It seems to me you’re missing the point.
The miners are all small time freelancers, one or 2 man operations let’s say. They have nothing to do with the cartel per se. They sell it to intermediate buyers, who then sell it to a cartel-controlled aggregator. The aggregator sells to legitimate businesses in the USA who then deposit legitimate electronic funds in the US bank accounts of Cartel Gold Resellers, Inc.
But Cartel Gold Inc used the palette of bills to buy the gold. Since they need gold that can be exported to the USA. they probably pay more than legal gold buyers. You have the numbers backward. Let’s say gold is $1400/oz. The legal aggregators pay, let’s say, $100/oz since they need to make a profit too. The cartel will pay above market price, because all they need is real gold to sell to real dealers in the USA for legit funds.
Of course, someone throwing around more money that the legit business encourages a lot more people to get into the illegal business of mining. It’s the same logic why Afghans grow poppies not wheat, or Columbians raise cocaine instead of beans and wheat. Indeed, the more gold that gets mined, the easier it is to translate cash into bank funds.
The cartel don’t care if the translation from pallets of cash to bank accounts costs them money. (As I said, one rule of thumb was laundering can cost up to 50% of the money’s face value) A pallet of cash won’t buy a Ferrari without attracting attention. Juan Carlos the apparently legit Gold Retailer can buy a fleet of Ferraris no questions asked with the proceeds from his gold sales.
The only gotcha is when the feds start looking at the money-in-money-out issue for the gold retailer; where did he get the money to pay for the gold? The idea is to look like an ongoing business making a markup on gold and bury the money in fancy accounting in Peru. The books say the small time aggregators got $800/oz when you paid them $1800/oz of illegal cash to get a reliable supply. Now it looks like you’re making $600/oz profit… Ay caramba!
The mining is (or was) being done in protected forests. It is illegal to mine there. There are no licenses being issued. The operations are destroying forest. The use of mercury to purify the ore, mercury which then pollutes the area. The miners are not working with any safety measures… Everything about the operation is illegal. Hence the gold is ‘illegal.’
It’s no different to the trade in so called ‘blood diamonds’ or (depending on local laws) trading in ivory.
However gold is gold. Once the physical gold gets into the system, once it gets moved around global refineries and mints it becomes difficult to impossible to link specific ingots to illegal mining.
Thanks. I guess my question was more specific. We don’t have a world government. Laws are enacted by nation states. What makes the mining illegal? Is it Peruvian law, whether done through a treaty obligation or not? If so, is that law simply and openly violated by paying bribes to corrupt local officials? I would seem to me to be very hard to conceal a large scale mining operation.
And do other countries have domestic laws which prohibit the purchase of such “illegal” gold? I understand that it is difficult if not impossible to differentiate between “legal” and “illegal” gold, but for example, as a U.S. citizen could I get in trouble if I openly contracted with the company and bought the illegal gold? Must I take some effort to make it look like I am buying “legal” gold?
In the documentary, the refinery in the US would ask the front companies if their gold was legal. The front companies would certify that it was and then the refinery would say “OK. Thanks.” They eventually had to pay a multi-million dollar fine for not doing more due diligence.
The gold is legitimate. It’s been laundered. You have an invoice, delivery receipts, wire transfer records and import documents showing it’s legitimate. Your problem comes if someone investigates you and compares the wire transfers to the market price of gold and crosschecks that against the amount of gold you’ve sold. But at that point, you’ve been subpoenaed, served a search warrant, and had your computers and office records seized. Money laundering is about covering illegal activities with legitimate activities and enabling the illegal income to be put in banks, or spent on things where someone’s income or the source of their funds will be scrutinised. You’re most likely not going to be caught as an outlaw because you’re selling gold. Rather, your other illegal activities will lead to the money-laundering. (Of course, if you’re laundering multiple illegal enterprises through a single money laundry, once the money laundry is discovered, it could lead to those other not yet discovered illegal enterprises.)
Most countries that have mines have mining laws and regulators checking that the mines comply with the laws. The laws cover things like permits to mine the land, ensuring that the mine workers are safe, and ensuring that the environment is somewhat looked after. In poorer countries, there’s often corruption and regulation can be avoided by bribery, but the operations are approved by the government. However, there are also people digging mines somewhere they think there’s gold, doing so with no permits or approval. Those are the illegal mining operations. And it not that they’re concealed, it’s that they’re in areas where the local officials don’t care about the mines, or are being either paid or threatened to ignore them.
As far as I’m aware, there aren’t any laws anywhere covering the sale of the gold itself. Anecdotal, but I know you can pan for gold in Alaska and sell any gold you find to the local assayer. I’ve seen on television that people go around in the Australian outback with metal detectors looking for gold at or near the surface. It’s probably no different than selling gold jewellery you’ve inherited, or no longer want. However, if you know that the gold came from an illegal mine, then by buying that gold, you’ve engaged in racketeering. I presume that’s illegal in Peru.
