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Aug 28, 2019
Exclusive on Gold Fake Bars: Fake-branded bars slip dirty gold into world markets
LONDON (Reuters) - A forgery crisis is quietly roiling the world’s gold industry.
Gold
bars fraudulently stamped with the logos of major refineries are being
inserted into the global market to launder smuggled or illegal gold,
refining and banking executives tell Reuters. The fakes are hard to
detect, making them an ideal fund-runner for narcotics dealers or
warlords.
In the last three years, bars worth at least $50
million stamped with Swiss refinery logos, but not actually produced by
those facilities, have been identified by all four of Switzerland’s
leading gold refiners and found in the vaults of JPMorgan Chase &
Co., one of the major banks at the heart of the market in bullion, said
senior executives at gold refineries, banks and other industry sources.
Four
of the executives said at least 1,000 of the bars, of a standard size
known as a kilobar for their weight, have been found. That is a small
share of output from the gold industry, which produces roughly 2 million
to 2.5 million such bars each year. But the forgeries are
sophisticated, so thousands more may have gone undetected, according to
the head of Switzerland’s biggest refinery.
“The latest fake bars
... are highly professionally done,” said Michael Mesaric, the chief
executive of refinery Valcambi. He said maybe a couple of thousand have
been found, but the likelihood is that there are “way, way, way more
still in circulation. And it still exists, and it still works.”
Fake
gold bars - blocks of cheaper metal plated with gold - are relatively
common in the gold industry and often easy to detect.
The
counterfeits in these cases are subtler: The gold is real, and very high
purity, with only the markings faked. Fake-branded bars are a
relatively new way to flout global measures to block conflict minerals
and prevent money-laundering. Such forgeries pose a problem for
international refiners, financiers and regulators as they attempt to
purge the world of illicit trade in bullion.
High gold prices
have triggered a boom in informal and illegal mining since the
mid-2000s. Without the stamp of a prestigious refinery, such gold would
be forced into underground networks, or priced at a discount. By
pirating Swiss and other major brands, metal that has been mined or
processed in places that would not otherwise be legal or acceptable in
the West – for example in parts of Africa, Venezuela or North Korea –
can be injected into the market, channeling funds to criminals or
regimes that are sanctioned.
It is not clear who is making the
bars found so far, but executives and bankers told Reuters they think
most originate in China, the world’s largest gold producer and importer,
and have entered the market via dealers and trading houses in Hong
Kong, Japan and Thailand. Once accepted by a mainstream gold dealer in
these places, they can quickly spread into supply chains worldwide.
Word
of the forged bars began to circulate quietly in gold industry circles
after the first half of 2017, when J.P. Morgan, one of five banks which
finalize trades in the $10 trillion-a-year London gold market, found
that its vaults contained at least two gold kilobars stamped with the
same identification number, 10 people familiar with the matter told
Reuters. Reuters couldn’t determine exactly where the vaults were.
J.P.
Morgan declined to directly address questions about the fraudulent
bullion, or comment on any of the details in this story. “It’s our
standard practice to immediately alert the appropriate authorities and
refineries should we discover mismarked gold kilobars during routine
checks and procedures,” the bank said in a statement. “Fortunately, we
have yet to have an incident resulting in a loss to the firm or a
client.”
The Shanghai Gold Exchange, which regulates China’s gold
market, said in a statement it was not aware of counterfeit bars being
made in or transported through China. “The Shanghai Gold Exchange has
established a thorough delivery and storage system. The process for gold
(material) to enter the warehouse is strictly managed and in compliance
with the regulations,” it said.
When others who store and trade
such gold found forged bars, they returned them to the refiner
concerned, some of whom have operations in Asia. Bars returned to
Switzerland have been reported by refiners to the Swiss authorities who
impounded them, refiners said.
Swiss Customs said 655 forged bars
were reported in 2017 and 2018 to local prosecutors in Ticino, a region
bordering Italy that contains three of Switzerland’s four large
refineries. “In all cases the marking of the 1 kg bars were fake,” a
Customs official said by email, without commenting further.
