Here’s is a transcript of Marcena’s recent talk at the Effective Financial Crime & Compliance Conference in Doha, Qatar – 4th September 2022
Hello. I'm Marcena Hunter and I'm a senior analyst with the global initiative against transnational organized crime. We're an NGO based in Switzerland that covers a wide variety of organized criminalist activity. I myself focus on extractives related crime especially gold as well as other types of financial flows.
My colleague Neil here set me up very well today um talking about designated non-financial entities how they will be a focus for the next fattest evaluation and part of one group of factors that falls into that is precious metal dealers and the gold trade and we are seeing a lot of movement around this with Designated Non-Financial Businesses and Professions (DNFBPs) politically exposed persons and beneficial ownership.
And this is certainly a very relevant and high risk within the gold sector not just in relation to the evasion of sanctions but illicit flows in general but today I will be focusing on how illicit gold flows can be used to evade sanctions.
While sanctions impacting on the gold sector have been around for quite a while many years the new wave of sanctions on Russia have significantly increased the imperative to understand sanctions their impacts and what it means for financial entities and other precious metal dealers.
There's three types of sanctions - there are comprehensive sanctions which cover an entire country, sectoral sanctions which Target a specific sector and there's targeted sanctions which target specific individuals or entities.
What we're seeing with the sanctions on Russia is that they're sectoral and that there are sanctions on gold. The gold trade by many countries and they're also targeted targeting specific individuals or companies that are linked to the gold trade but this is not the first time the gold trade has been targeted. We've also seen targeted sanctions on Sudan and Venezuela which have also impacted the gold trade in recent years and also looking at the purpose or motivation behind sanctions they can be either to signal a country that you disapprove of their action and use it as a bargaining tool going forward to constrain their action and this is more sanctions aimed at weaponry or other types of goods.
Gold could possibly fall into this and that you're trying to constrain their use of financial vehicles and to access for foreign exchange or Forex outside of the country.
And the final one is to coerce the country or to push them into cooperation so with the current rounds of sanctions we're seeing I think they would fall much more heavily into signalling and a little bit into constraining action.
So recent sanctions on Russia impacting the gold trade is the United States, U.S United Kingdom, UK, Japan, Australia, Canada, and the EU have all announced bans on Russian gold.
In June the U.S banned Russian gold Imports which built on previous action which also impacted the gold trade.
In July the UK prohibited the import of gold from Russia including prohibiting the acquisition, supply and delivery provision of technical assistance, financial services and funds and brokering services related to gold.
Also in July the EU adopted a package of sanctions including a ban on buying importing or transporting gold and gold products from Russia and any services in connection with Russian gold.
And in August Switzerland banned the import of Russian gold and gold exports.
These are really significant because these are major gold trading hubs Globally. In 2020 the UK was the biggest destination for Russian gold with Russia exporting 16.9 billion dollar’s worth of gold from Russia to the UK. So with that flow cutting off, Russia is still producing gold, it's just looking for other places for that gold to go and that's what we can dive more into later today.
Also the recent ban by Switzerland is notable because Switzerland previously had restricted gold - but Switzerland has had a significant increase in gold Imports in particular from Dubai recently and also from Russia.
Although Switzerland's major refineries say that they are no longer sourcing that gold - so it's a bit of a mystery where that gold is coming from - highlighting again the weaknesses in the Regulatory and Reporting systems around gold flows and how they need to be strengthened.
So while the UK has brought in sanctions - in July Russian gold has effectively been banned from entering the UK. Since March the UK brought in sanctioned sparring dealing with money market instruments (gold is defined as a money market instrument or financial vehicle) and so it essentially fell under that umbrella.
Also the London Bullion Market Association or LBMA gold delivery rules ban gold that violates any EU us UK or any other relevant economic and trade sanctions lists and the LBMA suspended all Russian refineries from its accredited lists and so as such Russian gold has been de facto barred from entering the UK since March
All of this is to say that gold flows from Russia are not necessarily illicit but gold entering into those major Financial hubs there are major barriers to entry and so being cut off from those markets- there's really significant motivation or imperative to hide the origin of that gold or the beneficial owners of where that gold is coming from.
I'd also like to talk a bit about secondary sanctions now
So secondary sanctions are economic restrictions imposed on third parties that transact with sanctioned entities. So what this means is that for example the U.S may not have direct control over a sanctioned entity a person or business but they may do business with a business doing business with that person if that makes sense.
So anyway what they can do is they can have penalties or fines against that person for doing business with that sanctioned person. Why the U.S has a unique power in this - is the dominance of the U.S dollar globally and so any one transaction in US dollars with an entity sanctioned by the U.S is vulnerable to fines or other action by the U.S. And U.S prosecutors and Regulators can apply significant pressure on Banks and other entities that may do business with any factor subject to U.S sanctions.
