ML/TF Risk Management in the Mining Sector

In the mining sector, the obligation to have an AML/CFT prevention system falls on every “natural person conducting business, or legal person, that carries out any of the mining industry’s activities under the concession system and that, in addition, engages in the trading of gold — understood as the purchase and sale, import for consumption and/or definitive export of raw or semi-processed gold, whatever name is given to it, as well as gold obtained as the direct product of a mining and/or metallurgical process”.

To identify this sector’s risks properly, we need to know the players involved in its operations and what its value chain consists of.

Players in the gold value chain

• The miner: carries out the mining or extraction.

• Small gold buyer: acquires the mineral to resell it, using their own resources or those provided by third parties, and resells it to gold-buying operations.

• Consolidating gold buyer: buys from small sellers and, once enough has been accumulated, sells it on to trading companies.

• Trading company: buys, smelts, sells and exports the mineral.

• Buyers: may be from the private or public sector, in the domestic or international market.

The mining value chain

At industrial level, the mining value chain (both metallic and non-metallic mining) is divided into three segments: exploration and extraction, processing, and trading.

I. Exploration and extraction

Exploration is the first stage of the mining industry’s value chain and is responsible for identifying new mineral deposits which, depending on their size and composition, will then allow reserves and production to be increased. The extraction segment also includes internal transport of the mineral, which may be carried out by truck, wagon or conveyor belt from the deposit to the concentration plant.

II. Processing

The processing segment runs from concentration of the mineral through to its transformation into refined products; in non-metallic mining the processing stage only includes primary crushing and washing activities. The processing segment also covers external transport from the concentration plant to the smelting plant by truck, rail, mineral pipeline and sea freight.

III. Trading

The trading segment covers storage, shipment and sale of mining products to end consumers.

ML/TF risk management

Identifying threats is the first step in assessing ML/TF risk. In turn, as set out in the conceptual framework, ML/TF threats are associated with a set of vulnerabilities that enable them to materialise and with a set of consequences. ML/TF risk is estimated as the product of these three factors.

1. Identifying the threats

The main risk in the mining sector is illegal gold mining. There are, however, other risks affecting the sector, such as drug trafficking, whose illicit funds are invested in the sector, and the illegal mining of other minerals such as copper, coal or limestone which, under the regulatory framework, qualify as illegal mining because they lack the requisite authorisation.

▲ Illegal gold mining

This activity is the main ML/TF threat in the mining sector because of the scale of the illicit funds it generates. According to the estimates made, illegal gold production would reach a billion dollars a year and, in Peru, would be concentrated mainly in regions such as Puno and Madre de Dios, and in other lower-producing regions such as Ica, Ancash, La Libertad and Cajamarca.

▲ Illegal mining of other minerals

There is also illegal mining of other minerals, whether metallic such as copper, or non-metallic such as coal or limestone which, under the Peruvian regulatory framework, qualify as illegal mining because they lack the requisite authorisation. The scale of illicit flows from this type of production is nevertheless considered low, given the lower value of these minerals, even though they appear to have grown significantly, above all in the case of non-metallic minerals used to produce construction materials.

▲ Smuggling funds invested in the mining sector

Here the focus is on border areas, which face the twin problem of smuggling and poorly supervised mining activity. In Peru, according to SUNAT, the Puno region receives smuggled goods worth between US$200 and 300 million a year, accounting for more than 40% of all smuggling entering the country. It is therefore plausible that part of the illicit profits generated by smuggling is channelled into mining activity in the Puno region.

▲ Drug-trafficking funds invested in the mining sector

According to the UNODC study (2022), Peru is the world’s second-largest cocaine producer after Colombia. There is therefore the possibility, and the suspicion, that profits from this activity are laundered across the different sectors of the economy, including the mining sector, which is one of the country’s main economic activities. There is also a risk of drug trafficking coexisting with illegal mining in specific areas, such as Sandia in the Puno region or Tambopata in Madre de Dios.

▲ Other illicit activities laundering their profits in the mining sector

Profits from illegal mining are also linked to illicit activities such as human trafficking, and to other offences that represent a serious problem in the country and for which there is some evidence of the vast resources they generate, as in the case of corruption. ML/TF risks in mining stem mainly from these offences occurring in regions with significant mining production.

▲ Terrorist activities financed by mining companies

Given the large volume of resources generated by the mining sector, it is assessed as a threat that part of these profits (whether of legal or illegal origin) may be directed, directly or indirectly, to financing terrorist activities. Direct financing means transfers in which the actors are fully aware of the destination of the contributions, whether or not they are voluntary — through extortion, for example. Financing would be indirect where there are organisations or agents that receive funding which is later diverted to subversive activities.

2. Identifying the vulnerabilities

To identify ML/TF risks in the mining sector, as well as knowing the threats, we need to know their associated vulnerabilities. Some of the vulnerabilities identified on the basis of these threats are set out below:

♦ Limited presence of the authorities in illegal mining areas

Supervision falls to authorities with little capacity to monitor illegal mining areas on an ongoing basis. There is also a high turnover of officials, which would make it harder to implement efficient policies designed to counter illegal mining in their areas of competence over the medium and long term.

