Gold Has Been a Haven of Wealth Since Antiquity

Since the dawn of recorded history, in diverse locales and cultures, gold has symbolized wealth and guaranteed power. Its possession has obsessed men and nations, destroying some cultures while helping others expand their influence.

The oldest gold objects discovered thus far were the products of the ancient Thracian civilization, dating from 4000 BC. They were found at a burial site in Varna, Bulgaria.² Archaeological digs suggest that the use of gold as a measure of wealth was initiated in the Middle East, where the first-known civilizations began. Egyptian tombs from the third millennium BC have been discovered with gold jewelry. The Egyptians obtained gold via trade with the Nubians of Ethiopia, as well as from their own mines. In West Africa, people traded gold for salt from the Sahara Desert in the north. The Persian Empire, in what is now Iran, made frequent use of gold in artwork as part of the Zoroastrian religion, while the Roman Empire used gold coins as currency. In fact, the acquisition of gold was the main focus of some of the Roman conquests, such as Rumania. Gold has also been important in the cultures of South Asia, China, and Central and South America. Finally, gold was one of the main reasons behind the early European exploration of the Americas. In the Inca civilization, gold was considered the blood of the sun. Gold exploration and mining were also keys to the development and settlement of the American West.

Gold Is a Readily Acceptable Medium of Exchange Anywhere in the World

Early in my career, while working for the U.S. intelligence community, I began training for a covert overseas assignment. I was to be inserted into one of the most remote areas of Africa to link up with a liberation group fighting a Soviet proxy government. In case I ran into trouble and would have to make my way to a nonhostile area, I was outfitted with boots that had gold coins secreted in the insoles. The assignment never materialized. But the reason for this anecdote is that it provides an excellent illustration that gold is recognized as a de facto bearer instrument anywhere in the world. In that sense, it is better than the paper dollar. Gold is an internationally recognized form of currency—even in far-flung and isolated lands.

In Times of Uncertainty and Civil Strife, Gold Is Often More Reliable Than National Currencies

I once traveled to Kuwait shortly after Saddam Hussein's Iraqi army was forcibly expelled by coalition forces. At the time, there were many stories of Kuwaiti citizens who had fled their country during the invasion and occupation. Prior to leaving, they had desperately tried to exchange their dinars and dollars for gold. These actions had many historical precedents. In times of economic or political uncertainty, gold generally increases in value as people seek out the comparative stability it offers. Today, in certain parts of the world, individuals continue to stockpile gold holdings in case they find it necessary to flee. Indeed, gold is a much better insurance policy, bribe factor, and source of transportable wealth than currency. With it, people can carry much more value on their person than they could via even large-denomination currency, whether they are using specially designed smuggling vests, small bags, or other means. Perhaps most important, gold is accepted at almost any destination—the same might not be true of some national currencies.

Gold Prices Are Fixed Daily in Markets Worldwide, and Gold's Value Is Relatively Constant Over Time

The price of gold is set in international trading markets, and as with most commodities, it fluctuates daily. Yet if gold is selling for $1,200 per ounce in New York, it will sell for the same price in London, Zurich, Tokyo, Dubai, or Johannesburg. The daily price can easily be determined, whether one is consulting financial markets, the Internet, a major newspaper, or visiting an Arabian gold souk (market).

In addition, although the price of gold varies over time, its value remains relatively constant. This is due to the fact that its supply is limited and generally fluctuates no more than a few percentage points annually; the gold in circulation continues to be recycled. Thus, it is the value of the dollar that changes, which in turn affects the price of gold. Because money launderers are businesspeople, they are attracted to the relative constancy that gold offers.

The Weight and Quality of Gold Can Be Assured

Gold is mined in every continent but Antarctica. Russia, South Africa, the United States, Canada, Australia, and Peru are some of the top producing countries. Gold is generally manufactured into bars and other forms in more limited gold centers, including Switzerland, London, and Dubai. There are strict international standards and safeguards regarding the purity, sizing, and quality of this manufactured gold.

Solid gold bars must be 99.99 percent pure. These bars are sometimes referred to as four-nine gold. Depending on the market, the so-called “good delivery bars” are formed into 35.27-ounce kilo bars, about the size of a small brick, which are particularly popular in Western countries and the Middle East. In South Asia, 10-tola bars (an Indian unit of weight) are popular; these 3.75-ounce pieces are approximately the size of a candy bar. Wafer-thin tael bars are primarily found in the Far East and are manufactured in various shapes and sizes (the tael is an ancient Chinese weight approximately equal to 1.2 ounces).