The
public prosecutor in Ticino confirmed it had received three reports of
gold bars with suspect serial numbers, but said it could not disclose
more information. The police in Neuchatel, where Switzerland’s other
large refinery is located, said neither it nor local prosecutors there
had received reports of any forged bars. Switzerland’s Attorney General
said its office was not concerned with the topic at present.
Refinery executives said forged bars had also been reported in other countries.
FILE
PHOTO: The Sicpa Oasis validator system (bullion protect) is pictured
on one kilogram bar of gold at Swiss refiner Metalor in Marin near
Neuchatel, Switzerland July 5, 2019. REUTERS/Denis Balibouse
HANDY FORMAT
Kilobars
are small - around the size and thickness of a cellphone - unlike the
roughly 12.5-kilo gold ingots typically stored in the vaults of the
world’s central banks. Kilobars are the most common form of gold in
circulation around the world, passing fluidly between banks, refineries,
dealers and individuals. The identifying features stamped onto a bar’s
surface include the logo of the refinery that made it, its purity,
weight, and a unique identification number. Each one is worth around
$50,000 at current prices.
In parts of Southeast Asia, it’s not
uncommon for individuals to use gold instead of cash for big purchases
such as real estate, bankers and analysts said. “It’s the only
investment tool that goes from institutional investors like banks to the
public and back again,” said an executive at a Swiss refinery.
In
China, almost all exports of gold are banned as part of the country’s
strict, longstanding controls on capital movements. That, market
analysts say, has spurred demand among well-to-do Chinese who want to
send money out of the country to find ways to smuggle it.
An
estimated 400 to 600 tonnes of gold are snuck every year across the
border from mainland China to Hong Kong in car boots and delivery vans,
most of it in kilobars, said Cameron Alexander, head of precious metals
research at consultants GFMS Refinitiv, which conducts detailed studies
of global gold flows. Hong Kong Customs said it had received no
complaints in the past decade about kilobars with forged trademarks.
Japan
also has a long-established problem of gold smuggling in which the
forged brands could be put to use, refinery executives said.
Swiss
brands are not the only ones to have been pirated, but are the most
targeted due to their global reach, executives said. Switzerland’s four
largest refineries - Valcambi, PAMP, Argor-Heraeus and Metalor - process
around 2,000-2,500 tonnes of gold a year, worth around $100 billion.
Their trademarks are among the most common and trusted in the industry.
PAMP and Metalor declined to comment on the record; Argor said there was
always a risk brands would be counterfeited, and recommended people buy
bars only from trusted distributors.
For recipients, the pirated
bars pose a compliance threat: Anyone who holds such metal - including
jewelers, banks and electronics firms - risks inadvertently violating
global rules designed to keep metal of unknown or criminal origin out of
circulation. The rules aim to staunch gold supplies that fund conflict,
terrorism or organized crime, damage the environment or undermine
national governments.
Governments in America and Europe are
legislating to force banks and manufacturers of items such as jewelry
and electronics to take more responsibility for their mineral suppliers.
For example, a clause in the Dodd-Frank Act adopted by the United
States obliges U.S. companies to disclose whether gold they use has come
from countries in central Africa where it could have been mined to fund
conflict.
Richard
Hayes, chief executive of the Perth Mint in Australia, one of the
world’s largest refiners, said his company had not encountered
fraudulently branded Perth Mint kilobars. But, given the experience of
other refiners, he has no doubt they are circulating.
“It’s a
wonderful way of laundering conflict gold,” he said. “The gold is
genuine, but it’s not ethically sourced ... They look completely
genuine, they assay correctly, and they weigh correctly as well.”
The
perfect appearance makes the bars highly effective. “Because gold is
completely fungible,” Hayes said, “you can bleed it into genuine
production. It’s very, very hard to control.”
