AFC CHALLENGES
When we think of gold , two common but rather contradictory images come to mind : Luxury , wealth and beauty on one hand , and environmental devastation , human rights abuse and corruption on the other hand . As is the case for many minerals , gold production and sourcing conditions are often linked to problematic social and environmental practices . What sets gold apart from other minerals in terms of risk profile is how it is linked to financial crime and illicit financial flows . This article explores how gold is linked to financial crime , what the main financial crime risks are , and how these risks can be prevented and mitigated .
Gold is of interest to anti-financial crime ( AFC ) professionals as the mineral has various characteristics that make it more vulnerable to being abused for financial crime . First , gold has a high and stable value ; it is a universally accepted currency , and it is easily exchangeable . Further , gold markets are often subject to weaker regulation ― in comparison with other financial instruments ― making them more attractive for those wanting to circumvent increasingly stringent AFC regulations . Gold markets often operate with cash payments . Gold also offers anonymity due to the difficulty of tracing it back to its place of production and the ease with which it can be transformed into other objects or otherwise concealed . 1
The gold sector and its actors
Gold comes from two main sources : Mines , through new extraction , and recycling , where gold is reclaimed from existing products , such as jewelry . Around three-quarters of the gold produced yearly comes from mines and the rest comes from recycling . Within the mining industry , we need to distinguish between large- and medium-scale mining ( LSM ) and artisanal and small-scale mining ( ASM ), with LSM being responsible for around 80 % of global mined gold production . An estimated 15 million to 20 million people work in artisanal and small-scale mining , which accounts for 20 % of global gold production . 2 Mined gold is typically traded by local or regional buyers and exporters and then transported to trading hubs and refining centers . Switzerland and Dubai in the United Arab Emirates , for example , are important locations for refining and trading . About 50 % -70 % of the world ’ s gold is refined in Switzerland by four major refineries , 3 and Dubai has become an important hub , particularly for gold from artisanal and small-scale mining . 4 From these refineries , gold is then sold to jewelry producers , technology companies or made into gold bars .
Financial crime risks
Various financial crime risks can be identified with regard to gold supply chains ; the first financial crime links to the illegal extraction of gold . It is important to distinguish between informal and illegal mining , as not all mining without permits should be called illegal . Illegal mining is mining that takes place in areas where it is explicitly forbidden , such as in protected areas or on someone else ’ s mining concession . Sometimes , however , miners simply do not have access to formal mining concessions , or the country lacks a regulatory framework or adequate support for formalization , but mining in the area is not explicitly illegal . In this case , the term “ informal ” is more adequate . 5 If the mining , buying or trading of gold happens through informal channels , however , this means that the production and trade are not reported or monitored , which means no official taxes or fees are paid and there is no traceability of the mineral . 6
This leads us to the issue of smuggling . This practice is widespread for some of the reasons stated above ( gold being easy to conceal and difficult to trace , for example ) and because gold is easy to transport , with small volumes carrying high value . Gold is smuggled , among other reasons , to hide its origin ― for example , if it originates from illegal mining ― or to benefit from lower export tax rates in neighboring countries . A recent report noted that gold from the Sahel region of Africa , for example , is smuggled through Togo as the country has lower export tax rates . 7 Traders and exporters might also seek to avoid costs for buyers ’ licenses , environmental assessments and other permits . If legal exports are costly and burdensome , smuggling becomes more attractive . 8 These practices can hence lead to tax evasion , be it of taxes that would be due at the mining , trading or export stage . However , evading taxes and other fees is not the only motivating factor for the smuggling of gold . Actors might also use gold as a currency to buy other goods , particularly in countries with less well-established banking systems . 9 When gold is smuggled and ends up in hubs such as Dubai , it becomes impossible to trace the gold ’ s origin back and establish whether it is linked to human rights abuses or has contributed to financing in-country or regional conflict .
While officially due taxes can be evaded , another risk in gold supply chains is the illegal taxation or extortion of actors along the supply chain . The perpetrators can be state or non-state armed groups , government officials or other actors such as criminal groups . Payments are requested from
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