Fill out my online form.

Tag Archives: gold

Due diligence in the gold supply chain: How much is enough?

On November 5, 2013, the M23 rebellion in the Democratic Republic of Congo (DRC) officially announced the end of their insurgency in the Eastern Provinces of the country. Just one day earlier, the Swiss Federal Prosecutor’s Office opened an investigation into the refiner Argor-Heraeus for allegedly laundering significant volumes of illegally extracted gold from the DRC between 2004 and 2005.

The two events are part of the larger picture of the illegal exploitation of natural resources in the DRC and in particular the linkages of the illegal trade in gold with activities of armed groups. Despite the official ‘end’ to the M23 rebellion, it is important to remember that the Congolese Army (FARDC) and the still operating armed groups, such a…, which is said to have links with Islamist Al-Shabab, continue to profit from the predation on artisanally mined gold. The Congolese Army (FARDC) is now being hailed as the victor over M23, but one must not forget that the FARDC is also known to be amongst the greatest perpetrators of human rights abuses and, further threatening companies’ reputational exposure.

As illustrated by the criminal case in Switzerland, the issue of “conflict minerals” is by no means new or restricted to specific parts of the DRC, or about to somehow ‘whither away’. While today’s attention is centered on North and South Kivu, the gold referred to in the case of the Swiss investigation reportedly originated from Orientale Province, home of some of the DRC’s most productive artisanal gold mines and also one of the geographical foci of a renaissance in industrial gold mining.

The rebel group cited in the Argor-Heraeus case, the Nationalist and Integrationist Front (FNI), which is also said to have traded gold for weapons from UN peacekeepers, officially put down its weapons in 2007. While places and actors have changed over the past decade, the way gold is used as a conflict financing vehicle has not.

Refiners, however, are now subject to stricter (self-)regulations to ensure their gold is sourced responsibly than they were in 2004. In particular the Swiss gold refining businesses are subject to strict Anti-Money Laundering (AML) regulations, monitored by the Swiss Financial Market Supervisory Authority (FINMA). These include annual third-party audits of the refiner’s AML practices. As a result when industry mechanisms such as the London Bullion Market Association (LBMA) and the Responsible Jewellery Council (RJC) started defining requirements for the responsible sourcing of gold, Swiss refiners were among the first to get involved, oftentimes pointing to existing controls on and reviews of their AML systems. Some of the Swiss refiners continue their engagement with responsible gold sourcing mechanisms, including information sharing on their AML programs to benefit other refiners but also more directly through the Swiss Better Gold Initiative to source gold from the DRC in a legal and sustainable manner that benefits local communities.

Considering the increased controls and third party verifications of refiners’ sourcing practices, the question remains though how far due diligence measures can be expected to extend into the supply chain. Although the Gold Supplement to the OECD Due Diligence Guidance defines a supplier as “any individual or organization who is considered to be a participant in the supply chain for the supply of gold and gold-bearing materials”, the expectation under the OECD framework – and consequently the LBMA and RJC – are for refiners to have controls in place only over their direct counterparty. On the other hand, the statement released by “Track Impunity Always” (TRIAL) on 4th November 2013 says the refinery should have assumed that the gold resulted from pillage.

Without commenting on the specific case referred to by TRIAL, the expectations that refiners should go beyond the facts at their disposal and make assumptions on actors and their linkages in the gold supply chain presents a number of practical challenges. In-depth investigations into gold supply chains may be feasible for a refiner with a dozen or maybe even a hundred counterparties. However, refiners with thousands of counterparties may find it difficult to gather detailed information not only on the counterparties themselves, but the entire gold supply chains.

Nevertheless, full transparency can only be achieved if all actors in the supply chain enforce Know Your Customer (KYC) requirements. Refiners may be able to use their influence and knowledge to work beyond their first tier contacts, looking into the entities supplying gold to their counterparties. For example, refiners could request information on the sources of gold from recycling businesses selling gold material to them. They could provide technical assistance to counterparties on AML and KYC standards and requirements, offering tools or templates for smaller businesses to use. Any such measures may be tailored to the type of counterparty as risks for conflict minerals in the supply chain or money-laundering practices may be smaller if the customer is a renown international bank, rather than an international recycler. Equally, the refiner’s influence over the latter may be larger.

The criminal investigation in Switzerland highlights that the gold sector in this country continues to undergo intense scrutiny for its past and present actions. The only way to respond for the Swiss refiners is to continuously improve their due diligence systems and push for all actors in their gold supply chains to do the same.

For comments on this article or for more information on how we can help you conduct due diligence in gold supply chains, contact me at [email protected] and visit our website here.

My thanks to Nicholas Garrett for his contribution to this post.

