Gold bars confiscated from smugglers at an Indian airport last year (Keystone)
Gold bars confiscated from smugglers at an Indian airport last year

Switzerland is one of the world’s biggest centres for refining gold and exports significant amounts to India - one of the world’s biggest importers. How much of this contributes to trade-based money laundering? 

Gold imports by India have doubled in the past 15 years, even though the price of gold has climbed and the rupee has strengthened. In this context, a sharp rise in the export of gold from Switzerland to India has raised eyebrows, with concerns of money being laundered through gold.
There is a perception among experts that the gold economy in India is significantly based on unaccounted resources. Dev Kar is the chief economist at Global Financial Integrity, a non-profit Washington-based group that tracks illicit financial flows in the world.
The gold trade - India
Higher import duties and quantitative restrictions on gold are suspected of fuelling the smuggling of imported gold. Last year the Indian government increased the import duty on gold to 10% to reduce overseas purchases, in a bid to control its current account deficit that had widened to nearly 5% of its GDP. The restrictions came in at a period when the Indian currency was strengthening, making exports less competitive. Gold imports shrank by 20% as a result. Now, although the current account deficit has narrowed (to less than 2% of GDP), the government continues to keep restrictions in place, due to unabated concerns of gold smuggling.  

swissinfodotch: What is the scale of illicit financial flows in India?

Dev Kar: The underground economy in India accounts for around 50% of the official GDP which is among the highest in the developing world. On average, $34.4 billion dollars in illicit funds have been transferred out of India every year over the past 10 years. Almost all of the outflows take place through the deliberate misinvoicing of trade. These estimates refer to outflows only.

swissinfodotch: How widespread is trade-based money laundering between India and its trading partners?

D.K.: Trade-based money laundering is one of the surest and safest ways to trade in illegal gold. According to some estimates, trade misinvoicing accounts for 80% of illicit outflows.
Trade-based money laundering is particularly active in India given the large scale of black money and close ties to several tax havens such as Mauritius, Dubai, Hong Kong and Singapore. Economic models and methods cannot pinpoint the destination of black money or how the funds are laundered.

swissinfodotch: How does the commodity trade in precious metals contribute to illicit financial flows?

D.K.: Commodity trade in precious metals can mask the generation and transmission of illicit financial flows, particularly if the customs and other enforcement agencies in the partner countries are weak. Cross-border smuggling of precious metals also generates “suitcase cash”. There are no economic data or methods that can capture such activities.
Switzerland, like most tax havens, is a poor reporter of re-export data. A lot of gold imported from other countries simply passes through Switzerland, which India records as being imported from Switzerland, but the latter does not record as being re-exported from the country. That could be the main reason for the understatement of Swiss exports of gold to India.
Exports of gold [to India] in 2011-2013 are much lower than India’s imports of the same commodities for the same years. [Exports of gold in 2011-2013 were much lower than India’s imports of the same commodities - specified by Harmonized Codes 7108 and 7109 on various forms of gold - for the same years. Harmonized codes are an internationally standardized system of names and numbers to classify traded products.]

swissinfodotch: Why is trade in gold so vulnerable to money laundering?

D.K.: The buoyant demand for gold in India can be attributed to factors including cultural reasons [gold is gifted at Indian marriages], a persistent high rate of inflation averaging nearly 10% every year during the last decade that has eroded investor confidence in financial assets, and massive amounts of black money. Unless the Indian inflation rate is arrested, the rupee/dollar exchange rate will continue sliding in the long run and gold may also be seen as a hedge against the slide.
Quantitative restrictions on gold imports and the higher duties on gold and gold products increase the domestic price of gold relative to international prices. This increases the gains from smuggling and encourages the illegal activity.

swissinfodotch: There have been reports in the Indian media that suggest Swiss banks are employing a strategy of `layering' through gold-based trade to disguise the identification of the real beneficial owners. How will addressing beneficial ownership in countries like Switzerland reduce trade-based money laundering, including through gold?

