2.1 Understanding and Assessing Risks Related to DPMS
Dealers in precious metals and stones (DPMS) play a significant role in the economy of the UAE. DPMS engage in a wide range of activities related to precious metals and stones, from production to trading, establishing the UAE as an important regional hub for this sector. The Dubai Multi Commodities Centre specializes in providing services to precious metal dealers and exchanges, and a significant volume of transactions also goes through the Jebel Ali Free Zone. A significant amount of activity also occurs in the Dubai Gold Souk.
Nonetheless, the precious metals and stones sector offers opportunities for criminals seeking to conceal, transfer, and/or invest their illicit proceeds. Like cash, precious metals and stones offer high value by weight, are difficult to trace and identify, and retain their value over time. DPMS, if they do not apply effective preventive measures, could be vulnerable to abuse by illicit actors engaged in laundering the proceeds of crime, financing of terrorism, arms trafficking, sanctions evasion, and other illicit activities.
2.1.1 Risks of Precious Metals and Stones
The characteristics of precious metals and stones make them uniquely appropriate as media to store, transfer, and exchange value:
i. Precious metals and stones are generally compact, durable, odourless, and of high value.
ii. Certain metals and stones (e.g., gold or diamond) are widely accepted as a method of exchange or currency.
iii. Precious metals and stones retain their value over time, and have roughly the same value all over the world.
In addition to these properties, precious metals and stones have characteristics that make them particularly attractive to criminals seeking to launder funds and others engaged in illicit behaviour:
i. Differentiating precious metals and stones often requires laboratory techniques, so it can be difficult or impossible to track their movement;
ii. Precious metals and stones can be transformed (through re-cutting or recycling) into different objects while retaining their value, interrupting known custody and transfer chains;
iii. Purchase, sale, and exchange of precious metals and stones often takes place outside the formal financial system.
For these reasons, DPMS may be targeted by illicit actors seeking to abuse their services and exploit the advantages of precious metals and stones. Although the majority of transactions involving DPMS are legal, these businesses may trade in items that could be the proceeds of crime, purchased with the proceeds of crime, and/or used to launder the proceeds of crime, unknowingly or complicitly.
Because they are themselves at high risk of abuse, DPMS pose a risk to LFIs. Complicit DPMS may knowingly partake in illicit activities and may in turn use their business relationships with LFIs to launder the proceeds of crime or carry out other illicit activity. Even DPMS that are not knowingly involved in illicit activities may use their accounts with an LFI to deal in the proceeds of crime. For example, a DPMS may wire payment for illegally mined gold to the entity responsible for mining and processing the gold.
Gold as a High-Risk Medium of ExchangeGold is easy to exchange and transfer, and may provide anonymity when processing transactions, as it is difficult to trace. It also has a universal price standard, a relatively stable market for investment, and may be used as a currency. Gold dealers may provide specific services to their clients, such as metal accounts, for storage or for investment properties. This may enable criminals to move gold under the guise of legitimate business.
2.1.2 Features of DPMS that Increase Risk
Not all DPMS pose equal risk. A DPMS is likely to be considered higher risk when it provides products or services that are attractive to illicit actors, has operations in high-risk jurisdictions, or does not apply appropriate anti-money laundering/combatting the financing of terrorism (AML/CFT) controls.
2.1.2.1 Regulatory Environment
In many jurisdictions, DPMS are not required to comply with requirements related to identification of customers and reporting suspicious activities. In other jurisdictions, these requirements are nominally in place, but DPMS are not subject to effective supervision and enforcement. Even in a jurisdiction that imposes and enforces such requirements, they frequently apply only to DPMS that engage in cash transactions above a certain value threshold. Where DPMS are unregulated or under-regulated, they are unlikely to be taking effective measures to protect themselves from abuse.
In contrast, an effective AML/CFT framework and supervisory regime for DPMS can protect DPMS and LFIs that serve them by effectively imposing AML/CFT requirements and by detecting, deterring, and prosecuting ML/TF crimes. It is important to note that, like LFIs, certain DPMS in the UAE are required to comply with all requirements of AML-CFT Decision, including the requirement to perform Customer Due Diligence (CDD) and report suspicious transactions (see section 2.1.4).
2.1.2.2 Products, Services, and Delivery Channels
Products, services, and delivery channels that facilitate the rapid, efficient, anonymous movement of value on a large scale will be more attractive to illicit actors and may put a DPMS at a higher risk of abuse. Such products, services, and delivery channels may include:
• Products (such as bullion and uncut stones) that are particularly hard to trace, retain or even increase in value despite being transformed into new forms (melted down, re-cut, etc.), and offer high value by weight. • Services, such as metal accounts, that allow customers to rapidly purchase and sell precious metals or stones. • Delivery channels that allow transactions to be carried out quickly and anonymously, such as accepting cash or virtual assets and conducting transactions online or through intermediaries.
2.1.2.3 Customer Base
The types of customers that a DPMS serves can also impact risk. For example, a DPMS that primarily deals with PEPs may be higher risk than one that serves a lower-profile clientele.
2.1.2.4 Geography
DPMS may be based, or may trade internationally, in jurisdictions that are higher risk for money laundering, the financing of terrorism, and the financing of proliferation. Such DPMS may pose heightened risk to LFIs. Higher-risk jurisdictions may be characterized by:
• A low level of government oversight and regulation of the precious metal and stone value chain;
• Low economic and political stability;
• High use of the informal banking system;
• High levels of corruption;
• The presence of terrorist and other non-state armed groups;
• Weak border control measures; and/or
• Sanctions and embargoes
Where a DPMS is based in a high-risk jurisdiction, LFIs are required by AML-CFT Decision to perform Enhanced Due Diligence.