That sounds like a violation of commodity trading regulations. Commodity companies have to go through a lot of effort and expense to ensure they’re trading with legitimate counterparties. Collectively the requirements are termed “Know Your Customer”. A lot of the KYC regulations are designed to prevent money laundering, but they have other purposes. Prevention of modern slavery and avoiding trading with sanctioned individuals are two I’m familiar with. I’ve not heard of controls designed to prevent trading with customers associated with illegal mining, but their existence wouldn’t surprise me.
According to wiki, Elemetal was fined $15 million for “failure to maintain an adequate anti-money laundering program”, a violation of the Bank Secrecy Act.
Like I said, the cartel has creative bookkeepers. Here’s a simplified example:
They start by buying some legitimate gold, 500oz, with some legitimate money. They then buy more gold, but illegal -700oz. Let’s say they pay 50% over market price to secure a supply of illegal gold.
Make the gold look legal by faking additional sales receipts from a bunch of legitimate resellers. Now they have say, 1200 oz gold instead of 500 but it looks at first glance that it was bought legally. Maybe they sell the illegal gold to someone who sells it to legal sellers who sell it back to them, so it’s gone through rinse cycles to make it look legit. Maybe business is scattered among dozens of resellers so no one merchant is showing up with miraculously more gold than the big legal mine. How deep into the small scale gold market will the investigators go? Plus, a lot of the Peruvian merchants are probably not too keen to cooperate, if the cartel finds they’ve been to open with the authorities.
Now the cartel gold merchant company sells to a dealer - jeweler, memorial medal maker, seller to the electronics gold-plating, whoever - and gets valid sales revenue from an American company.
The cartel may take a loss converting cash to legit sales receipts in a bank, but now they can legitimately buy that fleet of Ferarris. The cash is ultimately spread among thousands of illegal miners, middlemen, etc. each of whom can safely dispose of a few hundred in bills with no questions asked. Almost impossible to trace back to the cartel. Just- the area around the gold mines is a bit richer than usual.
The cartel perhaps has clever bookkeepers to help hide all this. Considering the US company got hit, obviously these accountants were not quite clever enough.
I don’t know how relevant this would be, but there isn’t a simple known yield from a gold mine. The ores are typically measured in grams of gold per ton of ore, and can vary quite a bit. You can’t tell by looking at the ore how much gold is in it. It is just dirt. Assaying the ore is a complex process. It isn’t unreasonable to imagine an apparently legitimate mining and refining company simply reporting better than real ore concentrations and using the dirty money to prop up its yields by buying gold from the illegal mining operations. If the company was controlled/owned by the drug cartel the cartel simply provides the dirty money to guy from the illegal operations and takes its clean money as profits on the sale of refined gold.
The host country might demand assaying of ore to back up licensing demands, but in poor countries this would be reasonably easy to work around with appropriate bribes and other tactics (such as controlling the assaying company.)
The problem noted above does remain. There is only so much money you can pump into the black economy before it becomes really obvious. The illegal gold miners are being paid in dirty money, for a dirty product. I’m not sure how the discounting would work here. But the illegal operations will have their own problem with dirty money. That will place a blockage on the pipeline of laundering money. Dispersing into the massed dirt poor miners will help, but there are limits. Minimally the illegal operations may start creating really noticeable economic imbalances in the region.
I definitely don’t want to present myself as an expert on the illegal gold industry. I’ve got a professional interest in being knowledgeable in commodities trading regulatory reporting, and have gained a bit of adjacent knowledge because of that, including learning a fair amount about money laundering.
Having said that, I think I should point out that the purchase of black market commodities is almost always cheaper than the purchase of open market commodities, so long as the purchaser has access to the open market. Also the nature of commodity markets that extend from small scale operators to large scale buyers/exporters fulfils all the needs of money-laundering layering without the need for loss-making machinations or non-existent purchases. The issue, using your example, isn’t that the hypothetical buyers need 1200 oz of legitimate looking purchases. They’d have that already, although some of their downstream supply chain would be pretty dubious. The problem for the buyer/exporter is that they’ve received funds for 500 oz of gold and they’ve purchased 1200 oz of gold. They have to hide that extra 700 oz of gold. On the purchasing side, that’s pretty easy - have a cash operation and keep that part of the business off the official books. On the sales side, they have to disguise 1200 oz of gold as 500 oz. My guess is they could do that by claiming it was a lower quality of gold, or having a mixed-shipment, although that’s total speculation. Maybe have several shipments and hope nobody is checking wire transfers against aggregated imports. But the problem for the Peruvian business isn’t with the illegal gold market. Their problem is how do they launder their illegal profits, and how to they ensure their gold exports get through US customs successfully.
