Sanctioned Russian entities are likely to turn to illicit gold trading as a means of moving funds across international borders, leaving banks at risk if they fail to tighten controls, experts are warning. 

US and Europe-led sanctions on Russia have targeted both wealthy individuals and private sector companies, meaning their ability to generate income, move funds and access foreign exchange is “greatly restricted”, according to a report published last week by the Global Initiative Against Transnational Organized Crime (GI-TOC). 

GI-TOC, an international network of organised crime experts, says those entities are now expected to turn to the “well oiled” wheels of the illicit gold market, exploiting both established trade corridors and underground criminal systems to retain their access to wealth. 

“Gold can be physically moved around the world outside of digital financial networks, including SWIFT financial messaging, making it difficult to track. Gold is also easily laundered in global markets through not declaring or disguising its origins,” the report says. 

“Moscow could use foreign exchange reserves accessed through illicit gold markets for imports, to fund Russian military operations or to compensate sanctioned Russian oligarchs for their losses. Separate from Moscow, other sanctioned actors may also make use of criminal networks to launder and smuggle gold.” 

Russia has bolstered its gold reserves significantly since its annexation of Crimea in 2014, which prompted EU and US-led sanctions that pushed the country into a financial crisis. 

However, following its invasion of Ukraine in February, fresh restrictions have been introduced that would likely affect the movement of gold, including the imposition of sanctions from four major gold trading markets: the US, UK, Switzerland and Singapore. 

The UK was by far the largest import market for gold from Russia in 2020, with buyers purchasing nearly US$17bn-worth, yet government guidance has confirmed that UK entities are now explicitly forbidden from engaging in gold transactions with the Central Bank of Russia. The US Treasury Department has also confirmed its restrictions apply to gold. 

As a result, GI-TOC warns that Russian entities may seek to move wealth by disguising its origin and the beneficiaries of trade transactions, for instance by exporting gold via a friendly country. 

“There are some reports of Russian actors transferring assets to gold and physically moving assets to jurisdictions that are perceived to be safe havens,” it says. 

This trend means financial institutions, including trade finance lenders, could be inadvertently exposed to illicit gold through seemingly legitimate trade transactions. 


Safe havens 

The GI-TOC report says Russian entities are theoretically able to access gold markets in countries that have not imposed sanctions, such as China. 

However, it notes that many entities are wary of secondary sanctions risks from facilitating Russia-linked trade, as well as barriers in accessing US dollars or the Swift financial messaging system, and so will voluntarily avoid Russian-origin goods. 

At the same time, numerous institutions have chosen to cut ties with Russian companies, including state banks in China, and lenders in India and the Middle East, to avoid potential reputational damage. 

“This is where criminal networks have a role to play,” the report says. “Sanctioned entities… can evade these restrictions if they engage in gold and money laundering to disguise the origins of the gold and the beneficiaries of gold profits.”  

Typically, this process involves source and transit countries with weak regulatory oversight, GI-TOC warns. 

The report identifies India as a “major gold smuggling hub”, citing research by Geneva-based think tank Impact Initiatives. It says weak due diligence on gold imports, including refined bullion, allow crucial documentation to be falsified, while goldsmiths have been known to “turn a blind eye” to questionable information. 

Similarly, GI-TOC says it would be “difficult to track” gold smuggling between Russia and China, as well as potential further movements into Hong Kong and India. 

The UAE has also previously been identified as a hotspot for high-risk activity, including trading of gold originating from conflict zones, due to lax disclosure requirements on origin and transit countries.  

Expert analysis of 2016 trade data suggests that at least 46% of the UAE’s gold supply came from nations that would be red-flagged under OECD rules if their country of origin had been recorded by officials. 

Elsewhere, Turkey has imported gold worth billions of dollars from Iraq, which the report says could be used as a transit country for Russian gold, and has been linked with sanctions evasion via gold trading with Venezuela and Iran. 

GI-TOC also says Russia’s growing influence in Africa – including through Russian ownership of gold mines and local operations involving Russian companies – could present other potential trade routes for illicit cargoes. 


The threat to banks 

Criminal attempts to circumvent restrictions “by resorting to the transfer of property to other destinations including the UAE, India and China” present an enforcement risk to banks, says Michael Ruck, a partner in K&L Gates’ investigations and enforcement practice. 

“The transfer of gold and other precious metals requires close consideration as it is a criminal offence to facilitate or aid the circumvention of various sanctions regimes,” Ruck tells GTR. 

Lakshmi Kumar, policy director at Global Financial Integrity – a non-profit research organisation that advises governments on illicit fund flows – says banks should look beyond the stated origin of gold if facilitating transactions. 

Checking production numbers and export data can give clues as to whether origins have been faked, Kumar tells GTR. “This is relevant both in the context of Russian sanctions and conflict gold,” she says. 

Due diligence of the entities involved in a transaction is “critical”, including whether they have any involvement in the gold sector in jurisdictions vulnerable to money laundering or illicit trade. 

“Financial institutions should reassess their risk profile and exposure to the gold sector as a whole in the wake of the sanctions,” Kumar adds. “Trade finance and compliance teams should not be siloed and should work together to develop specific red flags.” 

Russia’s build-up of gold reserves has long been characterised as an attempt to bolster resilience to sanctions, particularly by decreasing reliance on the US dollar. 

Russia’s gold reserves have more than doubled since its annexation of Crimea in 2014, GI-TOC finds, based on an analysis of Central Bank data. 

The report says the proportion of Central Bank reserves held in gold has also increased during that time, from 8.9% in March 2014 to 21.7% by June 2021. US dollars no longer make up the largest share of those reserves, falling from 39.4% to 16.4% over the same period.