All That Glitters is Not Gold

Although COVID-19 has created many uncertainties, one thing is certain—financial crimes do not stop based on economic conditions.

Perpetrators have capitalized on COVID-19 fears, with jurisdictions around the world seeing an uptick in illegitimate activities such as cybercrime, fraud and the sale of counterfeit goods.1 Proceeds of financial crime are often converted to precious metals and stones, such as gold, in order to conceal illicit proceeds given the cash-based nature and anonymity of exchange.2

Why Are Criminals “Going for the Gold” and What It Means for Dealers

The appeal of precious metals and stones has amplified due to the global geopolitical and market conditions. For example, central banks have started to diversify their holdings into gold while recent mass quantitative easing and low to negative interest rates have increased individual investors’ demand for the asset.3 This is evident in the appreciation of gold prices, which have risen more than 30% in the past year.4

Increased demand presents increased risks; in particular, financial crime risk for dealers in precious metals and stones (DPMS) has increased as bad actors exploit weak anti-money laundering/counter-terrorist financing (AML/CTF) regulations within the sector to conceal and protect their proceeds from illegitimate activities. In order to safeguard Hong Kong’s DPMS sector from being abused by illegitimate sources, DPMS are currently required to report timely suspicious transactions to the Joint Financial Intelligence Unit.5

On February 26, 2020, the financial secretary announced that the Hong Kong government will further enhance the territory’s AML/CTF regime by incorporating DPMS into Hong Kong’s AML/CTF framework, with public consultations kicking off this year.6 This announcement was in response to the Financial Action Task Force (FATF) finding that Hong Kong excluded DPMS from AML/CTF requirements.

Given the increasing demand and risk for precious metals, this presents an opportunity for DPMS to become gatekeepers in preventing financial crime. Failing to do so will not only impact the sector’s day-to-day operations for meeting increasing regulatory requirements, but also impact the industry’s reputation by being a perceived facilitator of financial crime.

What Regulations Can Dealers Expect and How Should They Prepare for It?

According to FATF, DPMS are classified as designated nonfinancial businesses and professions (DNFBPs).7 In March 2018, four DNFBPs (accountants, lawyers, real estate agents, and trust or corporate service providers) were brought under the AML/CTF framework in Hong Kong.8 The four DNFBPs are required to take a risk-based approach in conducting due diligence and ongoing monitoring of its customers and counterparties, so DPMS should expect similar legislation.9

While implementation of the AML/CTF framework may seem daunting—especially to those unaccustomed to AML/CTF regulations—leveraging effective technological solutions can help DPMS efficiently and proactively identify and mitigate the highest risks that are important to the business.

How Technology Can Help

Effective technological tools that are customizable can dynamically assess third-party information, develop risk heat maps, and rapidly identify and verify which parties display the highest risks through trusted sources in a matter of minutes. Artificial intelligence, such as natural language processing, can understand the nuances of various languages and analyze unstructured content with the same cognitive processes as humans. This not only allows vast amounts of information to be processed in an efficient manner, but also results in a more comprehensive understanding of risk.

These tools can also simplify continuous ongoing monitoring requirements with only incremental material risks needed to be reviewed and retained within the system, providing a clear audit trail. In addition, efficient technological tools can automate this entire process, which can alleviate the time required to identify and mitigate third-party risk effectively. Thus, through dynamic identification of high-risk parties and automated processes, businesses can be agile and proactive in how they identify, monitor and mitigate risks amidst market uncertainties, developing regulations and changing types of criminal activity. This minimizes time and costs spent on due diligence, allowing businesses to be proactive and not reactive to the true potential risks that are important to the business.

However, not all technological solutions are equal. The right one is proactive and flexible in how it can detect risks and help constrained teams in simplifying and streamlining compliance processes in an efficient and cost-effective manner. At the same time, the right technological solution can ensure defense against lapses and long-term sustainability.

Conclusion

By understanding how financial crime risks can be mitigated through effective technological solutions, DPMS can shape what the regulatory requirements are by proactively participating in future consultations. By planning ahead, DPMS can focus on rebuilding their operations and not on satisfying regulatory requirements or dealing with potential reputational risks that may further negatively impact their business.

Adrian Tang, CPA, CAMS, managing consultant, Exiger, Hong Kong, atang@exiger.com

Joseph M. Quiazon, managing director and head of financial crimes compliance APAC, Exiger, Hong Kong, jquiazon@exiger.com

  1. “Coronavirus disease (COVID-19) and Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) measures,” Hong Kong Monetary Authority, April 7, 2020, https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200407e1.pdf; Clifford Lo, “Covid-19: How Hong Kong phone scammers are trying to cash in on pandemic,” The Star, March 20, 2020, https://www.thestar.com.my/tech/tech-news/2020/03/20/covid-19-how-hong-kong-phone-scammers-are-trying-to-cash-in-on-pandemic; “How Criminals Profit From the Covid-19-pandemic,” Europol, March 27, 2020, https://www.europol.europa.eu/newsroom/news/how-criminals-profit-covid-19-pandemic
  2. “Money laundering / terrorist financing risks and vulnerabilities associated with gold,” Financial Action Task Force and Asia/Pacific Group on Money Laundering, July 2015, https://www.fatf-gafi.org/media/fatf/documents/reports/ML-TF-risks-vulnerabilities-associated-with-gold.pdf
  3. Brett Arends, “Watch out, America: China and Russia are stockpiling gold,” MarketWatch, July 29, 2019, https://www.marketwatch.com/story/watch-out-america-china-and-russia-are-stockpiling-gold-2019-07-29; Myra P. Saefong, “Fed move awakens gold, just as supply of the metal hits a snag,” MarketWatch, March 23, 2020, https://www.marketwatch.com/story/fed-move-awakens-gold-just-as-supply-of-the-metal-hits-a-snag-2020-03-23
  4. “Gold COMEX (Jun’20) (@GC.1:CEC:Commodities Exchange Centre),” CNBC, https://www.cnbc.com/quotes/?symbol=@GC.1
  5. “Anti-Money Laundering and Counter-Terrorist Financing Guideline for Dealers in Precious Metals and Stones,” ND.gov, 2018, https://www.nd.gov.hk/pdf/DPMS_Guideline_E.pdf
  6. “Budget Speech,” The 2020-21 Budget, https://www.budget.gov.hk/2020/eng/budget13.html
  7. “Anti-Money Laundering and Counter-Terrorist Financing Guideline for Dealers in Precious Metals and Stones,” ND.gov, 2018, https://www.nd.gov.hk/pdf/DPMS_Guideline_E.pdf
  8. Adrian Tang, Vincent Li and Dean Ward, “Understanding Hong Kong’s Expanded AML and CTF Compliance Rules: Due Diligence is Not Just for Banks Anymore,” Exiger, July 6, 2018 https://www.exiger.com/perspectives/understanding-hong-kong%E2%80%99s-expanded-aml-and-ctf-compliance-rules-due-diligence-not-just
  9. Ibid; “Anti-Money Laundering and Counter-Terrorist Financing Guideline for Dealers in Precious Metals and Stones,” nd.gov, 2018, https://www.nd.gov.hk/pdf/DPMS_Guideline_E.pdf

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