Friday, July 31, 2015

FATF Report on AML/CTF in Gold Markets

The Financial Action Task Force (“FATF”) has released a report on money laundering and terrorist financing risks and vulnerabilities associated with gold. The gold market provides criminals with an alternative route to store or move their assets in the face of more stringent regulations from authorities. Through the use of gold, illicit funds can be made anonymous, transformable and easily exchangeable.

The gold market is highly reliant on cash as the method of exchange which makes it attractive for organised crime groups. Cash-for-gold businesses are owned by such groups, providing them with facilities to place and integrate illicit proceeds. The high-volume, low value transactions conducted through such businesses 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. Moreover, due to the inherent value of gold and its exchangeability, retail gold is often used as a viable medium for exchange in criminal transactions and bribes.

The physical attributes of gold also allows it to be easily smuggled and traded abroad in other forms for concealment. Moreover, since the exact amount of gold harvested from recycling is difficult to identify, gold can be moved across jurisdictions to be refined. However, due to the nature of the market, transactions and movement of money can be justified by simply citing ‘gold’ as the traded good, instead of physically moving it. This movement of value without actually moving the underlying commodity helps reduce the cost of physical transactions and increases the difficulty for physical tracking. Depository and certificate products provide another alternative for criminal syndicates to launder money whilst distancing themselves from the asset.

In addition to the use of gold for transactions, criminal groups are also able to exploit the gold market for profit. Sources of illicit profits include large-medium scale mining, artisanal-small scale mining, retailing, smelting/refining, recycling and investment. However, new gold can only be obtained through mining or recycling:

  • Large-medium scale mining – The high barriers to entry of this industry and dominance of large corporate companies give rise to high levels of corruption where the ability to gain necessary clearances through illegitimate means will increase the profits and minimise the costs required. Theft of mined ore is also common where criminal groups infiltrate production supply chain and siphon mined ore for refining and retailing.
  • Artisan-small scale mining – This form of sporadic small scale mining is hard to govern and there are low barriers to entry. Similar use of bribery and corruption can help facilitate such activities and illegally mined ore can then be smuggled to other jurisdictions to be refined and sold as proceeds to support the illegal operations.
  • Recycling – The cash-for-gold business allows criminals to convert stolen good into cash quickly without any documentation of ownership.

Some red flags that companies should be aware of include inconsistent client occupation details with the corresponding gold transfer in the account; large movement of money/gold by companies/persons across jurisdictions known for money laundering activities; and lack of documents supporting proof of purchase or ownership of the gold.

For the detailed review, see the report by FATF.

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