Who Watches the Watchers?

From grocery shopping to voting to emailing, technological surveillance through political and corporate policing has infiltrated, and arguably undermined, most essential aspects of privacy and security.

So how, with all this technological know-how, has gold—one of the world’s most important commodities and, for a long time, currencies—gone virtually untraceable?

About 60 percent of the world’s gold trade flows through Switzerland, a jurisdiction that houses the  biggest gold refiners. If the London Bullion Market Association (LBMA) is to be believed, refiners based in Switzerland are some of the most credible and “clean.” They are audited by respectable accounting firms such as Ernst & Young. In theory, the regulatory fortress is strong.

In practice, this is far from true: until 2016, the LBMA’s International Organization for Standardization audits did not require that refiners publicly disclose the origin of their gold or that they produce third-party audits. Effectively, any gold traded from the LBMA’s “clean delivery list” prior to 2016 can be described as placeless, without nationality. More to the point, many of the LBMA’s clean refiners are based in Switzerland, where information disclosure, including gold suppliers and origin, is against the law. Refiners are conveniently protected by sovereign-backed secrecy. The LBMA, itself a private entity, also maintains that details related to its own corporate structure be kept confidential.

Meanwhile, other independent watchdogs, such as accounting firms, turn a blind eye to their clients’ unsavoury activities. These accounting firms are also protected by sovereign-backed secrecy, with branches based in tax havens. These obvious gaps have yet to prevent the Organization for Economic Cooperation and Development from celebrating, regulating, and prioritising accounting firms and the LBMA as credible and independent watchdogs.

The danger is not that Swiss-based refiners directly import commodities from conflict regions. Indeed, they would be foolish to do so. Swiss refiners have instead shifted toward outsourcing the first step of the legal but illicit laundering cycle by importing from other big refiners based in jurisdictions such as Dubai, which handles 20 percent of the world’s gold trade. Both jurisdictions are commodity-focused, and both are tax havens. Just as the Swiss refiner relies on its Dubai counterpart to perform the not-so-mysterious service of stripping the gold’s origin, Switzerland relies on Dubai’s legal and financial secrecy to protect the industry at large—its players, sure, but more importantly, the structure and techniques involved.

The naked truth of conflict minerals is that endemic factors identifying particular localities are only part of a bigger picture. The problem is systemic and is more political than geographic. The political dynamics at play are buried and reflected through a seemingly neutral economic, regulatory, and legislative architecture that remains blind to the obvious, the alluvial.

Take the example of Sudan: as the African Network of Centers for Investigative Reporting (ANCIR) recently presented to the OECD, initiatives designed to prevent Khartoum’s gold from entering international markets are designed to fail. Sure, the gold, priced at $2.5 billion or more annually, is U.S.-sanctioned. But more importantly, the gold is produced by artisanal miners, some of whom work under coercive or violent circumstances, such as the 100,000 miners in North Darfur’s Jebel Amir mines. The mines are allegedly overseen by the Janjaweed, a militia group that is perceived to be an arm of Khartoum—an association denied by the latter. Members of both the militia and the government are under investigation by the International Criminal Court for genocide in Darfur.

Gold mining in Darfur has shifted the character of violence from socio-political to resource-fueled. The Central Bank of Sudan has established a system of purchasing gold from artisanal traders at higher than market prices to bring the trade within a formal and streamlined process. On the surface, it’s working. Data obtained for 2012 shows that Sudan’s official declared volume of gold exports is short of the actual tonnage by about 10 to 12 tons per annum. For its part, Khartoum needs revenue to realize its own economic responsibilities to Sudanese citizens without the $7 billion or more that used to come from oil revenues—a deprivation caused by the creation of an independent South Sudan. There are also allegations that Khartoum uses government funds to finance arms and armies, formal or otherwise.

Sanctions, such as those imposed by the U.S. on Sudan, in reality affect only citizens, as the first and obvious tendency of any pariah regime or militia is to go dark by using tax havens where secrecy is the primary commodity sold. Most tax havens don’t even want to know the ultimate beneficiaries, enabling various intermediaries and nominees to stand in as due diligence substitutes. Dubai follows this model, as does Switzerland.

According to confidential information obtained by ANCIR, all of Khartoum’s official gold production flows straight to Dubai, where it is purchased by one refiner and then exported to jurisdictions such as Switzerland. The information shows that it is ultimately purchased by the LBMA’s “clean refiners” before circulating to global markets, including U.S. multinationals. Ernst & Young, the refiner’s auditor, looked past glaring irregularities such as gold classified as “high risk,” missing due diligence paperwork, cash-for-gold purchases, and mined gold reclassified as “scrap.” In fact, the answers to most of the due diligence questions appeared to remain blank. Ernst & Young, in a contradictory statement, denied doing anything wrong while also claiming credit for reporting wrongdoing to the regulator. Ernst & Young could, it appeared, no sooner find any untoward activities than incriminate itself for its own prior work. It’s not the specific client that mattered to Ernst & Young, but the nature of the business—selling legitimacy to private actors using its status as an independent third party.

Ultimately, the financial characteristics of conflict minerals are systemic, tethered to credible countries and institutions, informing not only how conflict takes shape on the ground or the tactics used to move money and commodities, but also the process through which the system is maintained and protected. The protection of this system lies in the total silence surrounding the use of tax havens as the main channel for the bulk of the world’s gold—a giant laundry service. The success of the model transforms conflict into a business, one that ironically taps into the grey market of the compliance industry because the actors buying into “conflict” need to find ways to limit their exposure.

Is it any wonder that gold remains untraceable, without face or place?

 *This article was published in World Policy. To view the article on their website click here

Khadija Sharife is a financial researcher, investigative journalist and writer based in South Africa. She has been a researcher, trainer, consultant and presenter on illicit finance, governance and natural resources for the African Union, OECD, Pan-African Parliaments and NGOs including Tax Justice Network, among others. She was formerly editor of the African Network of Centers for Investigative Reporting (ANCIR) and coordinator and lead researcher of the European Union’s Environmental Justice Organisations, Liabilities and Trade project housed at the Center for Civil Society. She has published across media and academic journals including South African Journal of Human Rights, Review of African Political Economy, World Policy Journal, Africa Report, African Business, New African and African Banker.

To read publications by Khadija Sharife on our website please click here.

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