Global gold trading: how Dubai is depriving African producers of part of the gold windfall

(Ecofin Agency) - Since its launch in 2003, the Kimberley Process (KP) international diamond certification scheme has helped to reduce the presence of "blood diamonds" in the global trade in these precious stones. Unfortunately, other mining products are still the source of human rights violations or cause the producing countries to lose billions of dollars every year. This is the case of gold, one of the most cited raw materials when it comes to illegal exploitation or smuggling. The responsibilities are certainly shared between the producing countries and the recipients, but that of the world trading centers is overwhelming.

The issue of responsible procurement, designating the process of acquiring a good or service that respects both quality standards and environmental and social criteria, has taken on increasing importance in recent years.

Several reports blame the Dubai Gold Souk.

Consumers pay more attention to what they buy and consume and, in the context of the supply of metals and minerals, the subject is even more sensitive for products such as cobalt or coltan. Used in lithium-ion batteries and in our smartphones, they are in the limelight, because of the conditions surrounding their extraction in the DRC, between regular violence by armed groups and risks taken by artisanal miners. Tech groups or automakers are now looking to ensure the products they buy meet responsible standards, prompting suppliers to take more steps to ensure traceability of raw materials from mine to recipient.

Meanwhile, gold mining and trading enjoys a general relative indifference to sources and methods of supply. Admittedly, reports regularly show the shortfall represented by smuggling for producing countries where illegal exploitation is rife, mainly African countries. However, these various alerts have still not generated the decisive awareness that would reduce the phenomenon to negligible proportions, as is more or less the case with diamonds now.

Billions of dollars lost due to illegal gold mining

According to surveys on the issue, artisanal and small-scale mining is unanimously considered to be the source of the billions of dollars lost each year by African states in the gold sector. In 2017, for example, the majority of artisanal and small-scale gold production from Mali, Burkina Faso and Niger was still exported illegally, according to an OECD report. At the price of the yellow metal at the time, this represented, we learn, a value of more than $2 billion. Mali alone loses 15 tonnes of gold every year to illegal exports, or about $900 million at the current gold price, local authorities estimate.

Mali alone loses 15 tonnes of gold every year to illegal exports, or about $900 million at the current gold price, local authorities estimate.

More recently, in its report "Traffic in gold from conflict zones", published in February 2021, the American NGO The Sentry indicated that $4 billion in gold leaves the countries of Central and East Africa illegally. The figures are dizzying, but also provide an estimate of the sums that the States concerned could recover if all this illegally exported production took formal channels. Foreign exchange reserves, export taxes, etc. Unfortunately, porous national borders and lax international gold trading centers about the origin of the yellow metal continue to fuel smuggling.

The bad student Dubai

Less known to the general public than the Burj Khalifa, the gold souk of Dubai, the most famous city in the United Arab Emirates, is, according to several reports, the initial destination of gold illegally taken out of Sudan, Burkina Faso, DRC and all other African producers who are victims of smuggling. The case of Sudan, whose production is essentially artisanal, is quite illustrative of the place occupied by Dubai in the smuggling sector.

"The biggest gap in value between what Sudan says it exports and what its trading partners say it imports is in trade with the United Arab Emirates," said Lakshmi Kumar, from the American NGO Global Financial Integrity, quoted by the French magazine Jeune Afrique.

The figures are dizzying, but also provide an estimate of the sums that the States concerned could recover if all this illegally exported production took formal channels.

According to data from Comtrade, analyzed as part of a survey by Reuters, the Emirates' gold imports from Africa rose from 67 tons in 2006 to 446 tons, ten years later, for a total value of $15.1 billion. That year (2016, editor's note), the country even overtook China, the leading importer of gold from Africa for 2015, importing almost double the $8.5 billion in gold bought by the Middle Kingdom. The survey published in 2019 notes a gap of $ 3.9 billion between what the Emirates claim to have imported from 21 African countries, and what these countries officially exported to the federal state of the Arabian Peninsula.

Not much has changed since the publication of this investigation since only a few months ago (February 2021, Editor's note), the aforementioned The Sentry report again presented the United Arab Emirates as the first destination for smuggled gold exported from Africa, before being transported to other international markets.