Conflict-free sourcing: The case of gold (Part I)

When the US Congress passed Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Section 1502) on “conflict minerals”, it soon became clear that companies would have to differentiate in their due diligence approach between the so-called “3Ts” (tin, tantalum and tungsten) and gold. In this blog series, RCS examines the response of the gold industry to the requirements of Dodd-Frank Section 1502. The first part looks at challenges the gold industry faces in the exercise of due diligence and provides an overview on initiatives taken along the supply chain to promote the responsible sourcing of gold. In subsequent parts of this series, RCS will focus more specifically on due diligence mechanisms implemented at the mining as well as refining level.

The reasonable country of origin enquiry that companies are required to carry out under the US legislation presents a number of challenges that are unique to the gold supply chain. Among those is the value of gold, making it commercially interesting to trade the commodity in small quantities and to recycle gold products. According to the World Gold Council, approximately one third of gold on the market at any point in time is recycled and thus cannot be traced back to the mine of origin anymore. Secondly, gold is not only used to manufacture jewelry or other consumer goods but also serves as an investment product. Thirdly, mined gold does not necessarily require heavy equipment or specialized knowledge to undergo basic refining.

As a result of these attributes, gold can – somewhat paradoxically – be both easy and difficult at the same time to track through the supply chain. Where actors attempt to conceal the origin of gold, the small quantities of gold and complexity of the supply chain renders any attempt to identify the mine of origin nearly impossible. However, owing to the high value of the commodity, legitimate trade in gold is very often accompanied by an extensive paper trail and subject to intensive scrutiny to prevent and eliminate practices of money laundering and bribery. Both arguments were initially advanced by the gold industry to justify what could be considered a slow response to Dodd-Frank Section 1502 when compared to efforts for the conflict-free sourcing of 3Ts. Whereas tantalum smelters underwent third-party audits under the EICC-GeSI Conflict-Free Smelter (CFS) Program as early as 2010, requirements for the responsible sourcing of gold for refineries were only published starting 2012.

Despite the reservations during early attempts to respond to the requirements of Dodd-Frank Section 1502, the gold industry has since caught up with efforts in the 3Ts sector. Industry associations such as the Responsible Jewellery Council (RJC), the London Bullion Market Association (LBMA), the World Gold Council (WGC) and the Dubai Multi Commodities Center (DMCC) have published their approach for the responsible sourcing of gold.

Whereas the EICC-GeSI Conflict-Free Smelter (CFS) Program, the primary mechanism for compliance with Dodd-Frank Section 1502 for tantalum and tin, focuses on the independent third-party verification of smelters’ documentary evidence on the source and chain of custody of minerals, the gold industry has chosen an approach emphasizing the establishment and implementation of appropriate management systems. In as much as possible, the WGC, LBMA or RJC encourage their members to expand existing mechanisms such as the sustainability reporting for large-scale mining operations or anti-money laundering systems for gold refineries to include information on the conflict-free sourcing of gold. Management systems, including the company’s own assessment of the conflict-free nature of their operation, have to be tested and verified by independent third-party auditors.

As positive as these efforts are in encouraging and incentivizing responsible sourcing practices for gold, they have so far not had any impact on the key issue US Congress attempted to address through Section 1502 of Dodd-Frank. In fact, gold mined in the DRC is highly unlikely to appear in the supply chain of a LBMA accredited Refiner, a RJC or WGC Member. Mining activities in the DRC are almost exclusively linked to illegal and illegitimate trade in gold, thus escaping the scrutiny of these formal organizations.

Furthermore, initiatives taken by industry associations have highlighted the challenge of associating artisanal mining operations in formalized supply chains. In particular, the requirement to establish strong management systems for compliance with an industry standard de facto excludes artisanal miners from participating, as their operations in most cases are not sufficiently formalized.

Recognizing these challenges, initiatives are emerging that aim to provide access to the international market for artisanal gold miners. Among those is the Fairtrade gold certification put in place by Fairtrade International; the Better Gold Initiative, a public-private-partnership supported by the Swiss Government; as well as the Certified Trading Chains (CTC), a project funded by the German Federal Institute for Geosciences and Natural Resources (BGR).

Under the Fairtrade gold certification, artisanal miners are required to comply with a set of minimum conditions, such as for example the elimination of child labor, to obtain certification. Certified operations gain market access as well as obtain a premium for the gold produced. However, the organization has started implementation of the mechanism in Latin America and although gradually expanding the project to include artisanal mine sites in Africa, does not include the DRC.

The Better Gold Initiative and the Certified Trading Chains, on the other side, work with artisanal mine sites in the DRC and (for CTC) Rwanda. However, focusing on pilot sites and relying on donor financing, these two initiatives present significant challenges for the scalability and business sustainability beyond an individual project.

