In Financial crime & money laundering, Past Events

GIFF Washington Roundtable

Executive Summary
Artisanal and small-scale gold mining (ASGM) is often informal and unregulated, leaving the sector vulnerable to criminal infiltration and illicit financial flows (IFFs). The Global Initiative against Transnational Organised Crime and Estelle Levin Ltd. have undertaken the GIFF Project to increase the understanding of IFFs linked to the ASGM sector, including how they inhibit formalization efforts, and strengthen responses to IFFs.

On 4 February, the GIFF project held a closed-door roundtable and launch meeting.

The GIFF Project was very well received. Participants actively engaged in discussions and expressed high levels of interest in the topic and the Project aims. As one noted, the “conflict minerals elite” was gathered.
Participants communicated that the GIFF Project correctly:

  • Identifies a crossroads of many key and emerging issues;
  • Recognises the pressure on companies to source responsibly;
  • Raises IFFs as a key impediment to achieving stability and sustainable development; and
  • Responds to governments from around the world who are asking for more information and
    assistance in combatting IFFs and formalising ASGM.

Therefore, there is a need for a gradual approach. Interventions ought to reduce, rather than eliminate, IFFs and illicit activity in the sector. As one participant summarised:

“We aren’t going to totally eliminate illicit networks, so what you’re trying to do is put a
pebble in the stream big enough that the river will reroute, have a big enough ripple, that even for a little moment, we can be ahead of the game and possibly affect change. The question is, where should that pebble be placed? Where can it cause the biggest ripple? And when and how do we place it? And what do we do during that brief point of impact?”

IFF mapping is instrumental here: by building an understanding of IFFs and supply chains, stakeholders, we will be better positioned to identify where, when, and how interventions (pebbles) should take place.

There was a strong call for local dialogues to inform responses. The GIFF project proposes a new bottom-up approach to understanding how IFFs impact the ASGM sector and in developing responses. Participants enthusiastically supported this idea as: democratic, effective, and capable of increasing local buy-in and ownership of solutions. As one participant stated: “We need to keep this local; there are a lot of different reasons to do this work, but at its heart we are doing this so we can formalise for the sake of these miners and their communities.”

The key issues and questions identified by the participants included:

  • IFFs are a key challenge to formalisation of ASM sectors, but they are not well understood.
  • There is a significant lack of data and Information on these issues
  • How do we discuss ASGM and IFFs without demonising the entire sector?
  • How do we incentivise change across stakeholder groups?
  • How do we deal with the lack of transparency and due diligence across the entire gold sector?
  • As the Minimata Convention comes into effect, what role does Mercury play in this discussion?

The Gold and Illicit Financial Flows (GIFF) Project would like to thank: GIZ for their robust support – conceptually and financially; Taylor Kennedy and RESOLVE for substantive contributions and for hosting at RESOLVE’s headquarters; and all roundtable attendees for their enthusiastic engagement and contributions.

Roundtable Structure and Objectives
The GIFF Project launch and roundtable was attended by 20 individuals representing government, civil society, multilateral institutions, and international organisations. Several individuals who could not attend requested to be briefed on the roundtable and receive subsequent information and materials.

The primary objectives were to:

  • Raise awareness and build understanding on IFFs and the presence of criminal networks in gold supply chains;
  • Build on current understanding of the extent to which and ways in which IFFs impede the formalisation of ASGM and gold supply chains;
  • Provide a platform to present and improve best practices and existing strategies for restricting IFFs in gold supply chains, and to develop strategies and initiatives to implement going forward;
  • Generate momentum amongst stakeholders interested in ASGM formalisation and IFFs in supply chains to share knowledge in the pursuit of improved prevention and mitigation measures.

The roundtable commenced with presentations on:

An overview of IFFs

  • Challenges faced in reducing illicit mining and achieving development objectives in the Democratic Republic of Congo (DRC)
  • Challenges to combatting global IFFs related to gold: A Government Perspective
  • Multi-stakeholder responses to complex challenges; and
  • Mapping IFFs and gold smuggling routes out of the DRC.

