How Dealers of Precious Metals are Exposed to the Risk of Money Laundering?

The Cabinet Decision No. (10) of 2019 on Anti-Money Laundering and Combating the Financing of Terrorism identify dealers in precious metals and precious stones (DPMS) as Designated Non-Financial Business and Professions (DNFBPs). DPMS qualify as a DNFBP in the UAE when they engage in carrying out a single monetary transaction or multiple interrelated transactions whose value is equal to or greater than AED 55,000.

Studies show that nature and unique characteristics of precious metals including gold and diamond make DPMS highly vulnerable to money laundering and the financing of terrorism. AML compliance officers should be aware of these risks and common money laundering red flags to identify the criminals who use DPMS for acts of money laundering. Here is a list of common risks or red flags that DPMS( or Compliance officer) should be wary of:

1. Using Precious Metals as Alternative to Currency

Due to its unique characteristics, precious metals, especially gold and diamond, can be used to store value. Criminals exploit this specific characteristic of precious metals and use them as an alternative form of payment for goods and services. Gold and diamonds can be smuggled easily and can be later converted to any other cash or any other forms of value or value transfer. For example, a corrupt official may seek to blur the link between himself and a bribe by asking for the bribe to be paid in gold to his wife.

2. Using Precious Metals as Means to Realize Proceeds of Crime

PMS such as gold and diamond are international commodities that can be easily traded and transferred across borders. Also, PMS can retain its value or appreciate over a longer period. Furthermore, they can be insured, warehoused, and changed into different physical forms. All of these characteristics and their relative anonymity make precious metals well-positioned to serve as a means of longer-term value storage and money laundering.

3. Laundering Illegal Precious Metals

The PMS supply chain is complex and involves multiple participants at each stage. This gives criminals a chance to deploy various techniques to conceal, disguise, and/or transfer the proceeds of crime. They exploit the financial flows associated with the trade-in PMS, at different stages of the supply chain.

The most common techniques used by the criminals include theft or embezzlement; smuggling; commingling of illicit and legal materials; forgery or fraudulent certification; transfer pricing; misrepresentation of quantity, quality, or type of precious metals etc. The criminals usually use such techniques while laundering the proceeds of crime through wholesale or retail trading of PMS.

4. Physical Smuggling of Precious Metals

Criminals may make use of PMS-related transactions and related financial flows due to the global nature of PMS trade. The most common techniques are over-invoicing, under-invoicing, or fraudulent invoicing, customs/VAT fraud, forgery and falsification of documentation, virtual trading, and others. These techniques are mostly employed by criminals in major PMS trading hubs such as the free trade zones.

5. Trade-based Laundering of Precious Metals

The high value-to-weight ratio and other characteristics of PMS make it difficult for anyone to detect or trace them and they can be smuggled fairly easily. Trade-based laundering is often done in conjunction with the other ML/FT methods referred to above and may involve different techniques, including the disguising of certain types of PMS as common low-value objects.

What should be done to mitigate the risks?

DPMS must take essential steps to build a safety net to shield themselves from misuse by criminals and terrorists. Especially, in situations where they identify high-risk customers, DPMS should actively monitor activity related to the transactions, services, or customer activities with which such customers are involved. The following are some of the ways in which this can be done:

1. The DPMS should maintain proper records of the certificate numbers and/or identifying characteristics of the PMS involved. It could be of weight, purity/quality, colour, shape, cut, inclusions or other markings, and other relevant factors
2. In cases of warehousing or safekeeping of PMS on behalf of business partners or customers, the DPMS must maintain the records and monitor the status of the merchandise throughout the transaction or account life cycle, to detect any unusual changes or substitutions
3. Monitoring is required while performing contracted services such as refining, cutting or polishing, or selling on consignment or memorandum. While collecting fees for their services, the DPMS should ensure that the funds received come from known sources on which they have performed customer due diligence, and not from third parties, foreign accounts, or any unknown source
4. Ensuring that the methods of payment and/or the financial instruments used are consistent with the customer’s profile and are not methods that could disguise the origin of the funds.

How Can Jitendra Chartered Accountants Help?

Gold and other precious metals have an intrinsic value and can be easily smuggled or traded internationally in different forms. This makes the sector riskier, and the players in the industry should implement robust measures to ensure compliance with AML / CFT regulations. The risks in the sector are likely to stay here in the foreseeable future, and therefore, the dealers in precious metals need the expert assistance of the best AML consultants in Dubai, such as Jitendra Chartered Accountants (JCA). JCA can help the DPMs by providing services such as assessment of tools and controls design, review of current AML Policy review, AML/ KYC/ CFT Plan and framework, AML audit & reporting, due diligence Frameworks and process implementations and corporate training.