Illegal Trade, Precious Metals

Criminal Activities

The high value assigned to precious metals has made them objects for criminal activities ever since the dawn of civilization. In Syracuse in the third century BCE, King Hiero II suspected that his goldsmith had mixed silver in a golden crown that the king had ordered, thereby shortchanging him, but at first he lacked proof. Archimedes solved the forensic problem by applying his famous principle of buoyancy to the fact that gold in those days was the metal with the highest known density, far higher than silver. The crown, having less density than gold, must consequently have had some other metal added to it.

Today, criminal activities in the production, trade, and use of precious metals can take many forms.

• Unauthorized mining or collection (such as from alluvial deposits) often serves local markets as uncoined currencies but leads to diversion of assets, tax avoidance, and other crimes.
• Pilfering (theft of small amounts) by employees during mining and processing may cause considerable losses. The amounts are likely to be traded to local intermediaries.
• Imitations and forgeries of precious metal products can encompass mixing with other metals such as lead in coins. Some tricks can be detected easily by measurements of density or change in malleability. To avoid being caught by simple measurements of density, forgers have coated wolfram (tungsten) bars with gold. Both metals have the same density (19.3), making forgery more difficult to detect. Many countries require official stamping (hallmarking) of precious metal objects to be sold domestically.
• Resmelting (refining) of precious metals requires industrial capacity. Some refineries only perform superficial diligence controls to ascertain the origins of their inputs. Resmelting makes the identification of the original source very difficult and thus offers a backdoor to recirculation of illegal batches. It also enables the recycling of stolen precious metals in bullion or pilfered metals from used machinery. The method of resmelting was used in World War II by Nazi Germany on a large scale to recirculate gold looted during their occupation of large parts of Europe. The new bullion was sold through neutral countries.
• Diversion (hiding or “stashing,” clandestine shipping, etc.) of precious metals is perpetrated, for example, to avoid property taxes or currency regulations, to ensure survival in times of economic crises, to hide criminal origins of assets, and so forth.
• Smuggling of gold is common in Africa, the Middle East, and many other parts of the world. It is a channel for informal currency exchange, financing of armed conflicts, corruption, and stealing from government coffers. After the September 11, 2001, terrorist attacks, al Qaeda and the Taliban transferred substantial sums [Page 875]from Afghanistan to Dubai by exporting gold in physical shipments before the U.S. invasion in Afghanistan in October 2001.
• Cornering the market is an attempt by a party to acquire such a large position (in assets or futures contract) that it is possible to manipulate the prices. In 1979–1980, a cornering attempt in silver by the American brothers Nelson Bunker Hunt and Herbert Hunt drove up the price from US$11 per troy ounces to US$50. The attempt failed and the price quickly dropped to US$11.
• Scams are swindles or frauds, often played on people with less understanding of a type of business. Precious metals scams can make use of unsupported estimates of hidden reserves, promises about new extraction methods, or forged geological assessments. Advanced schemes can even make use of “salting,” that is, the addition of small amounts of powdered or sprinkled gold (and also silver and copper to mimic natural compositions of ore) to samples sent for assessment. In 1997, the Canadian mining company Bre-X Minerals Ltd. collapsed when it was found out that estimates for its gold mining project in Busang, Indonesia, were based on fraud. Samples had been salted with gold dust.
• Money laundering is the hiding of the origins of assets from criminal proceeds to make them appear legal. Precious metals are well suited for this purpose as they are of high value, easily transported, and more difficult to track than bank payments. The hawala network of informal economic transfer by expatriate Middle Easterners uses gold as the standard for currency exchange for payments in large parts of the Middle East and Asia and sometimes also for physical transfer of assets to balance accounts. In recent years, the system has become the focus of concern about it being a channel for money laundering and financing of terrorism and conflicts.
• Financing of armed conflicts makes use of precious metals to channel payments or resources for logistics. This has given rise to the concept of “blood gold,” parallel to “blood diamonds,” that is, precious assets from illegal or unauthorized sources financing groups and factions involved in armed conflict. The conflict in the Democratic Republic of the Congo has, since the mid-1990s, resulted in millions of deaths and the displacement of millions of people. A report by the United Nations in 2003 noted that one major source of financing the conflict was through the illegal extraction and smuggling of coltan by rebel groups.
• Corruption is vital to enable and protect illegal activities related to precious metals, such as the acquisition of mining rights, trade permits, certificates of origin, and so on.

The illegal trade in precious metals generates a number of negative externalities (“spillover effects”). These can often involve criminal activities in the form of a “trade,” that is, financial arrangements to secure rights, assets, or avoidance of liabilities. The primary acquisition of the property rights to produce the ensuing precious metals can be illegal. Action of this kind may include illegally obtaining mining rights or encroaching on land rights of indigenous people who become displaced by the opening of mines and processing plants. In 2003, local opposition to a prospected gold mine in Tambogrande, Peru, led to the cancellation of the project, which would have caused serious displacement and extensive environmental impacts. Negligent or criminal handling of chemicals used in the processes or waste from the production can have far-reaching environmental and public health consequences. Old processes, which are still in use in many places, can produce large emissions of cyanide or mercury, for example. New technologies have considerably reduced emissions of this type. Plans to dump large waste deposits from gold mining into the Lower Slake Lake in Alaska were stopped in 2006 by a local court whose decision was based on the U.S. Clean Water Act.

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