“Electronics, jewelry, automotive and financial services companies are at risk of buying gold from conflict and risk zones in the Central African Republic (CAR), Democratic Republic of Congo (DRC), Sudan and South Sudan, through the United Arab Emirates (UAE), especially Dubai,” it read.

Switzerland leads the way

In a new report published in early November, the World Wildlife Fund (WWF) denounces this lack of traceability, focusing on Switzerland. The country of watches and gold bullion buried in the safes of its multiple banks is accused of participating passively in the lack of transparency in the global gold trade, due to a very weak regulation. However, according to the WWF, between 50 and 70% of the world's gold is refined in Switzerland. While it is true that some of this gold has followed an easily identifiable route, coming directly from several African countries that do not have refineries to process the metal themselves, the Swiss authorities can play a more important role regarding the other party who has taken dubious paths.

"Despite their dependence on this precious metal, watchmakers, jewelers and end consumers are still largely unaware of the risks associated with the gold supply chain", underlines Mark Pieth, professor emeritus of the university. from Basel.

“Despite their reliance on this precious metal, watchmakers, jewelers and end consumers are still largely unaware of the risks associated with the gold supply chain.”

Faced with accusations that have multiplied in recent years, from NGOs such as Global Witness or Swissaid, Switzerland has initiated some actions. The country has therefore decided to publish, since January ¹ , 2021, separate statistics for refined gold and mined gold. This distinction will above all make it possible to know the quantity of gold coming directly from the mines (artisanal and industrial) in order to improve traceability. After having initiated it in Switzerland, the State Secretariat for the Economy of the Confederation hopes that this new customs tariff classification will be applied worldwide, by 2027.

Metalor and the University of Lausanne offer a technological solution to ensure the traceability of gold.

Nevertheless, as the world's leading exporter and importer of gold, the implementation of this measure is already a step in the right direction, if it actually leads to stricter rules to regulate the origin of mined gold. These would include, for example, identification methods such as the one developed by the Swiss refiner (with Japanese capital) Metalor, in partnership with the University of Lausanne.

Concretely, a ton of gold coming from an artisanal mine in the DRC and which the importer would pass off as gold extracted in an industrial mine already known in Mali for example, would be automatically detected.

Called “Geoforensic Passport”, the tool presented last March has the advantage of removing the failures linked to a system based “on compliance, audits, local administrations, in an environment which is not free from corruption” . It makes it possible to identify, thanks to analyses, a unique signature similar to DNA for each gold mine. Concretely, a ton of gold coming from an artisanal mine in the DRC and which the importer would pass off as gold extracted in an industrial mine already known in Mali for example, would be automatically detected.

Efforts to generalize

Nearly two decades after its launch, the Kimberley Process now claims to ensure the traceability of more than 99% of diamonds officially traded in the world. While NGOs still note several shortcomings, the success of this initiative demonstrates that controlling the responsible supply of minerals depends on the concerted efforts of all the players involved. Therefore, to be effective, the measures initiated by Switzerland, as well as the various standards that govern the traceability of gold must be applied worldwide. This therefore requires more efforts on the part of the United Arab Emirates, but also more restrictive rules for the consumers of the metal traded in Dubai, namely the large luxury houses (jewelers, watchmakers, technology companies and investors buying the parts and gold ingots). It also requires that responsible sourcing standards like those of the London Bullion Market Association (LBMA) be mainstreamed.

To encourage artisanal miners to use official channels, the authorities of several African states are now offering them mining permits to practice legally.

These efforts will complement those already undertaken at the local level by countries that are victims of smuggling. To encourage artisanal miners to use official circuits, the authorities of several African states are now offering them mining permits to practice legally. Gold purchasing centers are also set up with prices closer to official gold prices and mechanisms are also put in place to monitor artisanal production. Among these mechanisms is the “Or Juste” project, which aims to create a responsible supply chain for artisanal gold in Côte d'Ivoire. In September 2020, Impact, the organization driving the mechanism, tracked a 755g gold bar produced by an Ivorian cooperative from the mine site to an LBMA-recognized refiner.

Emiliano Tossou