3.1 Risk scenarios

Trafficking in precious metals is linked to illicit financial flows. Several fraudulent schemes are used to evade tax, launder money or fund other crimes. The incorrect valuation of precious metals on export or import documents, or the practice of trading precious metals as “low-value scrap” are typical examples. Misinvoicing of transactions involving precious metals can be used for laundering money, claiming tax incentives (VAT and tax fraud) or dodging national capital controls.

Finally, the trafficking of precious metal is connected to the theft of products containing Platinum Group Metals (PGMs) (such as catalytic converters, chemical catalysts and other applications containing PGMs). A high percentage of PGMs can be refined and reutilized nearly an unlimited number of times. The high technical recyclability of PGMs means that over 95% recovery can be achieved once PGM-containing scrap reaches a state-of-the-art refining facility7 (e.g. 90% of the PGMs ever produced is still existing).

There have been many incidents involving the theft of automotive catalysts and other products that contain PGMs. Media reports show that thieves are ripping catalytic converters from cars at an alarming rate. One bag containing 1000kg of scrap spent automotive catalysts (a device used to reduce emissions from an internal combustion engine) can have a value of up to 50.000 USD while a repair could cost a victim thousands of dollars. For example, in the United States, according to a report by the National Insurance Crime Bureau (NICB), the increase in these thefts is dramatic. In 2018, there were 1,298 catalytic converter thefts reported. In 2019, it was 3,389 reported thefts. In 2020, reported catalytic converter thefts jumped massively to 14,433, with December leading the way with 2,347 thefts, or roughly 16 percent of the yearly total – in just one month.8 Furthermore, in the UK, an investigation by The Times showed that almost 6,000 catalytic converters had been stolen from 2015 to 2019, of which 2,894 occurred in the first six months of 2019.9

This section of the report describes three different risk scenarios related to the illicit trafficking of precious metals, to show how organized crime can explore vulnerabilities in this area. The scenarios are dedicated respectively to the illicit trafficking of precious metal materials, illicit trafficking of counterfeited gold bars, and the infiltration of the legal industrial refining process. Subsequently, the report analyses possible technology solutions aimed at limiting risks highlighted by the scenarios.

Three risk scenarios have been elaborated on in the area of illicit trafficking of precious metals.

Risk scenario 1: Illicit Trafficking of Precious Metal Materials

A developing country is known for its large reserves of precious metals, such as gold and platinum group metals, and mining is the primary national industry. In close proximity to large-scale mining sites controlled by foreign multinational companies, the government has awarded gold mining concessions to small-scale local mining operations. The small-scale mining operations: 1) exploit marginal or small gold deposits; 2) are labour-intensive; and 3) have poor access to markets and support services. The national authorities recognize the role of the developing domestic, small-scale industry and are therefore subsidizing local companies.

However, operations in a specific region are under the control of organized crime groups, which have infiltrated the supply chain of extractive industries to profit from the illicit trade in precious metals. The leader of a prominent organized crime group has realized that engaging in the illicit trade in precious metals would provide a high return on investment with a lower level of risk than other illicit activities.

7 See Recycling the Platinum Group Metal. A European Perspective, available at https://www.researchgate.net/ publication/233563592 8 National Insurance Crime Bureau, 15 April 2021, https://www.nicb.org/news/blog/catalytic-converter-thefts-skyrocket-acrossnation 9 BBC News, 20 September 2019 https://www.bbc.co.uk/news/business-49767195

To achieve this goal, she/he implements the following business model:

Step 1. Taking control of informal mines: Armed members of the criminal group raid the mining sites of the region, forcibly recruiting the workers to continue the operations to the benefit of the criminal group.

Step 2. Setting up an international smuggling ring: Precious metals extracted from the sites are then stored in a warehouse close to the main national seaport, where members of the criminal group take care of marking, weighing and analysing the precious batches of metals to determine their economic value. The criminal group aims to export the precious metals to a neighbouring country, where another affiliated criminal group owns shares in a metal smelting and refinery plant.

Step 3. Trade misinvoicing: In order to evade tax duties and dodge Customs controls, the leader of the criminal group proposes a lucrative business to a scrap dealer, who is licensed to export copper and other material containing precious metal components, for use in computers and telephone equipment. In exchange for a commission, the dealer misrepresents the nature of the merchandise as scrap metal on trade documents, with a significant underestimation of its value, thus avoiding the clearance required for the exportation of precious metals. The falsified trade documents are shared with the criminal group operating in the neighbouring country, who, thanks to its participation in the smelting and refinery plant, is able to receive such products for professional reasons, without raising suspicions. The content and the value of the consignment is then reassessed, to determine its economic value. The plant is then able to sell the refined gold to goldsmiths and retailers.

Step 4. Money laundering: At this stage, an amount equivalent to the underreported value of the scrap metal is wired from the purchasing smelting and refinery company to the shipper, thus simulating a licit economic transaction. At the same time, the criminal group transfer the proceeds of the sale of the precious metals to foreign bank accounts attributed to other front companies controlled by the same criminal organization.

The exploitation of workers at the mines allowed the leader of the criminal group to arrange monthly consignments of unwrought precious metals to her/his affiliate plants in the neighbouring country. After the refining stage, the metal-bearing rocks yield over 5 kg of gold, which is worth 175,000 euros (35,000 euros per kg). Over a year, the illicit trade scheme based on the misrepresentation and under-invoicing of precious metals generates over 2,100,000 euros in illicit profits for the criminal group.

Risk scenario 2: Illicit Trafficking of Counterfeit Gold Bars

A country is known for its large reserves of precious metals, such as gold and platinum group metals, and mining is the primary national industry. The leader of an organized crime group, which controls the production of narcotics in the same remote areas where informal mines operate, is seeking opportunities to launder illicit profits and, at the same time, generate additional incomes. She/he realizes that the illicit trade in gold would provide a high return on investment, at a relatively lower level of risk.

Her/his criminal group implements the following criminal business model:

Step 1. Acquisition of gold from illegal mining: The criminal group uses illicit profits (mainly generated by illicit trafficking of narcotics) to buy gold.

Step 2. Transform the gold into counterfeit gold bars: The criminal group uses a corrupt bar producer to manufacture counterfeit gold bars. The bars are fraudulently stamped with a logo of poor quality of accredited refinery companies. The purity and form of the bars are below the standards set by LBMA.10

Step 3. Smuggling to a neighbouring country: The criminal group illegally smuggle the gold bars to another country. They use two different routes: by boat for large quantities or by air for small quantities. In Redland, the gold bars are collected by an associate of the criminal group, which owns a precious metal import company. Through illegal smuggling, the criminal group evades consumption tax (VAT).

10 The Independent Precious Metals Authority.