Good Governance Illicit Financial Flows

According to the United Nations Conference on Trade and Development (UNCTAD), African countries lose about 40 billion USD per year through illicit financial flows linked to extractive commodities alone. Gold plays the largest role, ahead of precious stones such as diamonds, emeralds, sapphires and rubies. One of the reasons is that up to 20 % of the gold mined worldwide comes from artisanal and small-scale mining (ASM). As an anonymous and stable means of payment, gold is relatively easy to smuggle. In addition, the origin can no longer be proven after the smelting process.

The boundaries between mostly informal ASM and criminal activities are not always clearly discernible. In general, however, there is a particularly high risk of criminal exploitation by different actors in ASM: Starting with local gold buyers, criminal networks that finance illegal or even terrorist activities with the proceeds from gold smuggling, and ending with the gold trading centres, many actors can be involved.

The Financial Action Task Force (FATF), the Organization for Economic Cooperation and Development (OECD), and gold industry associations such as the London Bullion Market Association (LBMA) have highlighted the financial crime and supply chain risks associated with trading gold from conflict and high-risk areas.

In German development cooperation, the fight against illicit financial flows is anchored in the Marshall Plan with Africa. One starting point is the formalization of ASM gold mining, which, in addition to improved compliance with sustainability standards and reduced criminal exploitation, would also contribute to an increase in tax revenues in the countries concerned, which in turn would enable higher investment.

Sector Programme Commitment

The handbook Follow the Money: Financial Flows linked to Artisanal and Small-Scale Gold Mining (External link) was published by GIZ in cooperation with the Global Initiative against Transnational Organized Crime and Levin Sources. The toolkit enables relevant stakeholders to identify illicit financial flows in artisanal and small-scale gold mining and to understand the ways in which they interfere with the formalisation of the sector. The toolkit is designed for governments, development agencies, NGOs and the private sector alike. It can be applied to various natural resources such as diamonds and precious stones.

The case study Follow the Money: Financial Flows linked to Artisanal and Small-Scale Gold Mining in Sierra Leone (External link)applies the toolkit mentioned above to the artisanal and small-scale gold mining in Sierra Leone, a sector of substantial economic importance. According to the findings, the formalisation of the sector, and thus its developmental value, is being considerably undermined by illicit financial flows. The case study concludes with recommendations for future policy measures.

Both the Covid-19 pandemic and the adoption of the EU Conflict Minerals Regulation (External link) are affecting gold smuggling routes worldwide. Special attention must be paid to these changes.

In early 2021, the BMZ organized an international high-level conference on the EU Conflict Minerals Regulation (External link). It became clear that the EU Regulation is exposed to two major risks regarding illicit financial flows. On the one hand, the EU Regulation only takes effect above a certain threshold, which can be undercut by small transactions. Second, smuggling creates the risk of switching to other “non-high-risk” areas for export, thus circumventing the EU regulation. It is therefore important to continue to pay attention to the EU regulation in the future.