Participants formed small groups to discuss the presentations; share experiences and insights; put forth additional questions, concerns; and provide feedback on the GIFF projects aims and strategy.

The event concluded with a large-group discussion summarising the main issues identified in the small groups and recommended actions.

Key Findings
IFFs are a key challenge to formalisation, but they are not well understood
The contention IFFs are a barrier to formalising the ASGM sector, and consequently achieving a wide range of development aims, was roundly supported by participants. Many gave examples of how IFFs had frustrated their work in a number of contexts: IFFs thwarting formalisation efforts, profiting criminal actors and perpetuating illicit activity at the expense of some of the world’s most vulnerable people.

Formalisation is not a silver bullet. Nevertheless, formalisation of the ASGM sector is increasingly recognised as necessary to address development aims, including those relating to the environment, sustainable livelihoods, and health. Formalisation of ASGM sector was seen as fundamental to ensuring: governments can amass revenue from gold exports to deliver on their responsibilities to their constituents; gold is mined rationally and efficaciously; vulnerable groups can be protected; and miners can claim their rights and progressively professionalise by operating in an enabling context of legality and formality rather than a disabling context of criminality and/or informality.

In addition, it was generally acknowledged that multi-stakeholder solutions were likely to play an instrumental role in realising change.

There is a Significant Lack of Data and Information on these issues
More data and information is needed. The lack of quality data is a major barrier to implementing effective policies and initiatives. For example, the scale and nature of some IFFs are more egregious than others, but without more information it is difficult to identify where to prioritise action. Participants reported that many of the governments they work with are also requesting data. As one participant stated: “governments are in the dark, especially in regards to the impact this is having on economies.”

The need to compile better data and information is essential to developing and implementing effective responses. Without a map of the financial flows linked to gold supply chains it is difficult to ascertain who is benefitting from informal and criminal networks or identify pressure points where interventions would have the greatest impact. Better data can be useful to expose transnational networks, and identify demand and supply, push and pull relationships.

It is not only important to support efforts to collect better data, but also to develop strategies on how to use and share the information. As one participant stated: “we need to know what to do with the good data once we have it.” There is an argument for making the data as publicly available as possible.

How do we discuss ASGM and IFFs without demonising the entire sector?
A significant challenge to addressing IFFs, as well as other negative impacts associated with ASGM, is how to acknowledge and address the issue without demonising the entire sector. ASGM is an important livelihood for tens of millions of people and is strongly linked to rural poverty as well as the lack of alternative opportunities for generating income (Eftimie, A. et al., 2012. Gender Dimensions of Artisanal and Small-Scale Mining, Washington DC: World Bank). Proponents of the Fatal Transactions campaign, a pre-cursor to the Kimberley process stated, ‘This campaign is not anti-diamond but it is anti-war’ (Franks, D., 2015. Mountain Movers: Mining Sustainability and the Agents of Change, London: Routledge). Similarly, it is important to make clear GIFF is not anti-gold, but anti-crime, conflict, and instability. This reinforces the need to track IFFs, in order to highlight financial flows extracted from countries of origin, instead of invested in local economies.

An important facet of this challenge is defining key terms, including ‘illicit’ vs. ‘informal’. Similar to the terms ‘IFFs’ and ‘organised crime’ a number of definitions are used to broadly label activity with a number of grey areas and nuances. As such, it is necessary to develop a clearer definition of ‘illicit’ v. ‘licit’ as well as ‘formal’ v ‘informal’. This differentiation will be important to designing policy interventions. For example, drafting relevant legislation and regulations as well as structuring domestic regulatory structures.

