Gold is one of the world’s most precious commodities, but in South America its production is increasingly dogged by human rights abuses and illicit activities, which creates significant financial and reputation risk for companies. Heidi Vella discusses the challenges with Jesse Spiro, global head of threat finance and emerging risks for Thomson Reuters Financial & Risk.
Bullish gold prices in recent years have attracted criminal elements, ranging from highly organised criminal gangs to small scale informal miners, all keen to cash in on the popular commodity.
In South America in particular, a lack of monitoring or prosecuting illegal mining, together with endemic corruption, has resulted in gold being perceived as a low-risk-high-reward way to make money.
This is a problem that is growing in both scale and prevalence, creating significant challenges not only within South America, but for any company that produces, buys, sells and even finances gold-related projects.
“Many believe the major drug trafficking organisations in Colombia make all their money from the production of cocaine and trafficking,” says Jesse Spiro, global head of threat finance and emerging risks for Thomson Reuters Financial & Risk.
“However, we learned that illegal gold mining and the extortion that is baked into the system and targeting legitimate miners, both large and small, is extremely profitable, in some cases even more so than coca production.”
A whitepaper entitled Illegal mining in South America and financial risk – Taking the shine off gold, co-authored by Spiro and his colleague Brian Huerbsch, explains that the Revolutionary Armed Forces of Colombia, or FARC, a Colombian guerrilla group, obtains an estimated 20% of its funding through illegal gold mining. Whereas in Peru, annual illegal gold exports are double that of cocaine, amounting to around $3bn.
In addition to Colombia and Peru, in the latter of which it is estimated 95% of illegal gold is mined from one region, the problem is prevalent in Bolivia, Brazil, Ecuador and Venezuela.
Assessing risk
Spiro is an expert on financial crime, anti-money laundering, enhanced due diligence and third-party risk and is also a member of the non-profit Intelligence and National Security Alliance (INSA).
He says that illegal mining presents varying risks for locals, governments, miners and companies involved in the gold supply chain.
Due to the use of mercury and lack of adherence to environmental standards, illegal mining is hugely detrimental to the environment. This, according to Spiro, creates additional costs to the livelihoods of locals and to regional industry, and “ultimately to the security of the state and financial system.”
One particular problem is so-called ‘gold laundering’. Just as with money laundering, illegal miners and organised criminals try to hide the illicit origins of their gold by mixing it with legitimately mined gold, to then introduce it into the legal international gold market.
For refiners and others, this makes it almost impossible for international gold-buying companies to differentiate between legal and illegal gold exports.
Corruption is another problem, evident in the forging of official documents and bribery.
Heidi Vella 