When one thinks of the trade of precious stones and metals, diamond mining is generally what comes to mind – especially with respect to Africa. The ongoing global effort to ban the mining of “conflict diamonds” continues into the 2020’s, and efforts to change the stigma surrounding it by verifying the origins of these stones via the Kimberley Process have at the very least helped to slightly tidy up the market. In spite of these positive developments however, many loopholes that have allowed diamonds mined in war zones and under similar circumstances to continue to hit the international market remain, with analysts speculating that this $140+ billion industry may forever remain mired in controversy.
Some degree of hope may be on the horizon in this regard however. The growth in popularity of lab-grown diamonds – stones that have the look and feel of natural diamonds but at a mere fraction of the price – has grown significantly over the past five years alone, leading this individual market to swell to upwards of $23 billion in total value as of 2022, with these figures expected to continue their upward trajectory over the decade to come. While these synthetic alternatives may end up being a boon to the clean-up of the embattled diamond industry, the same sentiment cannot be shared for precious metals. The global demand for legitimate gold and silver continues to grow at exponential rates since the turn of 2020. While jewelry remains the primary driver of this uptick, many central banks across the globe (as well as wealthy consumers alike) continue to hoard gold bullion to diversify their reserves in these times of economic instability. While the talk of diamonds generally dominates the headlines with respect to Africa, the continent is also the third-largest gold-producing jurisdiction in the world, with mining activity actively taking place in more than 21 of its individual countries. Unfortunately, the African gold-mining industry has also been linked to corruption, financial crime and criminal enterprises since its very origins. Given these ties and the ongoing increase in demand, United States officials are now urging financial institutions with international reach to be cautious with respect to services provided for consumers that could be linked to the African gold trade.
Last Tuesday, the U.S. Departments of State, the Treasury, Commerce, Homeland Security, Labor, and the U.S. Agency of International Development released an official advisory urging companies to implement enhanced due diligence processes when dealing with individuals and entities involved in the mining and export of gold from Africa after linking the trade to armed militants and mercenaries, including Russia’s Wagner Group.3 “Individuals and entities engaged in the gold sector across the continent in countries or localities where corruption may be a concern should be aware of the risks associated with smuggling, including potentially facilitating the violation of economic sanctions, tax evasion, money laundering or other financial crimes,”1 officials warned in their 29-page declaration. The trade in this dynamic industry has long been directly tied to the international financial sector, with funds from purchases and sales often flowing freely in and out of domestic and international financial institutions and shrouded by the misuse of complex beneficial ownership structures and shell companies. The United States government is now warning of an increase in use of the trade in precious metals for sanctions evasion and fundraising efforts on behalf of Russia, China and other heavily sanctioned countries. As part of their report, the state departments also highlighted the opportunities and specific risks raised by the illicit gold trade across southern Africa and hoped to encourage members of this global industry “to adopt and apply strengthened due diligence practices to ensure that such malign actors are unable to exploit and benefit from the sector” and subsequently allow African citizens engaged in mining practices to maintain their livelihood.1
U.S. officials made a point of their concerns with terror organizations using the trade of gold to fund their destabilizing activities. Militants linked to al-Qaida, ISIS, and other Middle Eastern Islamic terrorists have historically been funded by sub-Saharan African gold, with these practices now migrating even further to the east. Given the threats posed by groups of this variety, the advisory states that industry participants should be prepared for increased U.S. government attention to the relationship between gold and these groups’ revenue streams and should be prepared for the possibility that U.S. sanctions could be used to disrupt these groups’ operations. It appears these plans are already underway as the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned four companies and one individual connected to the violent Russian group PMC Wagner (Wagner Group) and its founder and owner Yevgeniy Prigozhin, previously sanctioned by the United States, the European Union, Canada, and the United Kingdom, this on the very day the aforementioned advisory was released.2 The Wagner Group is a notorious Russian state-funded paramilitrary organization designated as a transnational criminal group by the U.S. in January, one which has been found to be directly benefitting from newer gold mining/sales practices in Sudan, Mali and the Central African Republic.
While the U.S. will attempt to continue its disruption of the illicit revenue streams backing militant groups and funding additional worldwide conflict, the government spokespersons have also made clear that they do not wish to discourage American participation or investment in the precious stones/metals industry – even those with African ties. While there is a disconnect of duties between the direct actors in the precious metals trade and financial service providers, businesses and financial institutions alike have been advised to enhance their due diligence over the activity of their clientele while maintaining current regulatory compliance standards in order to reduce their own level of risk with respect to the facilitation of money laundering and/or sanctions violations. This should theoretically also help to better maintain the integrity of the global financial system. The reality of the matter however is that banks will now most likely – if they weren’t already – go out of their way to avoid providing services to those linked to the metals trade in Africa and effectively “de-risk.” While the practice of de-risking has been heavily scrutinized by the Biden Administration, can we really blame the institutions choosing to do so given how much is at stake with respect to costly financial penalties for compliance shortcomings, regardless of whether they were performed deliberately or not? Of course, the U.S. government’s response to this is somewhat idealistic, if not unrealistic, adding that “responsible industry participants can reduce risks and increase responsible opportunities associated with the gold industry in sub-Saharan Africa”. Apparently, everyone just doing their respective due diligence will clean up the corruption of the gold trade that has plagued the sector for decades on its own.
The U.S. government’s official Africa Gold Advisory can be found in its entirety via this link.
- “Africa Gold Advisory.” The Office of Foreign Assets Control, U.S. Department of the Treasury 27 June 2023.
- “Treasury Sanctions Illicit Gold Companies Funding Wagner Forces and Wagner Group Facilitator.” U.S. Department of the Treasury, 27 June 2023.
- “US Treasury, State Departments Raise Alarm Over African Gold.” ACAMS Money Laundering, 27 June 2023.