Introduction
The precious metals and stones (PMS) sector is a highly attractive target for organised criminals seeking to launder illicit funds. Gold, diamonds, and other high-value commodities are easily transportable, difficult to trace, and widely accepted as a store of value, making them an ideal medium for financial crime.
Criminals exploit dealers in precious metals and stones (DPMS) to conceal the origins of dirty money, move illicit funds across borders, and integrate unlawful proceeds into the legitimate economy. This is often done through cash purchases, fraudulent invoices, trade-based money laundering (TBML), and smuggling operations.
This article explores real-world case studies where PMS businesses were misused for money laundering and provides practical measures DPMS businesses can take to prevent becoming unwitting accomplices to financial crime.
Case Study 1: The “Blood Diamond” Trade—Laundering Money Through Conflict Gems
The trade in “blood diamonds” or “conflict diamonds” has long been associated with organised crime, corruption, and money laundering. The Kimberley Process, an international certification scheme, was introduced to prevent illicit diamonds from entering the legitimate market. However, criminals have found ways to bypass it.
Criminals launder money by:
- Using illicit diamonds as a form of currency to settle transactions in the drug trade and arms smuggling
- Mixing conflict diamonds with legitimate diamonds to make them appear legal
- Using fraudulent Kimberley Process certificates to disguise the origins of smuggled diamonds
How did this happen?
Certain diamond dealers failed to conduct proper due diligence on suppliers, allowing criminal networks to integrate illicit diamonds into the formal market.
How can you avoid this happening to your business?
- Verify suppliers and demand full documentation, including authentic Kimberley Process certificates
- Conduct audits and trace the origins of diamonds before resale
- Refuse cash transactions from unknown sources
- Train employees to recognise suspicious activities in the diamond trade
Case Study 2: The Dubai Gold Laundering Network—How Criminals Used Gold to Move Billions
In 2020, an investigation uncovered that criminal networks were laundering billions of dollars through the Dubai gold market, particularly using gold from Africa that was mined illegally and smuggled.
Criminals exploited PMS businesses by:
- Selling smuggled gold to refiners in Dubai, where it was melted down and rebranded as legitimate
- Using gold dealers as intermediaries to accept dirty money and convert it into gold bars
- Transferring gold to international markets, where it was resold to banks, investors, and jewelers
How did this happen?
Gold refiners and traders in Dubai failed to conduct adequate supply chain due diligence, allowing illicitly mined and trafficked gold to enter the legitimate market.
How can you avoid this happening to your business?
- Verify the source of gold through proper supplier due diligence
- Refuse to deal with unlicensed or undocumented gold traders
- Implement strong KYC (Know Your Customer) procedures for all clients
- Monitor transactions for irregularities, such as large cash payments or underpriced gold deals
Case Study 3: The South American Drug Cartel Diamond Scheme
A well-known South American drug cartel used diamonds to launder proceeds from cocaine trafficking, exploiting jewelers and diamond dealers in major trading hubs like Antwerp and New York.
Criminals used:
- Diamonds as an alternative currency to move value discreetly
- Fake invoices and manipulated pricing to justify suspicious transactions
- Complicit jewelers who accepted large cash payments without questioning their origins
How did this happen?
Certain diamond dealers ignored red flags such as unusually high-value transactions paid entirely in cash and clients unwilling to provide documentation on their source of wealth.
How can you avoid this happening to your business?
- Refuse large cash transactions without proper documentation
- Ensure all high-value deals comply with AML (Anti-Money Laundering) reporting requirements
- Conduct enhanced due diligence (EDD) for politically exposed persons (PEPs) and high-risk clients
- Use blockchain-based tracking solutions for diamond transactions to enhance traceability
Case Study 4: The African Gold Smuggling Ring—Trade-Based Money Laundering in Action
An international gold smuggling network was discovered moving illicitly mined African gold to Europe and Asia via the UAE and Switzerland. This gold was used to launder money from criminal activities, including illegal mining, human trafficking, and corruption.
Criminals exploited PMS businesses by:
- Falsifying invoices to over- or under-invoice gold shipments
- Using shell companies to hide the true source of gold
- Laundering criminal proceeds by selling gold to refiners who failed to conduct proper KYC checks
How did this happen?
Weak AML controls in some jurisdictions allowed gold traders and refiners to accept smuggled gold without verifying its source, effectively integrating dirty money into the legitimate financial system.
How can you avoid this happening to your business?
- Check all gold shipments against reliable supply chain verification systems
- Ensure that suppliers are not linked to smuggling operations or illegal mining
- Report unusual financial transactions, especially those involving tax havens or shell companies
- Work only with refiners that comply with international AML standards, such as those set by the London Bullion Market Association (LBMA)
How Dealers in Precious Metals and Stones Can Protect Themselves from Being Exploited
1. Implement Strong Customer Due Diligence (CDD) and Know Your Customer (KYC) Procedures
- Verify the identities of all clients, including ultimate beneficial owners (UBOs)
- Demand proof of the source of funds for high-value transactions
- Apply Enhanced Due Diligence (EDD) for clients from high-risk jurisdictions
2. Monitor and Report Suspicious Transactions
- Be wary of large cash purchases, particularly those just below reporting thresholds
- Watch for unusual patterns, such as frequent high-value purchases from new client
- File Suspicious Activity Reports (SARs) with financial intelligence units
3. Strengthen Internal AML Policies and Compliance Programs
- Appoint an AML Compliance Officer to oversee risk management
- Conduct internal audits and compliance checks regularly
- Train employees to recognise red flags in PMS transactions
4. Avoid High-Risk Clients and Transactions
- Refuse business with individuals or companies that lack transparency
- Reject transactions involving jurisdictions with weak AML regulations
- Ensure all deals align with international AML standards and ethical sourcing practices
5. Cooperate with Law Enforcement and Regulatory Bodies
- Engage with global AML initiatives, such as the Financial Action Task Force (FATF)
- Report suspected money laundering cases to relevant authorities
- Stay updated on changes to AML regulations affecting the PMS industry
Closing Remarks
The precious metals and stones sector is a high-risk industry for money laundering, as criminals exploit gaps in due diligence, international trade loopholes, and weak regulatory oversight. High-profile cases like the blood diamond trade, Dubai gold laundering network, and South American drug cartel schemes demonstrate how criminal organisations manipulate PMS businesses to clean illicit money.
To prevent this from happening, dealers in precious metals and stones must:
- Strengthen AML compliance measures
- Conduct thorough due diligence on clients and transactions
- Report suspicious activities to law enforcement
By implementing these safeguards, PMS businesses can protect themselves from legal liability, financial loss, and reputational damage while contributing to the global fight against financial crime.