Reading through this whole thread, I was wondering when someone would state the obvious. This seems like the key. Cartel has a lot of cash to launder. They use some legitimate money (already laundered) to buy up some shitty but legitimate-looking on-the-books gold mine somewhere. Or they set up a shell company with no real assets which buys up some dubious mineral rights. They operate some kind of mine that hopefully moves a convincing amount of dirt around. Then they use dirty money to buy illegally mined gold from any sources. The cartel buys from small-scale panners/miners and large scale illegal operations alike but everyone gets dirty cash. The cartel is probably buying the gold at a discount because there aren’t a lot of legitimate buyers willing to pay market price for gold that may have been extracted illegally. The cartel just pretends that they extracted all the gold from their shitty mines and presto, it looks legitimate. They sell it into the open market like any other commodity and get regular money that can go into the banking system like any other money. Some small portion of the dirty cash goes to “government relations” to keep any regulators from looking too closely at how such a small mine with such small operations churns out so much gold. Avoiding government attention is part of the special skill set of a large cartel.
The small scale miners can spend their dirty cash without attracting attention. The large scale miners now have to launder the money they got but the cartel has succeeded in making money laundering someone else’s problem. Note that the miners aren’t really members of the cartel. They are more like contractors or suppliers who only work with the cartel in a very loose sense.
If they aren’t doing it this way, I don’t know why not.
First, whatever the going rate for illegal gold is - the cartel is incentivized to pay more since they need the gold for the purpose of money laundering - so in the competition to buy that gold, they will offer more so as to ensure a good supply.
So they pay. let’s say, $1200/oz when legit gold resellers will pay illegal miners $1000 an ounce. Since they are buying from dozens of miners and maybe some middlemen who are legit resellers, the transactions in total are hard to track and verify. Bonus.
With seed money, they buy say, 500oz legit gold. But they go to assorted (legit) middlemen and get receipts saying they bought 1000 oz. Now all their gold looks legit, not illegally mined. The seed money bought 1000oz at $800, according to the books, even if they really spent $1200/oz. They sell to the American refineries at gold market price. So their books reflect a healthy profit, to be used to buy more gold even if that gold cost them more than they claimed.
If their books reflect they bought from 50 dealers, who in turn each bought a few ounces from hundreds of river panners, jewelers, small legit mines, and other legit sources… Maybe some enterprising DEA or Treasury official will actually fly down to Peru, go through several middleman dealer books, and say “hey wait a minute. Hector and Pablo both bought 50 oz in December from El Gordo Mines, but El Gordo only produced 40 oz that month! But then the cartel dealer can say they bought from Hector and Pablo under the impression it was legitimate gold and did not question the source.” Maybe Hector and Pablo got paid extra to help fake the paper trail. Or maybe Hector and Pablo don’t keep detailed enough records to make discovering the trail possible.
The spread between what the cartel will pay to disguise illegally mined gold and what they could validly pretend they actually bought legit gold for - is a loss or markdown. But that’s simply the price of converting cash to bank funds.
I suppose anyone dealing in illegally mined gold could do the same tricks. But the cartel has the extra cash to spread around make sure they are the winning player in the game. the real issue is- are there enough small time legitimate operators mining gold to make the total paper trail too confusing to follow? If there’s only five big mines, already selling direct to the USA, it ain’t gonna work. but I presume somewhere in that chain, too, is a series of local government people with their hands out too and an incentive to keep the trail confusing. they just need to be paid too.
If I’m understanding you correctly, you’re saying that the money laundering cartel has a higher need for the illegal gold than the typical illegal gold buyer. Therefore, in basic microeconomic supply and demand, the demand curve is being moved to the right raising the price of the illegal gold. I disagree with that argument, because for most poor small commodity producers, the legitimacy of the buyer, if they have a choice of buyers, isn’t particularly relevant. The small commodity producers are the downstream recipients of price setting on a much larger scale. They sell at the best price they can get, and have no almost no capacity to make sales decisions based on the ethical status of their customers. Speculation on my part, but the opposite is likely to be true. The power imbalance, and the ability to hire thugs to enforce that power imbalance would seem to be on the side with the money, aka the buyers.
No, it’s the producers (miners) who are illegal. The sneak onto someone else’s land and run a small time mining operation and now have to get rid of the gold.
Non-cartel buyers need to make a profit selling the gold. Both probably pay small time miners cash. Non-cartel buyers get their cash from the gold they sold earlier, so they need to make a decent profit. But legitimate-seeming gold can only sell for the going price or less, so what they can pay is limited.
The buyers for the cartel need a certain amount of gold. (And they too handle making gold look legit when they sell it forward).The cartel is also trying to get rid of cash, so they can pay more. Their cash did not come mainly from previous gold sales, and their main goal is to sell a large quantity of gold into the USA and pretend the results are profit.
It’s the cartel buyers, not the gold miners, who shift the demand side of the curve, because they have extra (dirty) cash to pay out. A legit buyer (i.e. one whose profit comes only from selling gold) can’t really outbid them.
It occurs to me, this thread ties in with the nearby thread (in IMHO, I think) about the need to sort your laundry. It’s one of the little-noted features of American currency (as compared to the currency of many other nations) that, because all our bills are the same drab mono-color, you never need to sort American bills to launder them. Very convenient.