All that glitters

If resources are valuable, fraudsters will use them to commit crimes. And they love to misuse gold, diamonds and other glittery materials from the depths of the earth. Here’s how countries are battling the schemes and what it all means for fraud examiners.

At practically every stage of the precious metals and stone trades — from extraction to refining to sale or re-sale of finished products — vulnerabilities can motivate entities in supply chains to commit fraud by evading sanctions or taxes, laundering money or smuggling.

In 2019, a complex, continent-spanning fraud scheme included the smuggling of more than seven tons of gold from Venezuela’s reserves on a Russian charter aircraft to a gold refinery in Uganda and then on its way to … somewhere. No destination was ever confirmed, although several tons of gold went on sale at a steep discount later in Turkey.

Ugandan authorities seized the second of the two shipments but ultimately released the gold after Ugandan President Yoweri Museveni intervened.

In 2014, Belgian businessman Alain Goetz — with Museveni’s backing — established the refinery at the heart of the 2019 gold smuggling case, African Gold Refinery (AGR), in Entebbe.

The refinery had come under fire earlier for allegations of sourcing gold from conflict zones in African countries. (See How 7.4 Tons of Venezuela’s Gold Landed in Africa—and Vanished, by Gabriele Steinhauser and Nicholas Bariyo, The Wall Street Journal, June 18, 2019.)

Uganda’s Financial Intelligence Authority officially registered complaints that AGR smuggled, evaded taxes and laundered money connected with the gold. The complaints prompted an official investigation by Uganda’s Inspectorate of Government that hasn’t yet led to any charges.

Independent investigators at The Sentry, an organization dedicated to following dirty money connected to African war criminals, also prepared a report on AGR. The report, published before the Venezuelan gold incident, suggested the refinery regularly sourced gold from areas of armed conflict and rebellion in Zimbabwe, South Sudan, and the Democratic Republic of Congo; exported gold to an affiliate refinery in Dubai (also owned by Goetz); and ultimately put gold into global supply chains that made its way into the coffers of more than 280 publicly traded companies. (See The Golden Laundromat, The Sentry, October 2018.)

In February, a Belgian court found Goetz and his brother guilty of money laundering through the Belgian Tony Goetz refinery in 2010 and 2011. The refinery systematically purchased gold from anonymous sellers for cash in transactions purposefully split to circumvent limits on cash transactions. (See Court convicts Belgian gold refinery Tony Goetz of money laundering, by Marine Strauss, Peter Hobson and David Lewis, Reuters, Feb. 5.) 

Another high-profile case of gold smuggling recently drew media attention well after the incident occurred. U.K. authorities ordered EY in April to pay a former partner more than $10 million in damages after he reported money laundering in 2013 at the United Arab Emirates gold refinery, Kaloti.

The former partner, while conducting a regular audit, uncovered evidence of money laundering related to Kaloti’s purchase of gold bars from Morocco that were coated with silver to avoid export restrictions. He alleged that EY helped cover up the audit results and leaked information to the media about the money laundering after resigning in 2014. EY says it was “surprised and disappointed” by the ruling. (See EY whistleblower awarded $11 million after suppression of gold audit, by Huw Jones and Peter Hobson, Reuters, April 17.)

Gold and diamonds perfect for money laundering

The U.S. Financial Action Task Force reports that criminals like to launder money via global gold and diamond trades because they have reliable returns on investment, participants deal in cash, tracing transactions is difficult and gold and diamonds are easy to smuggle.

The reports highlight case studies such as drug traffickers accepting diamonds or gold as payment for drugs or storing wealth, smugglers reshaping gold into common objects such as wrenches or belt buckles, corrupt payments and bribes of gold or diamonds, and illegal mining of gold or diamonds to finance terrorism while evading taxes, among others. (See Money laundering/terrorist financing risks and vulnerabilities associated with gold, FATF, July 2015, and Money laundering and terrorist financing through trade in diamonds, FATF, October 2013.)

In an interview with Fraud Magazine conducted via email, Ephraim Matlala, CFE, deputy manager at the South African Diamond and Precious Metals Regulator, discussed some of the fraud schemes associated with precious metals and stones. According to Matlala, a common money-laundering scheme involves shell companies set up as fronts for illegal traders.