Another complexity to curbing IFFs and formalising the ASGM sector is that miners are not the traditional micro-finance demographic, much less the target of many development initiatives. The negative impacts associated with the sector tend to dissuade development actors from engaging with the sector, instead opting for less controversial activities. As one participant stated: “it is a hard sell – it is too risky.” However, the scale of financial flows (both licit and illicit) as well as the large number of individuals engaging in ASGM indicate the sector has the potential to play a huge role in achieving development objectives if it is ‘fixed-up’.

Incentivising Change
A challenge to effecting change is the question of how to incentivise actors across the supply chain to move from illicit to formal markets? In examining how to incentivise change, intervention will likely be necessary at multiple points in the supply chain and include both government and the private sector.

Participants buttressed the GIFF Project contention that IFF flows are heavily dictated by pre-financing agreements, this means looking upstream from miners. Other challenges and interventions proposed by participants included helping miners increase production (through the provision of low-cost technologies for example) and addressing pricing (many illicit buyers offer prices close to or at the world gold price). The formation of cooperatives has previously been touted as an avenue to formalisation; however in practice the approach has not generated universal success. Existing structures and cultures of production are not always compatible with the traditional cooperative structure (which revolves around reinvesting into the cooperative to share benefits). This results in cooperatives being cooperative in name only, more closely reflecting corporations or hierarchical systems.

Generating political will is a major challenge. Specifically, governance of the ASGM sector is a major hurdle in the DRC; technical solutions are not enough. In addition to the Great Lakes Region, where attention has traditionally been focused, there is a need to look at West Africa and Latin America. In these places governments have little capacity to combat flows and illicit activity. Without building political will in the region and strengthening governments, there is a threat IFFs will contribute to conflict and instability.

However, depending on the state, it can be very difficult to engage with government actors and build political will. In some countries it is possible to go directly to the government or through an organisation, such as the EITI, to discuss change. In others, ASGM and IFFs are very ‘hands-off’ issues, at times due to the fact government officials are investing in and profiting from ASGM and associated IFFs. In working to build political will we ought to be asking in which countries, if any, does political will exist and why? By asking these questions we are better positioned to build political will in countries where it currently is not present.

The private sector plays an important role in gold supply chains and perpetuating or enabling IFFs. It is necessary to incentivise change in the private sector. Proposed action includes engaging industry leadership, many who are already engaged in discussions, and put pressure on private actors to comply with traceability and formalisation efforts. Sanctions have been implemented in the past in an attempt to increase accountability. While sanctions can still play a role, criticisms of sanctions include the fact they are not always enforced, and they do not increase in-country or internal accountability. In turn, there is a call for a broader menu of accountability. In addition, interventions ought to look beyond ‘sticks’ (negative repercussions), and identify ‘carrots’ (incentives) for actors to change their practices.

Traceability and Due Diligence
The gold sector is characterised by a lack of transparency. While other commodities and high value extractives have been subject to regulation and state control (for example the diamond industry and the 3Ts), the gold sector remains opaque. A July 2015 report from FATF noted that gold is particularly suitable to illicit activity because it provides reliable returns, can be traded anonymously, is easily smuggled, and is often traded using cash (FATF and APG, Money laundering and terrorist financing risks and vulnerabilities associated with gold (Paris: FATF; Sydney: APG; 2015)). Despite the enormous challenges in tracing gold flows, it is necessary to attempt to form sustainable, responsible supply chains. In particular, if gold is not traced, it is not possible to certify it is conflict-free, jeopardising flows to the US and Europe.

As such, there is a need to prioritise progressive due diligence and partner with private industry actors. Multistakeholder groups may be instrumental in this regard, increasing industry understanding of the broader impacts of trade and questioning their practices. Resolve has played an important role in this process – ‘asking the hard questions’. Questions to consider going forward include: Is there a role for industry to pay the bill? And, how does industry play a role without being penalised? Overall, as due diligence concepts are developed it is necessary to consider where and how demands can be made on different actors.