D.K.: Hardly any country insists that banks and financial institutions collect information on the beneficial ownership [a person who enjoys the benefits of ownership even though the title is in another name] of deposit accounts.
 Layering of transactions, trusts, anonymous shell companies, derivatives and other complicated financial instruments, all make the identification of the ultimate or controlling owner of these accounts extremely difficult, if not impossible. Groups such as GFI have been pushing for rules and regulations on beneficial ownership at international forums.
 Beneficial ownership regulations will tighten the loopholes in opening up anonymous accounts in Switzerland, which holds the proceeds of trade-based money laundering involving gold. If other countries also adopt beneficial ownership regulations it would complement the Swiss efforts and money laundering involving trade in gold will go down. The risk related to such transactions would be unacceptable to those engaging in such activities. 

swissinfodotch: What other specific steps should jurisdictions such as Switzerland take to minimize money laundering through assets such as gold?

D.K.: The Swiss authorities must require traders to declare volume, value, and unit value accurately and require them to sign the declaration. In cases of suspicious transactions, regulators must check with the customs authority of the country of destination (for example, India) as to the accuracy of information provided in the declaration.  The unit value and deviation of unit value from arms-length world prices must be calculated.  Any significant deviation should be investigated. Particular attention must be paid to high-risk countries such as India, UAE, Afghanistan, Pakistan, China, etc.

The gold trade – Switzerland

In June this year, Switzerland’s total trade in gold, silver and coins was CHF3.9 billion ($4.1 billion), of which India accounted for CHF1.62 billion. In August 2014 (cumulated results since January) Swiss exports for these goods stood at CHF38.5 billion - CHF9.2 billion to India, according to the Swiss Customs Administration. The Swiss government denies any “nefarious patterns” in its gold exports. Anne Césard, a spokesperson for the State Secretariat for International Financial Matters (SIF) said: “Gold statistics strongly vary from one month to another and therefore should be interpreted with caution. After a strong rise in June compared to the preceding months [in particular in kg, less so in price], exports of gold to India dropped in July by half in kg and even more in price.” It is a question of supply and demand, Césard added. According to SIF, gold was not included in Swiss foreign trade statistics before 2014.
On the statistical registration of imports and exports in Switzerland, SIF makes two distinctions: first, commodities that are imported and put in circulation and then re-exported are registered as imports when they enter into Switzerland and as exports when they leave Switzerland. Therefore re-exports are not excluded from the statistics. However, commodities that come into Switzerland and are stored in a free port without being cleared are not registered as imports. Upon leaving the Freeport, the output is not registered as export when the goods are shipped abroad.

The global gold trade

Often, gold is produced in Africa, refined in Europe and consumed in Asia. Different legal frameworks bear upon the long supply chain of gold. “This makes it vulnerable to different kinds of verification procedures, not always stringent,” according to an Indian official who follows money laundering trails and spoke to on condition of anonymity.
“Anti-money laundering provisions in Switzerland apply to gold sellers. But those dealers who buy gold are often unsure of their supply chain,” says Olivier Longchamp, head of finance at the non-governmental organization, Berne Declaration. He says there are no legal requirements that oblige buyers - who can often be the sellers at a later stage - to ask questions about the source, mode of production or how the gold was purchased. Berne Declaration is pushing for the establishment of a dedicated regulator for the commodities market.
By Priti Patnaik, swissinfodotch

Editors Picks

Is Indian gold turnaround a game changer for prices?

There has been a surprise move in India reducing its gold import restrictions and an intimation from the RBI governor that further relaxation may be on the cards.
Author: Lawrence Williams
Posted: Friday , 05 Dec 2014
LONDON (Mineweb) - 
Something seems to have spooked the gold bears. We noted a few days ago that there seemed to be signs of new positive momentum building for gold, but then were worried that the big failure of the Swiss gold initiative might prompt another drive down in the gold price. Indeed it did, but the move was surprisingly shortlived and gold then recovered a remarkable $70 from the $1 141 low point reached to hit $1 211 before falling back a little. It then hovered around the $1 200 mark for a day and then showed another period of strength prompting the bulls to question (in hope) that this could be the start of something much bigger. It is still having trouble advancing far past the $1 200 level though.
Almost unnoticed on Friday with news overshadowed by speculation about the Swiss gold referendum result – by then seen as a foregone conclusion – was the news from India that the government instructed the Reserve Bank of India to relax its gold import restrictions with the cessation of the rule demanding that 20% of gold imports had to be re-exported.  All talk prior to this suggested that the RBI might actually be looking to extend gold import controls given the very high import levels over the previous couple of months and their impact on the Indian current account deficit (CAD).
But, fast forward a couple of days and we have the RBI chief implying that there could possibly be a further government-led relaxation in the import duties – an enormous apparent RBI policy reversal all within a matter of days. It had been known that the Modi Government, which came into power in the second quarter of the year, would be more sympathetic towards India’s gold sector – it drew a lot of support from it. And the inbuilt Indian positive feeling towards gold probably meant there was a lot of peripheral support for the new pro-business government for the same reasons. There was also government awareness that gold smuggling, brought on by the import duties and controls, had risen dramatically and was effectively impossible to suppress.
Go back five years and the RBI had just made the biggest single gold purchase ever by buying 200 tonnes of gold from the IMF at a price reckoned to be just under $1 100. Did the government believe that this price level for a big proportion of the country’s gold reserves was worth protecting and that the potential fallout from the Swiss gold referendum result could have put this value level in danger?
By all accounts the volumes of privately held gold in India, not least by religious entities, is phenomenal, and is greater that all the gold held by central banks. As we reported in Mineweb three years ago Gold consumption is part of India's culture and tradition. At a then value estimated at $950 billion (and no-one really knows – it could be even higher – the hoarding represents 11% of the global gold stock, the report has said, making India one of the largest private gold holders in the world.