“The process of money laundering happens in different ways,” he says. “For example, someone might open a company to trade in precious metals, but those who really trade illegally use the name of the company to facilitate the process, and the money that has been obtained from such trade is deposited into the account of the fronting company.”

Schemes dealing with manipulated evaluations of precious metals or stones, which capitalize on a lack of expert knowledge, are also common, Matlala says.

“Fraudulent activity will happen in a sense that the owner of a stone will acquire the service of a third party to assist in evaluation of the stone,” he says. “During this process, the person who is doing the evaluation is the one who truly understands the value of the stone. In many instances, they present a false report to the seller by saying the stone has low carat value; the trading value of the stone might be $5,000, but because of the seller’s lack of knowledge, it will be presented as $150 to the seller.”

Kimberly Process detects ‘conflict diamonds’

Regulations and industry standards exist to help prevent human-rights abuses associated with extraction of precious metals and stones. But they also force noncompliant producers to find refineries or other middlemen who are willing to help them profit off the raw materials that could end up in luxury jewelers’ showrooms or in safe-deposit boxes.

The U.N. established the Kimberley Process Certification Scheme to prevent “conflict diamonds,” or rough diamonds used to finance wars against governments, from entering the global diamond supply chain, Matlala says. It’s part of the 2003 Kimberley Process, a trade regime that now features 56 participants representing 82 countries. (The EU’s 27 countries count as one participant.)

The certification process oversees the member nation requirements and provisions, including establishment of national legislation on conflict diamonds, commitment to transparency and exchange of statistical data, prohibition of diamond trade with non-members and provision of conflict-free certification for shipments originating within the member’s borders. (See What is the Kimberley Process?, and Fraudulent facets: Shining a light through diamond fraud, by Donn LeVie Jr., CFE, Fraud Magazine, May/June 2018.)

“Some countries are not members of the Kimberley Process, and this poses a major factor in such a way that illegal trading could happen involving stones from those countries,” Matlala says.

To help traders with sourcing products, the Organisation for Economic Co-operation and Development (OECD) offers due diligence guidelines for metal and mineral supply-chain management in high-risk regions.

The guidelines provide recommendations and models to follow, but they don’t feature any provisions for penalizing violators. (See OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Third Edition, OECD, 2016.)

The London Bullion Market Association also provides standards and guidance on the over-the-counter wholesale bullion market. Members of this global precious metals market trade with each other bilaterally rather than through exchanges that have standardized contract sizes, delivery dates and settlement locations. These standards and guidelines build on the OECD due diligence guidelines that certify compliant refineries as “Good Delivery” entities and facilitate responsible sourcing for the global precious metals supply chain. (See Global Precious Metals Code, LBMA, April 2018.)

Many countries impose regulations on the trade of precious metals and stones, but their enforcement might not be strict enough to adequately prevent the use of gold or diamonds in fraud schemes, according to Matlala.

“The challenges associated with precious metals are often related to legislation and its enforcement, especially with regards to illegal mining,” Matlala says. “You may find the laws are lax and easy to manipulate in some countries, especially those that are not Kimberley Process participants.”

Beyond acknowledgement: managing the risks

Many jurisdictions attempt to address fraud risks associated with precious metals and stones through legislation. And international organizations provide helpful guidance, recommendations and red flags. However, anti-fraud professionals and organizations — such as financial institutions that intersect with gold or diamond transactions — must take steps to identify and manage those risks.

For example, identification of precious metals and stones in asset portfolios or business activities of an individual or entity could warrant an assignment of a high-risk designation, which eliminates that individual or entity from business partnership consideration, or triggers enhanced due diligence processes.

In such instances, banks can ramp up their due diligence by enlisting specialists with expertise in precious metals and stones. They can provide insight into transactions and entities’ activities that normally wouldn’t be available to the public. (See Precious metals: the gold standard in money laundering, by Dev Odedra, Riskscreen, Nov. 8, 2019.)

“You may understand the jurisdiction’s process or laws, but if you don’t know what a diamond is all about, or how to establish valuation and fair market pricing and compare it to claimed value, it will pose a challenge,” Matlala says.

Fraud examiners can approach assignments involving precious metals and stones the same way they’d handle an expensive piece of jewelry they don’t own: with extreme vigilance and care.

Mason Wilder, CFE, is a senior research specialist with the ACFE. Contact him at mwilder@ACFE.com.