So that's why U.S sanctions in relation to the gold trade become really important to understand and know what your risks are. So what we've seen since March is that a number of banks globally including in China, India the United Arab Emirates (UAE) have actually restricted their business with Russian entities over concerns of violating secondary sanctions.
For example one UAE Bank in Dubai which has previously agreed to play a hundred million dollars in penalties to resolve a U.S probe into sanctions violations related to Sudan - stopped lending to Russian Banks. So this was really notable because this was one of the first UAE Banks to take this step and so again this is where criminal networks step in is that it provides the services to various actors who are trying to evade these sanctions and access International Trade hubs, Foreign Exchange in US Dollars, Euros, pounds to enable them to transact in International Financial systems – this is why gold is very attractive to criminal networks for a variety of reasons.
The first is global liquidity gold can be used as a currency in nearly every single country in the world so it's a really adaptable financial vehicle that can be used anywhere.
The second is anonymity - the regulation of the gold sector and Precious Minerals is a lot less stringent or effective than what we see with other types of financial institutions and bank accounts that sort of thing. So it makes it really attractive for that reason as well as it's impossible to trace the origins of gold.
Once gold is melted down in a smelter or refinery or even before that process - you have no idea where gold came from and this is important too because you don't know whether it's freshly mined gold or it's recycled gold that has already existed
You can really easily disguise the origins of gold - for example by mixing it with some other types of metals to give it the consistency of jewellery rather than pure doré (A doré bar is a semi-pure alloy of gold and silver) or freshly mined gold - and so it's very easy to launder.
One of the last reasons is that it's also easily moved it has a very high volume to value ratio - so it's very heavy… but small in volume and so it's very easy to move. So this was the price in March but just to give you an idea of how much - what it would take to move a billion dollars’ worth of gold - it would be
- 21 flights on a small plane
- 312 trips by a mule and this would be a person carrying gold and hand luggage or cargo on a flight and moving about 50 kilos of gold at a time
- six truck trips moving / using a 20-foot truck and again the limitation there is weight not volume
So as you can see it's very easy to move a billion dollars across borders and with Russia in particular since 2014 Russia and Moscow have been working to make its economy more resilient to sanctions and this has been diversifying its economy and its reserves away from the U.S dollar.
So after more than doubling its gold reserves in March 2022 Russia had an estimated 130 billion dollars worth of gold and after invading Ukraine Russia lost access to an estimated 60 of its foreign exchange reserves leaving it with the 130 billion dollars worth of gold and some other miscellaneous assets
And so gold became a really important way for Russia to protect itself and since that time we have seen other countries include increasing their Gold stock piles including China and Turkey and some other countries
So I think this is a trend that will continue to see. So how does gold move so globally?
There are some major International gold trading hubs that are used to move gold through illicit supply chains not just to evade sanctions. These include Dubai in the UAE which is a major hub, Turkey has been involved in sanctions evasions in the past. China is relevant for Russian sanctions and we also have India has major gold markets - China and India are two of the biggest gold consumers in the world and so their consumer markets can be really important for this
Looking at ways gold has been used to evade sanctions - I'll just use the example of gas for gold with Turkey and Iran. So during when there was U.S sanctions on Iran and this was during the height of this operation it was 2012 to 2013.
What would happen - is that Turkey would purchase Iranian natural gas with Turkish Lira and this Lira would be used in Turkey to buy gold by Iranian gold buyers.
Then that gold would either be moved back to Iran or moved to the UAE and then in the UAE that gold would be sold for foreign exchange such as U.S dollars or euros and that foreign exchange could then be moved to Iran and this supported Iran's dwindling foreign exchange reserves and under a loophole at the time this was legal - as long as the payments were not made to the government of Iran which was likely happening in practice
So this loophole has been plugged since then and it's something governments are aware of and will likely be looking for going forward.
At the height of this … Turkey exported 15 billion dollars in gold including 5.3 billion to Iran and 7.9 billion dollars to the UAE
Venezuela has also been the target of waves of U.S sanctions as well as UK and EU sanctions and in 2019 the U.S blacklisted the Central Bank of Venezuela almost completely isolating the Venezuelan Financial system from the world.
Subsequently it is suspected that Russia supported Venezuela and using planes to move tons of Venezuelan gold to various foreign markets to evade sanctions
This includes Uganda, Turkey and the UAE. The gold was exchanged for foreign exchange including U.S dollars, in Euros which was then returned to Venezuela. So this is a common scheme that we see with gold being used in various ways
Probably the major location right now that we're seeing with illicit gold flows globally is the UAE- it's a dominant player in gold and illicit flows. Since the invasion of Ukraine there have been reports of Russia and Russians and their assets flocking to Dubai including trips by private aircrafts suspected of moving private property there
While there are very legitimate reasons for Russians to be moving their property in this way, it also creates significant vulnerabilities and opportunities for individuals looking to evade sanctions or engage in other types of illicit flows
In the 2020 mutual evaluation by the financial action task force found weaknesses in the UAE regulation of the gold trade and so this is a major point that has been identified previously as Neil mentioned - and one that needs to be addressed going forward.
