All That Glitters is Not Gold: Dubai, Congo, and the Illicit Trade of Conflict Minerals

All That Glitters is Not Gold: Dubai, Congo, and the Illicit Trade of Conflict Minerals

May 27, 2014

Dear Friend,

Partnership Africa Canada is pleased to provide you with a copy of its latest report, “All that Glitters is Not Gold: Dubai, Congo and the Illicit Trade of Conflict Minerals”.

You can access the report here, in English or French.

This report is a contribution to a growing body of research that seeks to better understand the illicit trade of gold (and to a lesser degree, diamonds) emanating from the Democratic Republic of Congo, and the role industry and state actors play (primarily in neighbouring countries and the United Arab Emirates) in facilitating this illegality.

The focus on DRC is not accidental. It is the second biggest diamond producing country by volume, and has been the site of often-violent extraction of valuable natural resources for over a century. More recently, gold mines in eastern DRC have been at the epicentre of a protracted armed conflict that has claimed millions of lives and economically destabilized the Great Lakes region for the last decade. Despite being mineral rich, DRC’s underdevelopment is directly linked to a myriad of inter-related factors including corruption, armed conflict, political instability, poor domestic enforcement capacity and a lack of fiscal instruments to realize the full potential of its mineral wealth.

But just as important is how sophisticated international smuggling syndicates have exploited-and in some case encouraged-these vulnerabilities for their benefit. Our investigations explore the illicit trade of these minerals from mine site to leading gold refiners and diamond trading centres in Dubai-and finally for onward travel to the jewellery factories of India, and beyond.

“The continued smuggling of Congolese minerals poses a significant threat to ICGLR certification, due diligence efforts and security in Central Africa,” says Joanne Lebert, program director for PAC’s work in the Great Lakes. “Dubai and members of its gold industry need to own up to their responsibilities and tighten regulatory controls on gold imports, particularly those entering in carry-on luggage.”

“The undervaluation of diamonds entering Dubai represents a major deprivation of African treasuries,” added Alan Martin, PAC’s director of research.

“In 2013 alone, lax regulations and manipulative transfer pricing generated in excess of $1.6 billion in profits in the UAE- approximately $66 million of which involved Congolese diamonds. This is revenue that African governments need and deserve.”

This report explains how Dubai came to play such a central role in the global mineral trade, and the way it has managed to attract an ever-increasing proportion of the worldwide gold and rough diamonds trade over the last decade. In 2013, 40% of the world’s gold trade, worth an estimated $75 billion, passed through Dubai, a 12-fold increase in value over a decade previous. In 2013, over 15% of the world’s rough diamonds, worth $12.4 billion, were traded through the Emirate, compared with $690 million in 2003.

This report situates the illicit trade of gold and diamonds into an increasingly established and harmonized international framework of due diligence efforts for conflict-affected minerals. In addition to the OECD, other complementary due diligence processes are currently under way in the African Great Lakes Region. For example the ICGLR is implementing a Regional Certification Mechanism for tin, tungsten, tantalum and gold, which sets the standards and procedures for countries to issue regional certificates for conflict-free exports.

One of the main findings of this report is that the gold sector in Dubai has yet to develop a coherent, comprehensive and universally applied strategy to apply due diligence or implement a chain of custody over its gold supply. Due diligence efforts by UAE refiners, for example, are primarily focused on stopping direct supplies of mined gold from DRC and known transit countries, but little has been done to set up traceable supply chains that extend back to mine sites.

This report further concludes that weak chain of custody procedures in Uganda, Kenya, Burundi and DRC, allow exporters to deliberately disguise or fail to know the origin of their exported gold. Weak export procedures similarly allow for gross under-declaring of gold, particularly in Uganda, as well as undervaluation of diamond exports in DRC. This represents a significant loss of revenue to the region’s economies.

A summary of the report’s other main findings include:

  • Many individuals identified in previous UN reports for their central role smuggling Congolese gold continue to operate without administrative or legal sanction by either exporting countries in East Africa or Dubai.
  • Transfer pricing poses a significant ethical and enforcement challenge to Dubai’s diamond sector. Re-exported diamonds are on average valued at 44% higher than at the point of import-a figure five times higher than Dubai’s next closest competitor.

This, coupled with its tax free practices, makes the Emirate vulnerable to money laundering and other criminality.

The report makes several recommendations:

The Governments of Uganda, Burundi, Kenya and DRC and other ICGLR countries should:

  • Integrate due diligence and ICGLR Regional Certification Mechanism in national mining sector legislation, and operationalize implementation in the gold sector. Harmonize policies and practices with an aim to interrupt illicit trading. This should include further harmonization of tax regimes, and greater enforcement strategies and trans-border cooperation.
  • Investigate and prosecute individuals and companies involved in illegal gold trade from the DRC, including the beneficiary owners of UN sanctioned entities and their front companies.
  • Finalize the institution of the ICGLR’s Independent Mineral Chain Auditor office, meant to investigate illicit mineral activity, as well as the ICGLR’s exporter third part audit system.

The Kimberley Process should:

  • Create a special taskforce to investigate the issue of transfer pricing in the diamond industry, with a view to recommend ways African diamond producing countries can secure fairer and more accurate diamond valuations, and predictable tax revenues.

The Government of the UAE should:

  • Tighten regulatory controls on gold imports, particularly on hand carried gold, including verification of the consignee, the (authenticity of) certificate of origin or export permit, and customs clearance documents (including tax receipts).
  • Address transfer pricing of diamonds through federal legislation and introduce frequent and routine inspections of the value of imported parcels by the DMCC, with a rejection threshold of 15% undervaluation.
  • Send shipments above the 15% threshold back to the country of origin so authorities there can tax them appropriately, after having been accurately appraised by an independent evaluator.
  • Participate constructively in efforts to design a due diligence guidance for diamonds and precious stones commensurate with Dubai’s leadership role in the diamond industry.
  • Proactively disclose on a quarterly basis all data related to the import and export of
    gold.

UAE traders and jewellers and refiners that are directly or indirectly sourcing mined gold
from the ICGLR region should:

  • Adopt and implement due diligence policies in line with the OECD guidance supplement on gold, including through on-the-ground inspection of circumstances of mineral extraction and trade, and establishment of a chain of custody and/or traceability system with local exporters.