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African gold producers grapple with illicit pre-financing networks

Small-scale gold producers in East Africa are dependent on informal or criminal pre-financing structures, with illicit gold likely ending up in international trading markets, researchers warn. 

An estimated 20% of the world’s gold in circulation is derived from artisanal and small-scale gold mining (ASGM), but much of this trade has its roots in networks linked to organised crime and political corruption, according to fresh research by Themis, a financial crime intelligence provider. 

With legitimate importers and financial institutions often unwilling or unable to provide financial support to ASGM operations, miners are increasingly turning to illicit networks to provide pre-financing to cover machinery and other costs. 

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As a result, gold linked to armed groups, exploitation, corruption or financial crime is likely being refined and re-sold on the international market, with its origins impossible to trace. 

“International sourcing of artisanal mining is currently stuck in a complex catch-22 situation, which arguably is undermining any real, scalable licit alternatives to the illicit gold trade,” Themis says in a research paper due for publication this week and seen by GTR. 

“In short, in order to escape from dependency on illicit channels, informal artisanal miners must have the resources to do so, but at this point they depend upon these very illicit channels for such resources. 

“In order to dismantle this system, the broader international market must find a way to directly purchase ASGM gold.” 

Elizabeth Humphrey, a research analyst at Themis, says illicit or informal networks are becoming increasingly verticalised, meaning they are able to provide smaller mining operations with an established and predictable pre-financing mechanism. 

“These structures vary, but a miner might have a relationship with a local trader, who will then have their own relationships with larger traders,” she tells GTR 

“It moves up the ladder to bigger players until the top rung, where you may have highly politically connected individuals, for example in Kampala, Kigali or parts of the Democratic Republic of the Congo (DRC). Financing tends to trickle down from those top rungs, and that enables those players to keep control of more of the supply chain.” 

 

Congolese gold and armed groups 

Despite DRC’s efforts to formalise the gold sector, its eastern provinces of Ituri, South Kivu and North Kivu are “notorious” for producing minerals, including gold, that is linked to the financing of armed groups, Themis says. 

“Armed groups, including the Armed Forces of the Democratic Republic of the Congo, provide illegal protection rackets around mine sites or impose illegal taxation at source or via roadblocks,” Humphrey says. 

“Meanwhile, business and political actors embedded in the gold supply chain provide pre-financing and in return purchase and control the price of gold at mine sites.” 

Despite providing a source of funding to armed groups, that system brings relative stability and predictability to supply chains and pre-financing arrangements, Humphreys says, increasing the likelihood that there will be a buyer and a steady work flow for small-scale miners. 

Themis cites an unnamed source familiar with such networks who says: “Miners don’t really care who their boss is as long as they come with money and fund the pits.” 

However, ASGM producers – known in DRC as creuseurs – typically have disadvantageous relationships with illicit or informal networks. This results in low pay, external control and even risk of violence.  

Though formal channels exist in some markets, including DRC, Humphrey says they are typically fragmented and costly, passing through several points of taxation. 

“Essentially, you have lots of different people trying to get a slice of the pie, so it becomes expensive and difficult for miners to use formal routes,” she says. 

At the same time, cumulative tax rates through formal channels are high, leaving “little incentive to declare and every reason to smuggle”, for instance into markets with lower tax rates such as Uganda, Rwanda, Tanzania and Kenya, she explains. 

 

International market exposure 

One reason legitimate financiers and buyers are reluctant to enter Africa’s ASGM market is the regulatory or reputational risk of exposure to illicit activities. 

Lawmakers, including the US government and the European Commission, have sought to crack down on gold with potential links to illicit activity, including armed conflict. Similar risks have been identified for buyers of other critical minerals, including copper, nickel and palladium. 

However, Themis warns that illicit gold is likely still ending up on legitimate trading markets. 

“My sense from talking to formal gold buyers on the international market is there is a lot of hesitancy on the part of bigger players, industrial gold buyers, to touch this market at all, and I don’t think big buyers are happily buying gold without vetting it at all,” Humphrey says. 

“But it is an issue that illicit gold is filtered into the global economy. Once it has been refined and mixed with other gold, it becomes impossible to trace it back to its original source. 

“Artisanal gold makes up around 20% of all gold globally, approximately, so we can be confident that a lot of it is ending up in global supply chains via artisanal gold trading hubs like Dubai.” 

Dubai has long faced criticism for sourcing gold from relatively high-risk markets, despite concerns over governance, risk assessment, customer onboarding and ongoing due diligence in the sector, though has since tabled legislative reforms aimed at improving such practices. 

“Upon sale, most artisanally mined gold in East Africa is moved to refineries in the UAE,” Humphrey says.  

“Refineries vary in terms of the countries of origin from which they state that they accept gold, with some accepting from any source. Although some refineries have demonstrated more stringency in this regard, the fact that some refineries will accept flows means that ‘there is always a way’ to get any gold through the system.” 

More generally, global gold flows are notoriously opaque, with investigative campaign group Global Witness warning last year that many countries appear to be exporting quantities of gold far in excess of their reported production and imports.

The post African gold producers grapple with illicit pre-financing networks appeared first on Global Trade Review (GTR).

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Published 23 November 2022