Indian households are thus estimated to hold 18 000 tonnes of gold, says global research firm Macquarie which is testimony to the untamed demand for the yellow metal in India. Demand may have eased with the imposition of the import controls by the previous government and perhaps initially eased further still when the Modi government came in with an expectation of relaxation. But when this did not happen immediately demand started picking up again and the third quarter of the year has seen a huge rise in gold purchases and imports which continued into October ahead of the festival season and is presumably ongoing. Indeed it is difficult to assess the true import levels as government and RBI figures understate the picture due to large volumes being smuggled into the company to avoid import taxes and the other restrictions.
But should the RBI further reduce the import restrictions there is the likelihood that some of the pent-up demand perhaps restricted by the current 10% price premium because of the import tax will further boost demand.  But we do not know if, when and by how much the import taxes may actually be reduced moving forwards. Much will depend on the overall strength of the Indian economy and whether the Current Account Deficit is seen to be reducing.
With China maintaining its recent high gold purchasing levels, any prospect of a further boost in demand from India, traditionally the world’s most gold-hungry nation, will further enhance the demand side of gold fundamentals. We have already suggested that gold supply is in deficit and this would just widen it. If this all happens how long can the West continue to dominate the gold price?


Indian homes hold gold worth $950 billion

Gold buying in India remains strong but the amount of hoarding of the precious metal that is evident, even in times of crisis, worries some economists.
Author: Shivom Seth
Posted: Monday , 05 Dec 2011
That Indian households hold the yellow metal close to their heart is a known fact. A new report indicates that the gold close to every Indian's heart and in most homes could be well over $950 billion, which in turn is around 50% of the country's GDP in dollar terms.
Gold consumption is part of India's culture and tradition. At $950 billion, the hoarding represents 11% of the global stock, the report has said, making India one of the largest private gold holders in the world.
Indian households hold 18,000 tonnes of gold, says global research firm Macquarie. In a report, the firm has noted that bars, coins and other modes of retail investment during 2011 have also reported a 90% increase, which are all testimony to the untamed demand for the yellow metal in India.
"Gold is very important to every Indian woman. It is the wealth of the women. In most Indian households, gold is transferred from woman to woman, from generation to generation. If, as a woman, you do not have a sufficient store of gold at home or even adorning your body during auspicious times or during visits to the temple, it is perceived that the particular woman has failed in her wifely or motherly duties and obligations,'' said Rajesh Narwicker, bullion investment manager at a foreign bank. Narwicker was referring to the Indian custom of buying gold to tide over an unforseen crisis and how Indians never sell the gold in their homes.
In the world's largest consumer of the precious metal, the demand continues to be unparalleled. Despite soaring prices, the buying of gold has jumped nearly 40% in three months between July, August and September, 2011. Imports are also expected to cross the psychological 1,000 tonne mark this year, up from the 950 tonnes brought into the country last year.
According to Macquarie, 78% of India's $329 billion in household savings was held in gold in 2009-10 . With gold evolving as a store of value more than an adornment, rising prices have also contributed towards increasing Indian households' `perceived wealth'.
Though gold demand in volume terms has shown a marked decline of 23% over 2010, India still remains the world's largest consumer of gold as of September 2011, in tonnage terms, the report has added.
Macquarie has used the term `perceived wealth' because most Indian households are reluctant to part with their gold jewellery and other gold holdings, even during severe times of crisis. ``Most consider letting go of gold a stigma. It is very unlucky. Even if the family is hungry, most Indians would not think of parting with the precious metal to fill their stomach. Most would try some other means,'' said Pareshbhai Zaveri, bullion dealer.
