10 measures to stop illegal financial flows from the mining industry

Date:

10 measures to stop illegal financial flows from the mining industry

  • news by AUN News correspondent
  • Thursday, December 01, 2022
  • AUN News – ISSN: 2949-8090

Summary:

  • The production and trading of gold from Venezuela, which typifies many of the problems with IFFs in general, are the focus of this article’s primary concerns and suggestions for solutions.

  • Following Minerven’s 2019 suspension by the U.S. Treasury, illegal mining is thought to have helped the Maduro dictatorship hold on.

  • Look beyond gold: While the movement of gold out of Venezuela is an important area for reform, other experts pointed out that other commodities, such as vital or transitional minerals, are being exploited to diversify criminal portfolios.

  • The proposals above offer a few illustrative ideas for combating IFFs.

  • Protecting human rights and battling corruption are goals of the United States’ anti-corruption strategy and the Summit for Democracy and its emphasis on pledges to promote democracy.

Transnational action is necessary to address the fundamentally complicated problem of fighting corruption. High stakes are involved. Multistakeholder efforts to fight corruption are crucial to achieving democratic renewal globally, as initiatives like the Summit for Democracy and the United States Agency for International Development’s Combating Transnational Corruption Grand Challenge have highlighted. An example is illicit financial flows (IFFs), which are “illegal movements of money or capital from one country to another.” IFFs encourage corruption, intensify environmental damage, increase inequality, and undermine economic security. The effects are particularly severe in low- and middle-income nations, but not just because IFFs result in a “loss of what are frequently vitally needed resources to fund public projects or critical investments.”

Of course, no economy can solve this issue by itself. Solutions to IFFs necessitate considerable cross-national collaboration due to the globalized structure of financial institutions. The production and trading of gold from Venezuela, which typifies many of the problems with IFFs in general, are the focus of this article’s primary concerns and suggestions for solutions.

Background

Venezuela’s gold production and trade illustrate many of the dangers and adverse effects of IFFs. Illegal mining, especially of gold, contributes to environmental degradation, violations of human rights, and security problems for Venezuela and the surrounding countries. Regionally, illegal gold mining is becoming more prevalent, partly due to high gold prices and a lack of governmental will and resources to address the issue. For instance, Colombia is thought to mine 69% of its gold illegally, and the country earns an estimated US$2.4 billion a year from the illegal gold trade.

Hugo Chavez, president at the time, nationalized the mining industry in 2011 to consolidate government control over the sector. Gold became a crucial source of income for the Maduro administration following the collapse of the nation’s economy. The dictatorship now has few sources of money due to international export restrictions combined with falling oil production.

The government-owned gold firm Compania General de Minera de Venezuela (Minerven), only undertakes a little amount of its mining. Instead, experts point out that the government buys gold from several small-scale mines all around the nation, including those run by illicit organizations. Sindicatos, a type of criminal organization from Venezuela, and illegal armed groups from Colombia, particularly ex-members of the FARC and the ELN, are examples of organizations participating in illegal mining. The government has also used the revenues from the clandestine gold market to pay the military and high-ranking political figures security fees to keep their allegiance. There are few options for change or restitution because this has occurred in an environment where there is “no democracy, no independence, or balance of powers,” in addition to a sophisticated worldwide corruption system.

The Banco Central de Venezuela (BCV) or criminal organizations ship gold straight out of the country as contraband, particularly to nations like Turkey, Iran, Uganda, Libya, and the United Arab Emirates. Following Minerven’s 2019 suspension by the U.S. Treasury, illegal mining is thought to have helped the Maduro dictatorship hold on.

These complex issues and possible solutions are explained through research by the Leveraging Transparency to Reduce Corruption (LTRC) effort and many others[1], as well as professional comments from a moderated panel discussion and the following workshop.

Arguments against and suggestions

An increase in gold production, the sheer volume of people participating in gold smuggling, and the challenges of tracking down illegal gold flows have all contributed to a problem with few opportunities to even attempt to resolve it. This includes the difficulty in obtaining trade and customs data (which could aid those fighting corruption in determining the size and sources of resource flows) and the complex global character of the issue.

