Gold Laundering: the New Alchemy

Lee Williams is the Regulatory Specialist at Minespider
Lee Williams
Gold laundering is the new alchemy; the creation of gold out of criminal activity, using children, forced labor, land seizure and pollution.
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Table of contents

In the last blog, we touched on some ‘root’ or fundamental causes that can account for the presence of children and forced labour in the mining of gold.

One of these root causes is corruption, or the misuse of entrusted power for personal or private gain. Corruption appears in the gold supply chain because gold is valuable, gold is fungible, gold is easily transported, and gold is universally traded and exchanged.

We also touched on the idea that gold could be used to launder money. As with previous blogs, it is important to understand the terminology, so let’s first look at the concept of ‘money laundering’ and importantly, ‘gold laundering’, and then consider how this applies to the current state of ‘conflict minerals’ and regulation.

Money laundering is the act of disguising the source or true nature of money obtained through illegal means (1).

The money to be ‘laundered’ may come from any number of illegal activities, including illegal arms sales, smuggling, drug trafficking, prostitution, embezzlement, insider trading, bribery, computer fraud schemes, or more in the context of our discussion, illegal mining.

Money obtained in these ways is considered “dirty”, as it would appear suspicious if large quantities of money simply appeared in an individual’s bank account. This money is ‘cleaned’, by passing through several ‘legitimate’ businesses before being deposited, thus obscuring its true origin. With the origin obscured, the ‘cleaned’ money will appear to have been derived from legal activities, with the result that financial institutions handle it without suspicion.

Money laundering is achieved through a three-stage process, typically involving Placement, Layering and Integration.

  1. Placement is the introduction of the money into the financial system. In most instances, the money from illicit sources is co-mingled with money from legitimate business as it is placed.
  2. Layering is disguising the trail to foil pursuit. Once the money has been introduced into the financial system, the source of the funding is disguised, using multiple layers of financial transactions to obscure the true source of the funds. Layering can be achieved using electronic transfer of funds to offshore accounts, or through the purchase and sale of expensive items such as real estate, golf courses, or yachts.
  3. Integration is then making the money available to the criminal, now having its business and geographic origins hidden from view. At this stage, the monies are integrated into the legitimate economy and are indistinguishable from other assets. The aim at this stage is to reunite the funds with the criminal in a manner that doesn’t raise suspicion and appears to be legitimate.

Of the three steps, placement of the money into financial institutions is the most difficult. This is because the Bank Secrecy Act of 1970 requires financial institutions to report deposits over $10,000 in a single day. To circumvent this step then, launderers funnel cash through a legitimate high-cash business, such as check cashing services, bars, nightclubs, casinos or convenience stores.

So what then is ‘gold laundering’?

Gold laundering is the process whereby illegally obtained gold is melted and recast into another form. The recasting is performed to obscure or conceal the true origin of the gold. The recast gold is then sold, thus laundering it into cash.

There are several stages in the gold laundering process. The first is the acquisition of the gold, which may be from any combination of sources, at least one of which is illegal. Certain small-scale gold mines, artisanal mines, and mines having no permits or licences, may extract gold from areas where government oversight is ineffective, or government officials are covertly participating in illegal extraction. This gold is then melted and cast into a mold.

The resulting transportable ingot, or bulk form bullion, is then sold by traders or brokers to smelters. The illegal ingots can be mixed with recycled gold, or newly mined legal gold, effectively integrating the illegal gold into the supply chain.

In some cases, there is no gold involved in the laundering scheme. Gold may also be laundered ‘in absentia’, or without even being present. Individuals may register gold exports with their customs agency by providing false documentation of sale, and then import cash in exchange for the fictitious gold.

The small Caribbean island of Curacao reported gold exports worth $435M in 2017– despite not having an operational gold mine. Colombia reported exporting 64 tons of gold in 2016 despite a mine production of only 8 tons (2).

So how big is this problem?

In 2017, two Miami businessmen who worked for a US metal refiner pled guilty in a $3.6 billion money laundering case involving the importation of illegally mined gold. They admitted to buying gold from a drug trafficker, falsifying paperwork and bribing government officials.

One reason for the increase in illegal gold activity in the past decade in the Americas has been the result of two trends: a reduced profitability of drug trafficking, prompting drug cartels to move into the increasingly profitable business of gold extraction; and ineffective government actions to adequately monitor land seizure, human trafficking and child labor in remote areas of their countries.

Drug cartels have been able to establish mining concerns on commandeered land and then to force the former residents to mine that land. A sobering consequence of this unlawful activity is the human rights abuse and land destruction that has devastated Madre de Dios in Peru. Over 60,000 hectares of Peruvian Amazon has been deforested and polluted with mercury (3). Local women and children have been subjected to forced labor and sex trafficking in mining camps. This illicit activity is growing virtually unchecked — an uncontrolled malignancy of our planet and our society.

This is the new alchemy, the creation of gold out of criminal activity, using children, forced labor, land seizure and pollution.

In an earlier blog, we suggested that blockchain technology could bring transparency and immutability to the mineral supply chain. It is evident that despite regulatory improvement and the responsible supply actions of large-scale miners, there remains a very significant illegal component to the provision of minerals, and that the growth of that component is rampant and uncontrolled.

Law-abiding, socially-conscious, environmentally-aware consumers, manufacturers, suppliers, and governments need a tool that is significantly better than the well-meant regulation and its burdensome reporting, which task the ‘legal’’ with proving their legitimacy.

Blockchain solutions can create an environment where the compliant are easily recognized and the criminals are excluded, an environment where responsible sourcing is acknowledged and illegal activity is excluded from participation. We will delve more into blockchain solutions in the coming blogs.

About the author
Lee Williams is the Regulatory Specialist at Minespider
Lee Williams
Lee's career has extended from private medical practice to associate medical director for Michelin, and from President of the Occupational and Environmental Medicine Association of Nova Scotia, to chair of the Cobalt REACH Consortium technical committee. He is passionate about product stewardship.

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