Responsible Sourcing Newsletter: February 2023

Are Free-Trade Zones an enabler for illicit material and behaviour?

This was one of the key questions raised during a panel discussion held last week looking at the link between free trade zones (ETZs) and illicit gold flows from Latin America and the Caribbean.

Held at Chatham House, and featuring LBMA’s Ruth Crowell, the conversation was guided by recent and ongoing research funded by the OECD to better understand how ETZs help to facilitate the laundering of illicit gold emanating from the region. (A third and final report is due to be published in May).

Regular readers of this newsletter will know that LBMA has been following this issue with keen interest since Dr David Soud, the lead author and one of the event panellists, presented his first findings in 2021. The reports highlight serious and entrenched methods by which criminal groups, terrorist organizations and complicit government actors collaborate to disguise the provenance of mined material and thwart good faith due diligence efforts by downstream actors. Much of this kind of material later transits through ETZs—something highlighted in a recent police investigation in Brazil.

Reports like this are useful in educating LBMA refiners and approved assurance providers of risks they should be aware of in the gold supply chain—and should be required reading for anyone working in or around responsible sourcing. Their findings amplify our understanding of the risks associated with free trade zones and inform LBMA’s outreach efforts to International Bullion Centres, as well as serving as teachable examples in our annual training of assurance providers.

The OECD reports also underscore several underappreciated and unique sourcing risks that exist in both the region and ETZs themselves. While there are approximately 5,000 ETZs worldwide, those in Colombia, Panama and Dominican Republic are singled out as the primary transit hubs for gold. As the report outlines, illicit gold moving through FTZs is typically laundered prior to entry, often through short-lived trading companies, the falsification of documents and layering the gold through multiple entities and jurisdictions to obfuscate its true origin. The lack of data transparency on goods moving through FTZs—such as trade data, and company- and transaction-level information on what happens to the gold once it has entered the Zone—is another potential enabler of illicit activity, allowing illegally mined or smuggled gold to be blended with legitimate production in a manner that makes due diligence extremely challenging.

Most of the trafficked gold comes from Venezuela, Brazil and Colombia—all commonly cited conflict affected and high risk areas (CAHRAs), each with complex security dynamics and differing enforcement approaches and political will to address the problem. Sophisticated networks and collusion between an unlikely array of actors exist within and between these countries, sometimes sharing or controlling mines, trade routes and front companies. Listed terrorist organizations like the ELN and FARC in Colombia pay for their armed incursions with gold; while drug cartels run mines as a way to launder the proceeds of their narcotics trade. Military elites in Venezuela partner with criminal gangs who ruthlessly control mining centres, while in Brazil armed bands of wildcat miners—acting on the encouragement of former President Jair Bolsonaro—exploit concessions in environmental and cultural protected area, sparking conflict and leading to irreversible damage of the Amazon. The situation is so beneficial to illegitimate actors that even known convicted money launderers who made their mark in Central Africa have relocated their operations closer to Latin America to get in on the action.

What can or should be done about a situation as seemingly intractable as this?

Firstly, events like this are useful for broadening the due diligence lens beyond the OECD’s original focus on Central Africa. It reminds us that due diligence needs to be practiced globally, and that once stable regions and countries can become high risk and conflict affected, and thus require enhanced scrutiny by LBMA and GDL refiners. As the OECD’s Louis Marechal reminded the audience: “Due diligence is a permanent process.”

Secondly, it requires intervention and cooperation from a broad range of actors, including local and national authorities and enforcement agencies in jurisdictions along the entire supply chain. Private sector actors, including LBMA refiners, have their part to play, most notably in applying enhanced due diligence on material passing through ETZs, or claiming to be from non-industrial mines or sources in the region.

While the Maduro government is unlikely to make a U-turn on a criminal enterprise they explicitly designed to enrich political and military elites (and do an end-run around international sanctions), the same does not hold true for others. The new administration of Lula da Silva in Brazil, for example, has taken several significant steps toward reigning in the wildcat miners, including using the military to shut down their operations and remove them from protected areas.

An equally significant step would be for the government to repeal a 2013 law that allows Brazilian miners and traders to make written self-declarations regarding the provenance of their gold. In the absence of a centralized and computerized system by which to verify provenance claims, these declarations are taken at face-value—a vulnerability that has not only fuelled illegal mining in the Amazon, but also led to massive inflows from neighbouring Venezuela and Colombia. From there gold can easily be sent to regional ETZs and then onward to international markets all over the globe.

Finally, it is clear greater oversight also needs to be brought to bear on ETZs. As the OECD report recommends, ETZ should be required to provide Customs officers with unrestricted access to goods within FTZs, and ensure digital documentation and inventory control systems are in place. In countries with known risks of gold laundering and gold-based money laundering (GBML), enforcement personnel should be trained and tasked to track shipments of precious metals, and jewellery through FTZs as well as other points of import and export. The same should be done for due diligence officers in companies sourcing gold transiting through these areas.

Spotlight: The grey zone: Russia's military, mercenary and criminal engagement in Africa

The latest report from the Global Initiative Against Transnational Organized Crime delves into the African operations of the Wagner Group, the elusive Russian mercenary group, and how their presence dovetails with Russia’s larger foreign policy objectives on the continent.

The report argues that the Wagner Group is unique as an organization in the breadth, scale, and boldness of its activities. However, the study also shows that Wagner did not emerge in a vacuum: The group’s activities and characteristics reflect broader trends in the evolution of Russia’s oligarchs and organized crime groups, their respective relationships with the Russian state, and their activities in Africa.

Read the report here.