Mercury, while previously characterised as a boutique issue within the broader ASGM sector, is set to play a key role in formalisation efforts. Mercury is widely used in ASGM to extract gold from ore and may be provided to miners as a form of pre-financing. However, there is little more than anecdotal evidence of how mercury counter-trade is used as a form of pre-financing, how it is distributed, and how closely the mercury distribution network is tied to larger criminal networks.

The Minimata Convention will soon come into force, which will significantly impact on countries in which ASGM takes place. The Convention aims to protect human health and the environment from the adverse effects of mercury, in part by reducing mercury supply and demand. A core objective of the Convention is to reduce the use of mercury in ASGM. The Convention is a major international convention, which has generated resonance with a broad population, and provides a mechanism for governments and organizations to tap into financing which can be used to support ASGM formalization efforts.

As such, now is an important time to collect data on the mercury trade (before it goes underground) and examine how mercury can be incorporated into broader discussions on formalization.

Other Key Questions
A number of questions remain regarding gold and IFFs. As was made clear during the roundtable, there are huge gaps in knowledge and need for further academic study. Theories of change have been put forth, but case studies are needed to show such theories of change are viable. Overarching questions include:

  • Through which lens or lenses do you look at the IFF/ASGM Formalisation issue?
  • What will strategies look like?
  • Where can we have the most impact?
  • What are the choke points (e.g. refiners and smelters? Banks and investors?)
  • How much of this is ancient trade derived from culture and tradition vs. new sophisticated methods?
  • Does a commodities focus make sense?

The GIFF Project: Context & Background
Initial scoping suggests that IFFs are a significant obstacle to achieving development aims in the artisanal mining sector and its potential solutions are poorly understood. The elevated gold price between 2005 and mid-2011 was a welcome development for gold-rich nations, generating foreign investment and economic growth. At the same time, gold production and trade have become increasingly intertwined with IFFs and criminal behaviour. Specifically, gold produced by ASGM has been linked to IFFs in Africa’s Great Lakes Region, West Africa (Hunter, M., “Case study: The artisanal and small-scale gold mining sector,” (Paris: OECD, 2016)), and Latin America (FATF and APG, Money laundering and terrorist financing risks and vulnerabilities associated with gold (Paris: FATF; Sydney: APG; 2015)) where it may enable criminal activity, inhibit formalisation efforts, and facilitate the distribution of mercury.

Initial assessments of gold IFFs reveal a complex web of financial flows, materialising before gold even leaves the ground. IFFs can be cyclical in nature, with illicit profits reinvested into gold operations, further perpetuating IFFs. Consequently, “following the money” is crucial to identifying actors profiting from IFFs, as well as understanding the enablers driving the flows and generating effective responses.

The Global Initiative against Transnational Organised Crime and Estelle Levin Ltd. have therefore undertaken the GIFF Project in order to:

  1. Increase understanding of to what extent and in what ways IFFs are an impediment to the
    formalisation of ASM supply chains;
  2. Better understand the vulnerability of the international gold sector to criminal infiltration; and
  3. Strengthen local and international responses to IFFs.

During 2016, the GIFF Project will develop a toolkit to arm stakeholders with knowledge and tools to better identify and combat IFFs in the gold supply chain that impede formalisation of the sector. It will assess the various forms and functions of IFFs in ASGM, analyse existing legal frameworks related to these flows, and prescribe ways to address and prevent illegal activity in gold supply chains.

If funding allows, one or more local dialogues in the Great Lakes Region, West Africa, and/or Latin America will inform the development of this toolkit. While desk research can be useful in developing a toolkit that enables stakeholders to identify and address gold-related IFFs, the data and analysis would be enriched through local dialogues that would enable stakeholders in gold producing regions to provide insights and advice. The project team would be pleased to share further information on this concept and hold an initial scoping meeting with interested donors at their convenience.

The Washington DC Launch and Roundtable was hosted to support this process. The event provided a forum to raise awareness, facilitate discussions between prominent actors in the sector, and generate input and feedback on proposed project deliverables, namely the development of the toolkit.

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