Gold Offers Easy Anonymity

When investigating traditional money laundering, authorities try to “follow the money” via a paper trail. Financial intelligence can be generated from bank records, identifiers found on currency, electronic codes associated with wire transfers, and numerous other sources. Gold, the commodity, lacks such identifying records. Gold coins, and even gold bars, may have serial or manufacturing numbers that are easily removed. Chemical analysis is generally unable to conclusively trace its origin. Although trade data are generally available (see Chapter 9), matters are complicated because gold's form is readily altered. In other words, there are very few effective ways to follow a disguised or laundered “golden trail.”

Gold Is Generally Immune to Asset Freezes

Given the proliferation of asset freezing and seizing efforts, criminal and terrorist organizations are often reluctant to deposit liquid assets in financial institutions. Many have realized that it is much more secure to simply hoard assets such as gold outside the formal financial system. For example, in 2007, as part of one of the largest money laundering seizures in history, the Colombian National Police and DEA discovered more than $80 million worth of cash and gold in private residences and businesses, buried in the ground, stashed in private safes, or hidden elsewhere.⁴ In 2008, when the European Union threatened new sanctions against Iran, $75 billion worth of Iranian assets were moved from European banks, and some of these funds were reportedly converted to gold.⁵ And in a 2009 law enforcement operation targeting a marijuana distribution ring that brought large quantities of the drug from Canada to Saratoga County, New York, authorities found 172 gold bars, 161 gold coins, and a 100-ounce silver bar in one of the conspirators' homes. The items were purchased with money from the drug trade.⁶

There Is a Tremendous Demand for Gold in Various Cultures around the World

Gold plays important cultural roles in much of the world. Throughout their histories, India, China, the Middle East, and Latin America have all treasured gold. It continues to be in high demand whether as jewelry, savings, a type of bearer instrument, a hedge against unexpected currency devaluations, an escape from the tax collector, a means of transporting wealth, or as part of religious/cultural ceremonies such as weddings.

China recently surpassed India as the largest consumer of gold. In 2013, Chinese consumers had purchased a record 1,066 tons of gold, 32 percent more than a year earlier.⁷ Historically, Saudis are the world's largest spenders on gold per capita.⁸ For example, it is not unusual at Saudi weddings for the bride to be draped with kilos of gold jewelry.

Depending on the Need, Gold Can Be Altered in Form

Gold's unique characteristics allow its form to be altered. For example, brokers and traders can change gold bars into various forms of jewelry. Moreover, it is not uncommon for gold to be melted or smelted and poured into special molds. As in the case of Operation Meltdown⁹ in New York City (described in the Case Examples section below), the gold was disguised as machine parts, tools, nuts and bolts, belt buckles, and other items. Once cast, these fake golden parts require only a coat of black spray paint and grease, making them much easier to smuggle across borders. Similarly, the Jordanian Customs Bureau told me that there have been instances of gold being smuggled in the form of license plates. The smugglers melted the gold, put it in a license plate mold, painted it to resemble a commonly issued vehicular plate, and simply drove it across the border.¹⁰ Although there are some small expenses associated with the schemes, the alteration of the gold is an acceptable cost of doing business for the illicit actors.

Gold also has myriad industrial uses that facilitate changing the form of gold and give paper justification for illicit transfers. For example, there are often strict controls on gold exports, particularly in countries that mine their own gold. But in some TBML schemes, the conspirators switch from four-nine gold to gold “scrap,” which bypasses controls. While scrap gold theoretically lessens the value of the shipment (see Figure 6.1), the new classification works in the favor of those who want to disguise illegally mined artisan gold.¹¹ Gold scrap is a frequent TBML commodity.

Electronic gold or “e-gold” has been used by criminals laundering illicit money via online accounts. E-gold is yet another way to alter the form of gold. As a result, in the United States the government has moved to ensure that e-gold businesses are licensed and operate under the same regulations as money services businesses.

Figure 6.1 represents the import of solid “four-nine” (99.99%) pure gold in comparison with gold scrap. The horizontal line represents time and the vertical line represents value. The data are taken from a comparison of harmonized tariff schedule entries representing the importation of gold into the United States from various countries in Central and South America. Gold scrap is not defined with precision and invites fraud. Suffice it to say its value and gold content do not approach “four-nine” gold. That being the case, why is the United States importing massive quantities of gold scrap at prices higher than gold bullion? Perhaps criminal organizations are seeking to launder the proceeds of crime by overinvoicing multiple shipments of scrap to send payment out of the country?

Gold Brokers Can “Layer” Transactions That Further Confuse the Paper Trail

As described in Appendix A, layering is simply a method of disguising a money trail via a series of transactions. In traditional money laundering using financial institutions, this is often accomplished by the use of multiple wire transfers from one location or jurisdiction to another. This tactic can be used with gold as well. For example, criminal organizations involved directly or indirectly in the gold business often have “gold accounts” in banks or trading houses, as well as silver accounts, dollar accounts, and local currency accounts. To muddy the trail, they can shift value from one account or institution to another and from one jurisdiction to another. They can even combine this practice with the previous tactic of altering gold's physical form. This type of activity makes it very difficult for criminal investigators to follow the value trail.