Nevertheless, Dodd-Frank Section 1502 has resulted in positive change by encouraging the gold industry to set clear standards for actors in regards to responsible gold sourcing practices and to communicate more openly on the industry’s efforts to exercise due diligence on gold supply chains. The legislation, although unwittingly, also highlighted the existence of the market for gold that is not mined or traded within legal framework and which is situated largely outside of the influence of formal institutions. Looking forward, the gold industry should look to develop market-led approaches, particularly with small-scale miners, that seek to pull the informal trade into the formal sector, as well as seek closer ties between large scale and small-scale legal mining.

In the next part of this blog series, RCS will more closely examine the conflict-free gold standard established by the World Gold Council and its impact on large-scale gold mining operations.

RCS Director Harrison Mitchell speaks at the Munich Center on Governance workshop on Standards and Certification in the minerals trade

Spring came early to Munich this year, with two sunny days on March 22 and 23 for the workshop on Standards and Certification in the minerals trade held at the Munich Center on Governance (MCG) in Germany. Hosted and sponsored by BGR (the German Federal Institute for Geosciences and Natural Resources), MCG and Cost (European Cooperation in Science and Technology), the workshop bought together academics and practitioners to discuss international approaches to certification in the sector.

RCS was represented by our Director Harrison Mitchell. Notable attendees included Paul Mabolia, in charge of Promines, the mining sector reform program of the Democratic Republic of Congo, who discussed the efforts to work on certification in the Congo. A key problem he identified was the sustainability of the traceability schemes, due to the expense of financing them. He noted that it makes no sense to “tag an empty bag” and suggested that there was a sense of urgency to ensure material could be sold internationally in the first place. Reviewing his comments on the de facto embargo in place, RCS was reminded of a warning we gave to the international community back in April 2009, when we suggested that “banning, or even disrupting the trade will have a severe effect on the livelihoods of up to one million people in the Great Lakes region.”

While the debate has come a long way since RCS’s first reports on Congo’s mineral trade in 2009 and 2010, many of the issues raised are still relevant.

How can gold be traced when the trade is currently 95% informal? Are certification schemes just a distraction away from the real problems of entrenched poverty in the DRC’s mineral sector? How are the schemes going to be financed?

Angeline Gough discussed the Forest Stewardship Council’s work in the forestry sector providing pro-poor value chain assessments. The FSC has been holding workshops to identify where local communities could achieve more value in their supply chains, by cutting out the middle men or improving efficiency. We speculated with her about whether such a method could work in artisanal mining communities.

Of particular concern is the fact that achieving more value likely results in cutting out the middleman (a commonality between forestry and minerals), who has a vested interest in maintaining the current status quo. From experience, middlemen often act as considerable spoilers to attempts to formalise and help artisanal miners achieve more value. They can be gatekeepers to information about the value of the resource, or encourage dependency through the monopoly of capital that is needed to fund activities. The silver bullet consists in convincing the middlemen to join community efforts to achieve increased value together… while taking a pay cut.

Harrison spoke as a panellists with Dr Philipp Pattberg (Associate Professor for Transnational Environmental Governance at the Institute for Environmental Studies), Anna Stetter (Chair of Global Governance and Public Policy at the Geschwister-Scholl-Institute of the Ludwig-Maximilians-Universität) and Julia Steets (Associate Director of the Global Public Policy Institute in Berlin). The discussion called into question the effectiveness of certification as an effective instrument to achieve sustainability objectives in the first place. Dr Pattberg noted that there exists a ‘paper reality’ (great term!) as there is a lot of desk research, but not a lot of information on the impact on the ground. Anna Stetter’s work is interesting in its attempts to identify an ideal certification scheme that balances effectiveness, legitimacy and efficiency. However, the panel later noted that structure should follow function and objectives of a scheme first and foremost. Harrison discussed the fact that both the design and implementation of certification schemes often are a political process, where the priority of Northern and consumer states trumps the needs of Southern producer states. The result is Southern states jumping through hoops that tick the boxes of Northern consumers, but which may have little to do with the sustainability and economic growth concerns of producers.

Finally, Harrison noted that there were often “successes by accident” in certification schemes. For instance, the Kimberley Process for diamonds cannot be said to be successful in tracing diamonds (for a number of reasons), but has done a lot to formalise the international export and trade of diamonds. This has resulted in an increase in export revenues by exporting states. Likewise, the various conflict mineral schemes are at an early stage, but market pressures to comply with the schemes are already resulting in mid-level companies adopting and implementing policies on labour standards and human rights, where sometimes there were none before.
Thanks to the organisers for a highly worthwhile conference.