The Sicpa Oasis validator system (bullion protect) is pictured on one
kilogram bar of gold at Swiss refiner Metalor in Marin near Neuchatel,
Switzerland on July 5, 2019. PHOTO | 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, channelling 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.
Counterfeit bars
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
finalise 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.
Hand 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 jewellers,
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 jewellry
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 US 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, jewellers 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, micro surface 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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