Following are ten suggestions that outline potential avenues for addressing IFFs through research, training, education, and engagement methods. These suggestions were informed by the expert conversations mentioned above and take into account the obstacles mentioned above. While many of these opportunities apply to the fight against IFFs more generally, they were found in the context of illicit gold flows from Venezuela.

  1. Address and include important regional actors: Several experts emphasized preventing IFF enablers at the supply chain and regional trade levels. Even though there is no doubt that there are international laundering networks, it appears that gold from dispersed flows leaving Venezuela is primarily laundered in the Latin America and Caribbean (LAC) region through significant regional transit hubs, particularly Colombia, the Dominican Republic, Brazil, Suriname, Guyana, and Panama.
  2. Support the development of local journalists’ capacities: Transparency can be advanced by providing local journalists with funding and training to examine suspected IFFs and other corruption-related issues. This can lead to pressure for reform from anti-corruption advocates. For instance, exercise may be provided to journalists on how to probe illicit flows using transaction-level data, with the results being shared through worldwide outlets.
  3. Leverage incentives broadly: Since interaction with the Venezuelan government is not anticipated, it’s critical to identify alternative means of encouraging better management of natural resources. More engagement with indigenous people, a collaboration between local and international organizations, and coordination with the commercial sector and all participants throughout the value chain are crucial, according to several experts.
  4. Thinking broadly: Talk about all participants throughout the value chain and examine how gold is exchanged (doré, scrap, jewellery, concentrates) with an eye toward their vulnerabilities to completely address the challenge.
  5. Close implementation gaps: There are frequently substantial gaps between the standards for due diligence and its completion or application. We may be able to comprehend these bottlenecks better and their causes with the aid of new studies.
  6. Build stakeholders’ ability and understanding regarding due diligence: In addition to the aforementioned, it is crucial to instruct buyers, exporters, and traders on how to do their supplier due diligence more successfully. According to several experts, governments everywhere should be pushed to increase the pressure on exporters and trade hubs to adhere to strict due diligence norms.
  7. Consider free trade zones: According to the OECD, these areas can “act as enabling mechanisms for both gold laundering and money laundering linked with gold,” hence it is essential to pay more attention to how they facilitate gold flows and related financial crimes.
  8. Enhance data: According to several experts, trade and customs data are frequently inconsistent, incorrect, or insufficient, and as a result, there is a need for international institutions to assist in enhancing this data.
  9. Increase public awareness of environmental degradation: In Venezuela, groups like SOS Orinoco have recorded ecological damage and human rights violations by illicit mining. Many experts emphasized that these concerns received insufficient attention both locally and internationally and pointed out that the international community, especially international environmental protection organizations, frequently avoids working in Venezuela.
  10. Look beyond gold: While the movement of gold out of Venezuela is an important area for reform, other experts pointed out that other commodities, such as vital or transitional minerals, are being exploited to diversify criminal portfolios. More study is required to comprehend this issue’s size and complexity fully.

The proposals above offer a few illustrative ideas for combating IFFs. It is crucial to building on these concepts going forward by figuring out who is most suited to pursue them and how to do so in a way that is mindful of dangers to people or collectives. This must be accomplished while handling the politics surrounding the necessary acts, especially in enabling nations.

Protecting human rights and battling corruption are goals of the United States’ anti-corruption strategy and the Summit for Democracy and its emphasis on pledges to promote democracy. These promises may present a critical window of opportunity for a more comprehensive, global initiative that targets the nations that produce IFFs and other countries where gold and the proceeds of its commerce are laundered.

LTRC will continue engaging with international, subnational, and local organizations to understand better and identify opportunities to combat the challenge of IFFs and corruption more broadly through research, engagement strategies, and/or specific initiatives. We welcome interested organizations to connect with us by emailing LTRC@brookings.edu.

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