Responsible Sourcing Newsletter: September 2021

Despite international sanctions regimes and its close associations to human rights abuses and criminal networks, Venezuelan gold continues to infiltrate the legal gold market.

This is the message of a recent report, Gold Flows from Venezuela: Supporting due diligence on the production and trade of gold in Venezuela, commissioned by the OECD.

Gold production in the Latin American country is estimated to be as high as 75 tonnes per year with an approximate value of $4.4billion, but the report believes that actual production is closer to one third to one half of that estimate. Even on the lower end of the scale, the report’s findings are a wake-up call for governments and refiners, including those on LBMA’s Good Delivery List.

While some of this gold exits Venezuela through official channels, destined for friendly countries like Iran, Turkey and United Arab Emirates, the majority of the illicit material is laundered into international markets by criminal and terrorist organizations—mostly based in Colombia—that are aligned to politically-exposed elites in the Maduro regime.

As one of the main conclusions the report noted: “All risks listed in Annex II of the OECD Guidance are reported to be prevalent across supply chains of gold from Venezuela. Companies sourcing gold need to determine whether they purchase, handle, process or transport gold associated with any red flags linked to country of origin or transit, suppliers or other circumstances listed in the OECD Guidance to make sure they do not contribute to human rights abuses, conflict financing or financial crimes. Existing regulations and industry due diligence programmes have thus far been inadequate for ensuring due diligence is carried out on Venezuelan gold flows – making it likely that international purchases of Venezuelan gold may be contributing to abuses linked to Annex II risks. In addition to increasing regulatory consistency and implementation across legal regimes on due diligence for minerals in key mineral importing, transit and exporting jurisdictions, internal silos need to be dismantled. In particular, closer and more sustained collaboration between financial regulators including financial intelligence units and industry actors would allow for better detection of the links between gold flows and illicit financial flows (IFFs)."

LBMA sat down with Louis Marechal, Sector lead, Minerals & Extractives, at the OECD’s Centre for Responsible Business Conduct (RBC), to elaborate on some of the key points of the report.

LBMA: What research findings surprised you the most?

Marechal: The important role Dominican Republic (DR) [is playing] was probably the biggest surprise. We had been made aware of an increase in local ASGM (Artisanal and Small Scale Gold Mining) production some years ago, but we were far from imagining that international smugglers could at some point target this country to base their operations. Another surprise was the extent to which the supply chains of mined gold in Venezuela seem to be marked by abuses of human rights and connection to non-state armed groups (as well as domestic Politically Exposed Persons). This certainly creates a unique set of challenges which can only be addressed through meaningful and sustained cooperation between the private sector and public entities (including law enforcement).

LBMA: What would you say are the key takeaways of this report for LBMA refiners?

Marechal: For LBMA refiners, a key takeaway is that international gold supply chains are getting more and more complex, and therefore due diligence probably requires even more resources and attention than ever before. The report sheds light on the vast variety of actors that actually play a role, knowingly or not, in those supply chains, from local regional exporters to global Central Banks. Another important reminder is how much informal supply chains can be fluid and can easily reorganise themselves to escape law enforcement and private sector scrutiny.

LBMA: You highlight the little-known, but central, role Dominican Republic plays as a laundering hub for Venezuelan gold. What factors make it so attractive to criminal networks and what could be done to counteract this?

Marechal: The Dominican Republic has the largest economy in the Caribbean and is a major hub for both regional and international trade as well as tourism. It is also, incidentally, a gold producer. All that movement of people and goods provides excellent cover for various kinds of trafficking, especially to the United States and Europe. In addition, to date, the focus of DR law enforcement agencies has largely been on narcotics and weapons. Further developing collaborative efforts with other countries in the region would certainly help counteract the involvement of criminal networks. And, of course, making sure adequate due diligence is carried out on gold coming from the country.

LBMA: The report recommends the OECD undertake more research into how opaque and largely unregulated Free Trade Zones (FTZs) facilitate the illicit gold trade. What specific issues would you say warrant greater research?

Marechal: All around the world, FTZs have reportedly been infiltrated by criminal networks. This is enabled by often less rigorous checks on shipments in FTZs. Also, data from FTZs are not integrated with customs data. An FTZs documentation system may be a combination of digital and paper, which is further subject to criminal manipulation. The reality that gold shipped to a trader and stored in an FTZ doesn't enter the commerce of the country hosting the FTZ creates blind spots in the supply chain that can be exploited in the gap between arrival at, and eventual departure from, the FTZ. In addition, in many cases, the origins of gold moving through an FTZ can be concealed by using the host country as a layer through which to launder the gold-particularly if some alteration is made to the gold while it is in the FTZ.

LBMA Launches Second Public Consultation

Following a first round of extensive consultations with stakeholders, LBMA is pleased to launch a second public consultation of the Responsible Gold Guidance (RGG) Version 9, the document that underpins our Responsible Sourcing Programme.

The latest draft of the RGG, and a summary of the substantive changes and the rationale behind them, can be found here.

We welcome your constructive feedback on this document. Please share your comments to RGG@lbma.org.uk in bullet point form, identifying the relevant page and section to which your comments pertain.

Deadlines for the submission of comments is Tuesday, 12 October 2021.