♦ Corruption among the authorities

Corruption among the authorities distorts oversight of the sector, above all in the areas where money laundering in mining would be most prevalent. In Peru’s Puno region, for example, the prosecutor’s office for official corruption received more than 400 complaints and, symbolically, two prosecutors specialising in money laundering were charged there for taking a bribe from a person under investigation.

♦ Weak border controls

This vulnerability both strengthens smuggling networks and facilitates illegal gold trading networks, since illegal producers find new ways of getting around government controls. In Peru, for example, after the legislation against illegal mining and tighter export controls, illegal miners began routing part of their output illegally through Bolivia to be “re-exported” afterwards. As things stand, Bolivia is exporting three times more gold than it produces.

♦ Inadequate monitoring and measurement of illegal and informal mining

There is a set of vulnerabilities linked to informality, such as:

o Inadequate monitoring and measurement of informal and illegal mining

o The high level of informality in the regions where illegal mining takes place.

♦ Shortcomings in current legislation on illegal mining and a highly informal economy in illegal mining areas

Current legislation may have shortcomings that prevent the sector being formalised on a large scale. Likewise, the legislation does not appear to have been accompanied by the necessary resources and actions. Planning has also been less than ideal, given that deadlines have been extended on several occasions. A symptom of these problems is that there has been little progress in the formalisation process.

♦ Prevalence of drug production

The country’s long tradition of drug production would have given rise to organisations specialising in money laundering that have infiltrated not only economic sectors but also the public sector, making it more likely that this threat will materialise. In addition, the geographical proximity of illegal mining and drug trafficking would have created a degree of coexistence and interrelation between the two illicit activities.

♦ AML/CFT requirements not properly implemented, possible high turnover of buyers, or the presence of unidentified intermediaries

These vulnerabilities allow profits from illicit activities such as human trafficking, corruption or tax evasion to filter into mining activity, as well as allowing the presence of customers suspected of laundering money.

♦ Prevalence of smuggling networks in the south of the country

One of the points analysed is the prevalence of smuggling networks in border control, above all in Peru’s Puno region. Illegal mining activity could benefit from smuggling networks to bring in machinery, transport equipment and controlled chemical inputs illegally.

♦ Presence of individuals/organisations that promote terrorist action, and backing from the authorities for organisations or individuals that promote terrorist action

There are organisations such as the Frente de Unidad y Defensa del Pueblo Peruano (FUDEP), which brings together various organisations that have had or maintain links with groups such as Sendero Luminoso and the MRTA. These organisations may also enjoy the sympathy of some local authorities in mining areas, increasing terrorist financing risks.

Other vulnerabilities are associated with profits from illicit activities such as human trafficking, corruption or tax evasion filtering into mining activity, as well as with the presence of customers suspected of laundering money. Here the main vulnerabilities are incorrect or non-existent implementation of AML/CFT mechanisms by mining companies, the possible high turnover of buyers, and the presence of unidentified intermediaries, such as natural persons, who could make purchases in the sector.

Cross-cutting vulnerabilities common to all the risks have also been identified:

♦ Limited capacity among the institutions that combat ML/TF.
♦ Poor coordination between the institutions that combat ML/TF.
♦ A low resolution rate for ML/TF accusations.
♦ Gaps in the current legal framework for combating ML/TF in the sector.
♦ A lack of preventive measures to combat ML/TF.
♦ Companies’ lack of awareness of ML risks.
♦ A lack of training for the competent authorities.

3. Consequences of ML/TF in the mining sector

The possible consequences identified should the threats materialise include the following:

► The spread of organised crime and increased violence
► Human trafficking
► Labour exploitation
► Environmental damage in illegal mining production areas
► Price distortion in the regions (high inflation)
► Distorted investment decisions
► Increased corruption among the authorities
► Damage to the mining sector’s reputation
► An incentive for other illicit activities to spread in the sector
► The expansion of illegal mining
► Distortion of mineral purchase prices
► The spread of terrorism nationwide
► Terrorist attacks
► The strengthening of terrorist cells in the VRAEM

Recommendations

For the mining sector, preventing money laundering and terrorist financing (ML/TF) is crucial given the risks inherent in the industry. Here are some key recommendations:

1. Know Your Customer (KYC): implement rigorous procedures to know your customers, including identity verification, understanding the nature of their business and assessing the source of their funds.

2. Ongoing training: ensure that all employees, especially those in key positions, receive regular training on ML/TF prevention policies and procedures.

3. Monitoring and reporting suspicious transactions: put systems in place to monitor transactions and detect unusual or suspicious activity, and report that activity to the competent authorities promptly.

4. Internal policies and procedures: develop and maintain clear policies and detailed procedures for ML/TF prevention, making sure they are known and followed by all employees.

5. Risk assessment: carry out periodic risk assessments to identify and mitigate possible vulnerabilities in the company’s processes and operations.

6. Inter-institutional collaboration: work together with other companies in the sector, and with authorities and regulators, to share information and best practice.

7. Use of technology: implement advanced technological tools for monitoring and analysing transactions, which can help identify suspicious patterns more efficiently.

These measures not only help meet legal requirements, they also protect the company’s reputation and contribute to the stability of the mining sector as a whole.

At Líderes Empresariales APLA we specialise in training and advising compliance officers and in implementing money laundering, terrorist financing and proliferation financing prevention rules for the various obligated entities. If you need help, do get in touch.