I mentioned this before but in March of this year Switzerland noted a sharp increase of gold from Dubai which increased to 36 tons of gold worth 2.1 billion dollars and this was the largest import of the last six years - four of the Swiss refineries that are members of the LBMA said that they have not imported gold from Dubai since March seeing this as a major risk and so observers and NGOs observing this think that there's a high risk that Russian gold is moving through Dubai to Switzerland or other flows are moving that way - but it was a bit of a mystery who the school belonged to or where it's coming from and I expect the recent Swiss move in August is an attempt to shut down this loophole
China also comes up as a source of gold and this isn't necessarily an illicit or illegal way to move gold, but it is a trend that we're seeing in a shift and how gold is moving Russian export gold
Exports to China have increased since March and they’re the largest gold miner
Looking at African vulnerabilities - Africa is a major gold producer and has faced their own sanctions on various countries including Sudan as well as having relationships with sanctioned Russian actors including the Wagner group in particular Sudan has been in the news quite a bit lately
Sudan is a major gold producer exporting billions of dollars worth of gold and there have been reports of Sudanese officials working with the Russian government and Wagner group in Sudan to be producing and exporting gold so this is a risk
We also see Mali as a recent risk … Mali is a major gold producer in West Africa and in recent years Guinea has also become a major gold exporter
Guinea is not necessarily involved in any sort of sanctions evasion but it is a major player in illicit gold flows from the region and is one to watch And I should also say that seeing a shift we hear a lot about gold from Africa going to the UAE but we are still going to shift a little bit more about gold also going to Turkey and so I think that's a trend to watch in the future as we go forward especially with Turkey playing a role in also Global Food flows and that sort of thing and we see a lot of overlaps with the gold trade and trade-based money laundering and that sort of thing where gold profits are used to buy Goods in foreign countries such as the UAE and those are re-imported back into the country of origin… it's a very common type of money laundering we see
So looking at opportunities and resources going forward - I think looking at Effectiveness and improving the effectiveness knowledge is really key and so reporting on gold and financial flows highlighting risks and vulnerabilities is important to being able to identify how best to protect yourselves and take action also targeted sanctions and actions are really important - comprehensive sanctions which target whole countries or sectors have actually shown to not only be not as effective but actually have greater harm and empower criminal networks
So when we're designing not just sanctions… but also actions by governments and Banks … it's important that they be well informed and targeted so that we're really having the most effective action against the individuals or entities
We want to influence because it can have very negative impacts for vulnerable populations in those sorts of transit countries that then rely on criminal Networks
Another action is supporting support for formalization and regularization - regularization of gold supply chains – so I think it's really important that we don't walk away from this saying ‘oh well we need to cut off buying from gold sector or cut off our financial actions with them’
it's actually shown that one of the greatest barriers to formalizing the gold sector and making it more secure is access to finance and access to formal markets So what would be more effective would be want to turn on - I like is lean in due diligence and finding ways to more responsibly engage with the gold sector I think Qatar is really well positioned for that for various reasons
A last point is educational resources - there are resources available to better understand sanctions gold flows and actions that can be taken including OECD due diligence and actions that can be taken about KYC (know your customer) and designated non-financial entities - including precious metal dealers and I would also just note is that another overlap we see is money laundering through the real estate sector we do hear a lot about illicit profits from the gold sector being used in trade-based money laundering as well as the real estate sector and casinos actually so I would say those are some of the three big overlaps that we say not necessarily just with sanctioned but illicit gold flows and gold smuggling … so yes I think with that I will leave it to my colleague Martin who’s speaking next…
Marcena Hunter
THEMATIC LEAD ON EXTRACTIVES AND ILLICIT FINANCIAL FLOWS AT THE GLOBAL INITIATIVE AGAINST TRANSNATIONAL ORGANIZED CRIME
Marcena is a Senior Analyst at the Global Initiative Against Transnational Organized Crime, which she has been with since 2012. While Marcena’s work has covered a wide scope of material and geographic spread, her current work has focused on gold-related crime, other mineral resources, illicit financial flows and development responses to organized crime. Marcena is also currently a Research Fellow and PhD candidate at the University of Queensland, Sustainable Minerals Institute. Marcena past work includes analysing migration flows, access to justice, and gender issues, as well as providing guidance on security sector and criminal justice reform. Marcena has a JD from Washington and Lee University, and a BA in Political Science from the University of Denver. She is currently based in Australia