Universal currency of the underworld

By K Raveendran

The ongoing investigations into the sensational case of gold smuggling through the diplomatic channel provide a live example of the nexus between gold, drugs, dirty money and havala. All preliminary findings point to a ‘standard operating procedure’ followed across the world by the underworld, as highlighted in what has been called the FinCEN files, just published by the International Consortium of Investigative Journalists (ICIJ).

Law enforcement has long seen gold trade as a key vulnerability in the global fight against money laundering. Drug gangs and armed militant groups use gold to launder money and fund conflicts. In the process, they have supported illegal mining operations that destroy pristine rainforest and are hubs for sex trafficking and child labour. In Peru, Latin America’s biggest gold producer and the world’s second-largest cocaine supplier, the illegal gold trade is now twice as big as drug trafficking.

“There is no better mechanism in the world for laundering money than gold,” the papers quote David Soud, head of research and analysis at I.R. Consilium, a consulting firm that specializes in analyzing resource-related crime, as saying. “It is concentrated, portable wealth, has essentially the same value anywhere in the world, and can be moved outside the global financial system.”

Dubai, from where the gold smuggling through the diplomatic channel originated, is a key hub for the clandestine trade, which gives the case currently under investigation in India international ramifications. Investigators are already pursuing leads for the link between gold smuggling and terrorism. They are now in search of actionable proofs.

In fact, according to FinCEN files, a Dubai company, named Kaloti Jewellery Group, had become a key cog in the dirty gold trade, buying the precious metal from sellers suspected of laundering money for drug traffickers and other criminal groups. Kaloti often paid in cash — sometimes so much it had to be hauled in wheelbarrows — and wired money for suspect clients to other businesses, investigators believed.

In 2014, a US Drug Enforcement Administration-led task force recommended that the Treasury Department designate Kaloti a money laundering threat under the USA Patriot Act, a seldom-used measure known as the financial ‘death penalty’ because it can freeze a firm out of the international banking system.

But the Treasury Department never took action against Kaloti. Former Treasury officials said a decision on whether to move ahead was deferred for fear of angering the United Arab Emirates, a key US ally in the Middle East. When attempts to convince the UAE to act on its own against Kaloti fizzled, the investigation was mothballed.

The US investigation of Kaloti has not been previously reported. The outcome points to challenges common to money laundering cases: Investigators must follow money across borders and through companies based in secrecy havens, like Dubai, that have shown little interest in cracking down. Bringing cases against powerful actors also requires political will and agreement among different U.S. agencies with competing priorities.

The investigation came to light in a batch of secret bank filings that describe the flow of more than $2 trillion in suspicious transactions through the global banking system. JPMorgan Chase, Deutsche Bank and other financial institutions flooded the Treasury Department’s Financial Crimes Enforcement Network with warnings about Kaloti, flagging as suspicious thousands of transactions, worth $9.3 billion, that occurred between 2007 and 2015, the reports show.

The documents, called suspicious activity reports, or SARs, were obtained by BuzzFeed News and shared with ICIJ and 108 media partners as part of the FinCEN Files investigation. Some of the documents in the FinCEN Files were gathered as part of US Senate committee investigations into Russian interference in the 2016 U.S. presidential election while others were gathered following requests to FinCEN from law enforcement agencies.

ICIJ confirmed additional details about the government inquiry into Kaloti with nine current or former law enforcement and other officials with knowledge of the investigation, who agreed to discuss it on the condition that their names not be used. They are not authorized to speak publicly about the case and fear repercussions for discussing it.

US investigators never questioned Kaloti directly. Because the case did not result in charges or a Treasury designation, Kaloti never had a chance to see or challenge any of the evidence investigators had gathered.

In 2014, a former partner at EY’s Dubai office reported that Kaloti had accepted gold exported from Morocco disguised as silver, with falsified paperwork. Auditors at the global accountancy firm, formerly known as Ernst & Young, also discovered that Kaloti had purchased gold from Sudan, where the precious metal has financed a militia group under investigation for genocide, without properly vetting its suppliers, according to the former EY partner. The following year, Kaloti’s refinery lost an important industry accreditation.

Kaloti has managed to maintain business ties with major corporations, including the Swiss refiner Valcambi, according to Global Witness, an anti-corruption advocacy group. Kaloti recently opened a new refinery in Dubai.

Indian investigators have failed to track down any major player in Dubai in connection with the gold smuggling through diplomatic channels, except for fringe actors, who may have acted on their own behalf or for some others. The investigations have been stonewalled by issues of diplomatic immunity for the consulate staff, suspected of doubtful roles in the clandestine operation.