are registered elsewhere.
  • No clarity of how the company transports the merchandise it has bought.

Possible trade laundering:

  • Cash payments for high-value orders are an indication of trade based money laundering (TBML) activity.
  • Misclassification of gold purity, weight, origin and value on customs declaration forms.
  • Gold is shipped to or from a jurisdiction designated as ‘high risk’ for money laundering activities or sensitive / non co-operative jurisdictions.
  • Gold is transhipped through one or more such high risk / sensitive jurisdictions for no apparent economic reason.
  • Consignment size or type of commodity being shipped appears inconsistent with the scale or capacity of the exporter or importer’s having regard to their regular business activities or the shipment does not make economic sense i.e. there is no reasonable explanation for the client’s financial investment into the shipment.

‘Cash-for-gold’ operations a magnet for criminals

Cash-for-gold businesses are a particularly alluring and challenging aspect of the industry because of weak or non-existent exam and enforcement initiatives, according to the report.

“Given the limited level of industry oversight and licensing requirements, cash-for-gold businesses have the potential to provide criminal groups with a continuous supply of untraceable gold commodities from various sources,” the group said, adding that “in most jurisdictions there is little governance or oversight of this type of activity.”

At the same time, the gold is being purchased from individuals, who don’t have to prove they own the gold or where it came from, creating a cash-intensive revenue stream that “can be easily falsified or co-mingled with the proceeds of crime, while the purchased gold can be used to make untraceable gold-based payments for illicit goods and services.”

Trade in recycled gold, both legal and illegal, requires “little start-up capital and therefore operations can be very itinerant, opening and closing with little difficulty. This adds to the difficulty for regulators to monitor these activities,” the FATF report stated.

No enforcement means no incentive to comply

Understated in the report is that most likely, even the cash-for-gold operations that are not intrinsically linked to criminal organizations likely have little knowledge of their AML obligations and have even less of an incentive to implement them, said David Tilzer, the former head of the IRS AML division in New York.

“A lot of these operations don’t know or care about AML,” he said, noting that entities would have to buy and sell $50,000 in a year to get caught by the rules. “I am not saying they are blatantly trying to flout the rules, but no one is going out and trying to explain their responsibilities or penalize them, so their attitude is ‘who cares.’”

The only way the operations would change their ways is if a few operations got penalized by FinCEN, or if financial institutions ratchet up the pressure by asking about their AML programs and requesting evidence such controls are in place, Tilzer said. He noted that institutions could ask to review their financial crime policies and procedures, identity of the designated compliance officer and copy of the most recent independent review.

“Banks should be asking gold industry accountholders these questions, and if they don’t like what they see or don’t get the answers they want, let the company know they will be closing their account,” he said, adding that vital questions as well would be where the operation operates and what kind of identity details, such as fingerprints, does the business collect and at what thresholds.

While the report highlights the risks of the seemingly-ubiquitous cash for gold businesses, the “boom is over because the price is so low, a lot of these businesses are closing,” said Cecilia Gardner, president and chief executive of the Jewelers Vigilance Committee, an industry lobbying and outreach group.

As a result, that means many of the operations that have survived the culling likely have more senior AML programs and a better understanding of state and regulatory requirements, she said, adding that new provisions under Dodd-Frank have increased the provisions gold-related manufacturers must follow to ensure their suppliers have no ties to conflict minerals.

Malleability of gold throws ‘wrench’ into the works

Even though fears abound at the retail level, the “majority of money laundering and predicate offences relating to the gold market are associated with international and domestic trading,” according to the report. In the physical sense, it is easy to melt gold bullion and convert it into different forms to disguise the fact that it is gold,” the FATF said.

Similar to the cash for gold operations, criminals gravitate toward the path of least resistance to launder through trade, using “routes that do not have strong governance over the tracking of the movement of gold or the gold is smuggled to avoid detection,” the report stated.

In some cases due to the nature of the market, the gold does not have to exist or be moved physically to be traded, according to the FATF, noting that some criminal groups simply put the world “gold” on an invoice when they are actually moving large amounts of bulk cash internationally.

To fool trade inspectors all the more, the report notes that in several interdiction efforts between North and South America, criminals disguised the gold as American souvenirs or reshaped them into low risk, low value objects, such as “wrenches, nuts, bolts and belt buckles. Gold in these forms is easier to conceal from border authorities and its value can be considerably understated on the Bills of Lading.”

Broadly, adequate financial crime controls for the gold industry have never adequately materialized, even in regions where precious metals are covered with some semblance of AML rules, said Ken Rijock, a convicted money launderer, author and financial crime consultant.

Many transactions and deals are “done with a wink, nod and cash,” he said. “They have never really reached the 21st century, so it’s a great way to launder cash and transport value anywhere in the world, and then turn that gold into another currency.”

That is a gaping vulnerability globally because gold is a major stumbling block at any stage of the laundering chain, placement, layering and integration, Rijock said.

“At all of the stages of money laundering, if you insert gold as a factor, you cut the chain of finance and then no investigator can pick up the trail anymore,” he said. “That suits criminals because the whole objective of money laundering is to confuse the enemy and ensure there are sufficient roadblocks to deter anyone from conducting a successful investigation.”

That puts added pressure on investigations, who likely could only recover such a tenuous thread if they find an inside source willing to turn over on the rest of the organization, and detail where they gold has gone and will turn up next, or get a gold-related buy somehow on camera, Rijock said. “If not, the gold is fungible. It disappears off the face of the earth.”

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