CFT Measures in Precious Metals, Stones, or Jewels

Blog / CFT Measures in Precious Metals, Stones, or Jewels

Illicit financial flows, corruption, smuggling, drug trafficking, illicit arms trafficking, and terrorist financing have all been connected to the precious metals and stones trade. Furthermore, if correctly managed, the extraction of precious minerals and subsequent trading in these resources can generate enormous cash, particularly for developing countries. 

Misuse Patterns of Precious Minerals in ML and FT Schemes

First, precious minerals have been trafficked from production to consuming nations as a source of unlawful revenues to be laundered, notably supporting armed conflicts or escaping domestic taxation. In other cases, manufacturers have chosen not to declare their output's true worth to the government to reduce their tax liability. Because of the high worth of precious minerals, public employees may be tempted to demand or accept bribes at any stage of the extraction and trading process. Smuggling and corruption revenues (such as bribery) will have to be laundered. Law enforcement officers have launched many investigations into Belgian diamond centers for diamond-related fraud and tax evasion.

Second, valuable minerals can be acquired with unlawful money, such as drug or human trafficking revenues, as actual vehicles for laundering. For example, drug dealers in the United States were accused of buying gold with the proceeds of narcotics trafficking. The gold was subsequently modified and disguised as commonplace objects before being sent back to a South American country. According to reports, drug gangs in Western Europe have switched to the diamond sector to launder money. 

Third, precious minerals are appealing because they can be used in trade-based money laundering (TBML) strategies as a cover for laundering illegal revenues raised by other crimes, such as price manipulation or falsified invoices covering fake gold or diamond sales when other crimes actually developed the money. As a result, the earnings are misrepresented as coming from legal diamond purchases and sales.

Fourth, valuable minerals have been used as a kind of alternative money to purchase banned or restricted commodities, such as gold for cocaine and diamonds for weapons, or to keep income created by criminal activities to evade seizure and confiscation.

Possible Causes for Underperformance

1. Tax and other administrations' incapacity Because the production of valuable minerals frequently takes place across large geographical areas; state administrations frequently lack the capacity to monitor the mining's organization. Furthermore, a lack of technical abilities is crucial. In the case of diamonds, the revenue administration is handicapped when attempting to estimate the tax base due to a lack of competence in diamond evaluation.

2. Poor regulation and vested interests

Governance failures are widely acknowledged as the primary reason why natural resource riches do not result in more sustainable development. Economic issues outweigh governance challenges because technological solutions for the latter are well-known and easier to execute. The characteristics of precious materials (high value, mobility, and odorless ness) and the restricted number of wholesale purchasers, notably in the case of diamonds, enhance the propensity toward secrecy, which is extremely common in natural resource concerns.

3. In the financial industry, AML/CFT controls are not being appropriately implemented.

While cash is still widely utilized in emerging and developing nations to manufacture and trade diamonds, financial institutions such as banks are also active in the diamond industry in these countries. As a result, customer due diligence (CDD) processes should be applied to diamond merchants. However, these nations' overall compliance with FATF guidelines for financial institution prevention measures is poor.

The AML/CFT regime help in preventing criminals from misusing precious metals 

Throughout the value stream, a fully functioning anti-money laundering system can help preserve revenue and combat crime: from the time a valuable mineral is first mined, processed, sold to a wholesaler, retailer, and then to a consumer, and finally reused or given back to the market for resale. The FATF guidelines include "dealers in precious metals and stones" but do not define the term. As a result, a government must define the scope properly in order to guarantee that it includes a wide variety of players and their respective activities. The FATF offers a possible description in its "Risk-Based Approach (RBA) Guidance for Precious Metals and Stones Dealers." It includes a wide range of players, including miners, intermediary purchasers and brokers, those who cut, polish, or refine precious materials, retail dealers, and those involved in secondary and scrap markets. All of the groups of people who will be subject to the applicable AML/CFT obligations will be determined by definition. In order to fight against criminals in the precious metal sector following three factors should be taken into account: 

  • By formalizing dealers, tax compliance can be improved.

The AML/CFT framework's adoption should result in the general framework and licensing/registration of traders, as well as enhanced transaction transparency, making tax laws easier to implement.

  • Make smuggling and tax evasion charges prerequisites to money laundering.

According to FATF Recommendation 3, all major violations, such as smuggling (including customs and excise fees) and tax offenses, must be prosecuted as money laundering.

  • Set up procedures for collaboration and coordination between AML and tax agencies.

Customs or tax officials should be allowed to request any relevant information kept by the FIU while conducting investigations into smuggling or tax offenses.

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