2.1.3 Typologies
Precious metals and stones may be involved in a wide variety of illicit finance schemes. The following are some of the most common.
• Illegal mining or mining supported by the proceeds of crime. In jurisdictions where precious metals or stones are mined, illicit actors may operate small-scale ‘artisanal' mines without receiving a license or paying taxes to the state. The products of these mines are then exported to a refining or cutting hub for processing into saleable goods, like gold bullion and cut stones.
In many cases, criminal organizations control a mine or a network of small-scale miners. They may invest the proceeds of other illegal activities, such as drug trafficking, into the illegal mines and take the majority share of the resulting production as a return on investment. When the resulting precious metals or stones are processed, the criminal organization can sell them on world markets. The proceeds fund further illicit activities and may also support terrorism.
Example: Trading in gold to legitimise the proceeds of drug traffickingA criminal organisation in Country X was buying gold from various precious metals retailers using illicit proceeds from narcotics sales. The gold was then sold to a precious metals broker who then sold it to other businesses. The proceeds of the sale were then wired to a third party outside of Country X with links to the drug trafficking organization, thus completing the money laundering cycle.
• Use of precious metals and stones in sanctions evasion. The tradable nature, liquidity, wide availability, and anonymity of precious metals and stones has made them popular with individuals, organizations, and governments seeking to evade sanctions imposed by the United Nations or other jurisdictions. This activity may involve mining precious metals or stones under the control of the sanctioned person; the resulting products are then injected into legal trade using front companies and complicit DPMS, earning money for the sanctioned group. Or sanctioned actors may use precious metals and stones to disrupt a transaction chain involving the formal financial system and thus hide their interest in a transaction.
Example: Large-scale sanctions evasion using precious metalsAccording to Country A's federal indictments, a government sanctioned by Country A used front companies and complicit financial institutions to buy large quantities of gold in Country B. The gold was supposedly exported to the purchasing country, but was in fact moved by courier to the UAE, where it was sold in exchange for cash (U.S. dollars and euros). The cash was deposited with LFIs in the UAE under the names of front companies, and was made available to the sanctioned government to use in proliferation activities.
• Evasion of duties on precious metals and stones. Precious metals and stones are often the subject of heavy customs duties and other taxes. As a result, illicit actors will frequently seek to smuggle these goods from high-tax to low-tax jurisdictions, or may declare artificially low values for the goods by misrepresenting their quality or purity.
• Trade-based money laundering (TBML). The value of precious metals and stones varies highly based on their quality and purity, features which may not be apparent to the naked eye. In addition, the value of certain precious stones, particularly diamonds, can differ for different non-industry customers based on their personal preferences. This makes precious metals and stones particularly vulnerable to TBML, in which illicit actors use supposedly or actually licit trade to hide illicit finance. This can take a variety of forms:
o Trading the same goods—often precious stones—repeatedly between co-conspirators to justify funds transfers between members of a criminal network, or between companies owned by the same individual(s). In these schemes, a single precious stone may be repeatedly sold between members of the network, or a single stone may be sold to multiple “purchasers” at the same time, each time with a different description.
o Inflation or deflation of the value of traded stones to provide justification for cross-border transfers. A merchant may sell low-value precious metals or stones to a purchaser, but invoice for higher-quality goods and thus a higher sum. The purchaser pays the full invoice price, justifying the transaction to financial institutions, and also receives illicit goods such as drugs or smuggled items.
• Use of precious metals and stones as security for fraudulent loans. In a typology that is often related to TBML, precious metals or stones may be repeatedly sold or falsely valued between members of a network in order to justify loans and other forms of financing.
Example: Over-Valuation to Justify Illicit TransfersMr. A, a licensed DPMS, entered Country X numerous times, each time declaring that he was carrying valuable precious stones. He was in fact carrying gems that were lower value than the ones he declared. He then substituted the lower value gems for higher value gems that were already in Country X and presented them for inspection and clearance at an official diamond exchange. Through these methods, Mr. A obtained validated official importation statements for multiple importations of high-value stones which did not actually take place. He used these statements, together with fake invoices, to facilitate international foreign currency transfers to entities abroad in the guise of payment for the imported goods. He ordered these transactions both for himself and on behalf of other DPMS wanting to receive funds abroad without having to face scrutiny by financial institutions and public authorities.
2.1.4 Regulation and Supervision of DPMS in the UAE
DPMS that qualify as Designated Nonfinancial Businesses and Professions (DNFBPs) are subject to AML/CFT requirements that are substantially the same as those imposed on LFIs, including the requirement to identify customers, to report suspicious transactions, and to perform a risk assessment. Under Article 3 of AML-CFT Decision, DPMS qualify as DNFBPs only if they are “carrying out any single monetary transaction or several transactions that appear to be interrelated or equal to more than AED 55,000". A DPMS that does not engage in such transactions is not required to take any preventive measures. Although cash transactions are certainly high risk, LFIs should be aware that the fact that a DPMS does not qualify as a DNFBP does not mean that it is low-risk. All DPMS, regardless of whether they qualify as DNFBPs, must have a commercial license to operate legally in the UAE. The Ministry of Economy is also responsible for identifying and classifying DPMS as DNFBPs; LFIs are not required to make this determination. But LFIs should discover, through the CDD process, whether their customer has been classified as a DNFBP by the Ministry of Economy.
Obliged DPMS are supervised for compliance by the Ministry of Economy, which has issued guidelines for supervised entities describing their AML/CFT compliance obligations.2
2 Available at https://www.economy.gov.ae/english/Pages/AML.aspx.