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Third party risk

Taking the shine off gold: How illegal mining creates financial risk

Jesse Spiro  Head of Threat Finance & Emerging Risks, Thomson Reuters

Jesse Spiro  Head of Threat Finance & Emerging Risks, Thomson Reuters

Gold is perhaps the oldest and most venerable investment of all time. Recognized for its importance and stability, it was, so we’re told, brought as a gift by the Magi to the baby Jesus in Bethlehem. It is seen as a safe haven in times of trouble and is one of the world’s most precious commodities; used in many commercial sectors including jewelry, electronics, computers, medical equipment and aerospace technology. Gold is the most popular investment of all precious metals, and countries buy the commodity for financial holdings in the form of gold bullion.

But due to the location and nature of gold-mining operations, the industry tends to have complex supply chains with operations and third parties (including vendors, agents, suppliers and contractors) situated across multiple jurisdictions that make the chain difficult to manage and compliance even more challenging.

Despite a growing effort to examine and regulate this industry, companies must pay close attention to ensure their supply chain is not negatively impacted by bribery, corruption, environmental crimes, conflict minerals, human rights violations and illegal mining when using gold as a raw component – all of which could cause reputational and financial damage.

A recent Thomson Reuters white paper, “Illegal Mining in South America and Financial Risk – Taking the Shine Off Gold,” explores the inherent supply-chain risks for companies for whom gold is an integral part of their business operations and what steps can be taken to mitigate these risks.

The illegal mining of gold is overtaking cocaine’s preeminence for the most profitable organized crime activity in parts of South America, especially within the traditional coca-producing nations of Peru and Colombia. The rise in gold prices, the belief that it is a relatively low-risk venture compared to the drug trade, and a lack of enforcement and government standards make illegal mining an appealing option. In Peru, “dirty gold” now outstrips cocaine as the country’s most lucrative export. And for narcotics dealers, illegal mining and the export of “dirty gold” is now considered to be the simplest and most profitable way to launder money in Colombia.

As a result, this illicitly gained commodity has made its way into legal international gold markets such as in jewelry, electronics, investments and more.

Due diligence: It’s a start

The Organisation for Economic Co-operation and Development (OECD) guidance on responsible mineral supply chains obligates companies producing or trading in gold to implement requisite due diligence, to ensure identification of third-party and supply-chain risk, and to take steps to reduce said risk of illegal gold entering supply chains. This is most definitely a start, but it is a complicated process.

A long history of mining

Hundreds of thousands of people throughout South America depend on small-scale artisanal gold mining for their income, and industrial-level mineral extractions and mining are enormously important to the economies of the region. So how can a company know what is legal and what is illegal?

Certification schemes provide a framework

Laws specific to governing the legality of gold mining operations such as licensing, excavation, labor standards and environmental requirements differ substantially from country to country, and can be intricate, further complicating the management of supply chains in South America, especially when businesses buy gold from several countries. To help, a few growing certification schemes have been introduced to provide a framework that helps companies navigate these complexities through a third party.

While they aren’t binding, meeting these standards provides a financial incentive for companies who become “certified,” securing the “endorsement” of the certifying body through a formal review process.

But certification isn’t the be-all and end-all. While the process provides significant benefits, it can also pose some potential downsides. It is a “pay to play” process which can, by its nature, raise questions about the accuracy and bias of the oversight. Additionally, in some cases organizations have attempted to manipulate the scheme, obtaining certification and then engaging in nefarious activity after the fact. This so-called “whitewashing” is also a potential problem.

When looking at their supply chains, organizations need to be aware that while regulation and certification schemes are in place in the region, this does not necessarily equate to them being enforced.

Furthermore, although risk exists across all sectors, industry standard codes of conduct tend to focus on the large-scale mining sector while the majority of the issues lie within artisanal mining, putting more emphasis on the value of certification.

Key certification schemes in the gold market include:

 Fairmined Fairmined is an assurance label that certifies gold from empowered responsible artisanal and small-scale mining organizations.
 Fairtrade The Fairtrade Standards for Gold and Associated Precious Metals for Artisanal and Small-Scale Mining covers the compliance requirements to participate in the Fairtrade system and earn the Fairtrade mark. The aim is to improve working conditions and to formalize/strengthen legitimate mining companies.

Certain steps and controls should be set in motion to detect, identify and combat illegal mining by all parties involved. There is a need for the increasing enforcement of legislation and for a hard line to be taken against the infiltration of criminal elements and organized crime groups into the gold-mining industry and upstream supply chains.

Proper due diligence and certification schemes are an important step in this process.

Learn more

To read the full white paper, visit:

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