Gold Is Susceptible to Double Invoicing, False Shipments, and Other Fraudulent Schemes

Chapter 2 offered an explanation of trade fraud and examples of fictitious invoicing and related schemes. Although most commodities can be used in such schemes, gold is particularly attractive to trade-based money launderers. Because its high value can be condensed into a comparatively small size, gold can be used to launder or transfer larger amounts of value in a single transaction, contrary to other items such as foodstuffs or textiles. Since money launderers generally want the largest return for their efforts, gold's unique properties make it the commodity of choice in various fraudulent schemes.

For example, Colombia's official annual gold exports are reported to be approximately 75 tons although the industry only produces 15 tons.¹³ Could the difference be fictitious sales?

Figure 6.2 illustrates how massive quantities of gold were exported from two neighboring countries “into the commerce of the United States” (customs terminology). (Note: The graph was created from real data, but many of the details of this case constitute privileged information so the details are omitted.) Neither of these neighboring countries mine or produce gold in notable amounts. According to the U.S. Customs special agent who investigated the case, the spike in exports represented drug proceeds cycling through the region in the form of gold. As explained in Chapter 2, multiinvoicing is a common TBML technique.

The graph's horizontal axis represents time while the vertical axis represents the value of gold being exported to the United States. The data make clear that when authorities cracked down on the illicit gold trade in Country A and made arrests, the criminal organization responsible for this activity simply relocated to neighboring Country B (additional arrests were eventually made in Country B as well, confirming the shift indicated in the graph).

Gold Is Easily Smuggled

Gold smuggling in various forms has been chronicled around the world. Because of its unique characteristics, it can be altered in form to fit a smuggler's needs. As described previously, it can be melted or smelted into various shapes and sizes, disguised, and smuggled across borders. It can also be concealed on a person, within baggage, or hidden in a shipping container. There are special gold smuggling vests outfitted for smugglers that allow them to transport hundreds of thousands of dollars of gold on their person—much more value than actual paper currency. Some gold bars are even manufactured with special rounded corners and edges so as not to rip courier bags (or sensitive body cavities).

In certain areas of the world, illegal gold mines are also a major problem. For example, in Latin America the last decade has seen a tremendous boom in illegal gold mining that in some cases has eclipsed the cocaine trade as the leading source of criminal income. Guerilla groups such as the Urabeños and the Revolutionary Armed Forces of Colombia (FARC) have set up their own mining operations or charge miners “fees” to operate in territory they control. The gold is then smuggled out of the country or combined with licit production. According to the Colombian Ministry of Defense, in 2014 authorities seized approximately 740 kilos of illegal gold. In 2010, no gold was seized at all.¹⁵ Similar schemes involving gold, illegal mining, smuggling, and money laundering have taken place in Mexico and Peru.¹⁶

Gold smuggling has been curbed in some regions. However, pilfering and smuggling from mines is still a concern in South Africa, Ghana, and other locations. Although the gold trade in the Indian subcontinent was liberalized in the mid-1990s, Dubai still maintains a shadowy reputation as an international gold smuggling center. In fact, the waterway winding through the port of Dubai has been dubbed “Smugglers Creek” because of its multitude of rarely inspected dhows that ply the Arabian Sea, Indian Ocean, and waters of eastern Africa.

In the United States, customs authorities have investigated cases in which drug proceeds are used to purchase gold from American vendors. The gold is then smuggled across the border into Mexico in the same manner as illicit bulk cash.

In most jurisdictions, gold is exempt from traditional cross-border currency reporting requirements. Vietnam, Italy, Saudi Arabia, Jordan, Taiwan, and Ukraine are among the few countries that mandate the declaration of gold as a form of currency. For example, travelers entering or leaving Vietnam must fill out a cross-border currency declaration form if they are transporting the equivalent of more than approximately $5,000 or more than 300 grams of gold.¹⁸ A customs official opined that almost every woman crossing a customs terminal, anywhere in the world, is carrying gold. He said, “Monitoring this flow of funding can be implemented only through amendments to laws and regulations, including forcing customs declarations for personal precious jewelry. Even then, only a minor portion will be reported.”¹⁹

Gold Is Often the Commodity of Choice in Underground Financial Systems

As per the discussions in Chapter 4 on hawala and Chapter 5 on fei-chien, gold has long been one of the principal means for brokers dealing in underground finance to balance their books. In fact, a 1998 study by the British Commonwealth Secretariat on the misuse of hawala found that “gold smuggling linked to invoice manipulation plays an important role in the settling of accounts between hawaladars.”²⁰ At the time, the Secretariat concluded that if gold (and silver) smuggling were somehow curtailed, 80 to 90 percent of hawala transactions would cease.²¹ Although underground financial systems are increasingly diversified today, TBML and value transfer based on the misuse of the international gold trade are still essential.