J.P. Morgan
supplies gold from major refiners for many of the world’s biggest banks,
jewelers and investors, and the discovery of the forged bars in its
vaults triggered a full review of the gold it held, market sources said.
One said this sweep unearthed around 50 fraudulently-branded bars.
Another said it found several hundred. J.P. Morgan did not comment.
People
in the industry familiar with the matter said the number of forged
bars, and their high quality, meant their production must be well
organized. An analysis of the bars’ movements suggested they had been
made in Asia, probably China, they said. But the gold in them could have
been melted and re-melted after being mined anywhere.
J.P.
Morgan responded to its discovery by deciding to stop buying any gold in
Asia that had not come freshly made from a small clutch of refineries
it trusted, five people familiar with the decision said. J.P. Morgan
declined to comment.
Other banks have also restricted gold
purchases in Asia, 15 people in the industry said. “Anything that has
even the chance of being iffy they are not going to be involved in,”
said Alexander, the analyst at GFMS Refinitiv.
Reuters
approached five large banks that trade gold in Asia, several of which
have vaulting facilities. HSBC declined to comment in detail but a
spokesman said it only bought bars directly from a small group of
refiners accredited, like the Swiss, by the London Bullion Market
Association (LBMA). It said it had found no counterfeits. UBS did not
comment on counterfeit bars, but said it only sells gold processed by
LBMA-accredited refiners. Standard Chartered declined comment, saying
“this is not an issue that affects us.” ANZ said it buys previously cast
bars from “a select group of counterparties” and its policy, which had
not been changed by the counterfeits, was to re-melt and recast them
before selling them on. No one from ICBC Standard was available to
comment.
THREE NINES
The number of fake bars being found
has dropped since 2017. But refiners say the forgeries are becoming
increasingly sophisticated, so the problem may have grown.
In
2017, Valcambi’s Mesaric said, hundreds of bars were found stamped with
the same identification number. The bars’ markings also had spelling
errors, flaws in logo images, or print that was too deep or shallow,
other refiners said.
Today, the forgeries are more precisely
made, using what appears to be sophisticated machinery, Mesaric said.
There can still be giveaways, such as indentations from a robotic
gripper or repeated imperfections in a cast mould. But these are easy to
miss.
The most reliable way to identify the fakes is to test
their purity. Gold is available on world markets in varying levels of
purity: For professionally produced kilobars, the most common standard
is 99.99% - known in the trade as “four nines.” An analysis of three
counterfeit-branded bars by one Swiss refinery showed that two of them
were 99.98% pure, and the third 99.90%.
Though short of
legitimate professional standards, even that level of purity is
difficult to achieve, and takes advanced equipment to detect.
Swiss
Customs said of the 655 bars reported to local prosecutors in Ticino,
the purity fell slightly below 99.99% in some cases.
“The level
of counterfeit is becoming really good. Even for us it is hard to tell,”
said a Swiss refinery executive who spoke on condition of anonymity.
“They are, however, slightly less pure because the people doing the
counterfeits don’t have the equipment we have.”
TAMPER-PROOF INK, MICROSURFACE SCANS
The refineries are responding to the problem with technology.
Metalor
this year began to put spots of tamper-proof ink on its bars. Like the
security features on banknotes, these display different features when
viewed under certain light or through filters. PAMP and Valcambi perform
a microsurface scan of their bars and supply machines or phone apps
that can scan each one and verify whether their surfaces match the
refinery’s records. Argor said its bars had various security features,
but declined to elaborate for security reasons.
The LBMA, which
accredits global refineries to vouch for the quality of their output, is
drawing up standards for security features. It has also proposed a
global database containing information about every kilobar produced, as a
way of cross-checking the products to add an extra layer of security.
“Any security feature can be duplicated that’s on the bar itself,” said
the LBMA’s chief executive, Ruth Crowell.
But most of the
refiners’ security features have only been introduced recently, and no
database is planned until 2020 at the earliest.
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