According to the U.S. Department of State's 2015 INCSR report, in Taiwan, “Jewelry stores increasingly are being used as a type of underground remittance system. Jewelers convert illicit proceeds into precious metals, stones, and foreign currency, and generally move them using cross-border couriers. The tradition of secrecy in the precious metals and stones trade makes it difficult for law enforcement to detect and deter money laundering in this sector.”²²

Case Study 1: The Magharian Brothers

The first major case that brought attention to gold's role in international money laundering was the late 1980s investigation targeting Barkev and Jean Magharian.²³ Operating from hotel rooms in Zurich, these Armenian Lebanese brothers laundered an estimated $1 billion in drug proceeds through gold dealers and Swiss banks with the help of a Bulgarian government connection.

The Magharians were part of an international currency and gold smuggling network. Under their direction, money from drug sales in the United States and elsewhere was smuggled in suitcases to Turkey where it was delivered to gold shops. Acting as a parallel banking system, the shops then forwarded cash to Bulgaria. The security services of the communist Bulgarian government facilitated the shipment of cash to Zurich, where it was deposited into banks by Lebanese and Syrian couriers. Operatives then purchased gold from a Swiss precious metals dealer, transported it to Bulgaria, and smuggled it into Turkey. Once safely in the gold bazaars, it was used to pay the drug traffickers.²⁴ The trail continued into the boardrooms of the three largest Swiss banks and even to the highest levels of the Swiss government.²⁵ The Magharian brothers were eventually indicted in California for conspiracy to launder drug money and in New York for selling cocaine.²⁶

Case Study 2: Illegal Gold Mining and Tax Fraud in South Africa

According to Global Financial Integrity, South Africa is the fifth largest producer of gold. The gold mining sector represents about 2 percent of the South Africa GDP.²⁷ Yet there is a growing problem with underground mines in South Africa that are serviced by thousands of illegal gold miners. Many of them are illegal immigrants from neighboring countries. In addition to the criminally mined gold, South African authorities are concerned about the large associated tax fraud.

The South African government doesn't charge value-added tax (VAT) on mined gold. However, like many countries, it does charge tax on processed or “worked” gold. Some of those who traffic in illegally mined gold recognized an opportunity. They disguise the gold as second-hand “scrap” gold. According to the Financial Transparency Coalition, they employ “invoice writers,” create false identities, and use trade misinvoicing tricks to produce false documentation that is adequate to pass audits from the tax authorities. They then claim back VAT they never paid. Official corruption is assuredly involved. So South African taxpayers end up paying 14 percent VAT over and above what they lost on the illicit gold itself!²⁸ And not only is the scheme a fraud against the South African treasury, but illegal mining can cause severe environmental degradation. It has also generated gang warfare over turf, robbery, theft, and prostitution.²⁹

Case Study 3: Gold Smuggling into Colombia

According to official Colombian statistics, in 2013 Colombia exported 58 metric tons of gold and in 2012 exported 77 metric tons. It is believed more than half of the gold exported may have been smuggled into the country and treated on the books as local production. It is estimated that as much as $3.3 billion of gold was smuggled into Colombia from Venezuela, Panama, Mexico, and Chile. Some of the contraband gold was allegedly sent via trading firms and bought at inflated prices with drug money.³⁰

Case Study 4: Operation Meltdown

In a 2003 case, ICE investigators discovered that money launderers were converting the proceeds of narcotics sales to gold. The launderers visited gold jewelers in the greater New York City area and purchased jewelry in various forms. They then melted the gold and recast it into a wide range of common materials such as wrenches, nuts, bolts, belt buckles, and trailer hitches. Sometimes the golden objects were painted and covered with a layer of grease. The disguised gold was then shipped to Colombia to be sold and converted back to cash. “Operation Meltdown” resulted in 23 arrests along with the seizure of 140 kilograms of gold and $1.5 million in cash.³¹

Case Study 5: Fake Gold Sales

A two-year investigation by Colombian law enforcement officials focused on a gold export company. The company reportedly used fake gold sales to launder 2.3 billion pesos (approximately $1 billion). Investigators found that many of the thousands of alleged providers of gold that did business with the suspect company didn't even exist or were registered in the names of deceased individuals. Some of the companies were reportedly linked to Colombia's largest criminal group.³²

Case Study 6: Cash-for-Gold-for-Drugs

In a 2015 investigation centered in Chicago, 32 people from the United States and Mexico were accused of being involved in a “cash-for-gold” conspiracy that laundered more than $100 million in U.S. drug proceeds for Mexico's Sinoloa drug cartel. Individuals used cash from narcotics sales to purchase gold scrap and gold jewelry in a multistate area. The gold was later sent to precious metal refineries in Florida and California. The refineries sometimes transferred payments for the gold directly to Mexico.³³