Notwithstanding the 64% cumulative rise in gold prices (in rupee terms) between January 2010 and September 2011, gold consumption in India in volume terms, including jewellery and net retail investment continues to hold firm.
Statistics show that during the first three quarters of 2011, there has been a 5% year on year increase. This is over and above the 72% year on year growth registered in 2010. The Macquarie report has noted that though gold demand in volume terms declined 23% during the quarter ended September 2011, as compared to the last year, this was largely due to a sharp depreciation in the rupee, and several inauspicious times according to the Hindu calendar, when most Indians refrain from buying gold.
However, the Indian mentality to hold on to their precious tonnage has got many economists worried. Gold imports are the third largest of India's merchandise imports after crude oil and capital goods. In 2010, about 92% of the supply of gold in India was met through net imports and the rest through recycled gold and other sources.
India's yellow metal fetish is threatening to take the shine off its fast paced economic growth, with many economists saying that financial markets are losing out on funds that have instead been spent on gold.
"The 18,000 tonnes of metal in Indian households is almost double the gold reserves maintained by the US Federal Reserve. And it just sits idle in family vaults across India as ornaments, bars and coins,'' said an analyst with a brokerage firm.
Y Venugopal Reddy, a former governor of the India's central bank, the Reserve Bank of India, has said that it has created an incurable `drain on savings', threatening to hobble economic progress. As gold fever grips most households in India, the country's household savings rate has plummeted in the financial year that ended on March 31 to 9.7% of GDP, compared with 12.1% in the previous fiscal year.
Moreover, with the central bank raising interest rates more than 12 times since March last year to combat double digit inflation, domestic deposits and fixed income investments have been looking increasingly vulnerable. The Bombay Stock Exchange benchmark Sensex has also fallen more than 16% till September and since the start of 2011.
Analysts have said the cumulative GDP value lost by parking $800 billion worth of savings from Indian household over the years in gold, which is not a productive asset, is quite huge. However, India's continued rapid growth will have a significant impact on income and savings and is set to increase gold purchasing by almost 3% per annum over the next decade. For gold, India continues to be a market with significant scale.
iPad Version - A woman checks a gold waist belt inside a jewellery shop on the occasion of Akshaya Tritiya festival in Hyderabad: REUTERS/Krishnendu Halder


India major recipient of Swiss gold exports

India is now seen as the biggest recipient of gold exports from Switzerland, raising questions in government about black money (illicit funds) held in Swiss banks being imported as bullion.
Author: Shivom Seth
Posted: Monday , 11 Aug 2014
Mumbai (Mineweb) - 
Indian imports of gold from Switzerland have raised eyebrows in government circles. Data released recently by the Swiss Government showed a spike in bullion exports to India in June.  Over 40% of the gold leaving Switzerland is reportedly landing in India.
Data showed that India accounted for around 42% of total June exports. Compared to the 33% of bullion exports to India in May, this has set the alarm bells ringing  loud and clear.
Though India was recently replaced by China as the world's largest consumer of the precious metal, it is still a major consumer of bullion. In June, the value of Swiss derived gold and silver coins was worth about $4.3 billion.
What could be the reason for such colossal shipments of gold leaving Switzerland for India? While India’s Finance Minister Arun Jaitley has asserted in television interviews that there was no evidence yet to indicate that unaccounted money was entering through gold imports, as was being discussed in government circles, Indian investigative agencies like the Intelligence Bureau and even the customs authorities are said to be tracking the shipments.
Even as a debate on alleged black money stashed by Indians in Swiss bank accounts continues in India's Parliament, data shows that India now accounts for the greatest amount of gold and silver leaving Switzerland shores, the largest for any single country.
Data showed that total export of gold, silver and coins in the month of June 2014 stood at 3.9 billion Swiss francs (SFR), of which India alone accounted for SFR1.63 billion.
This has taken the overall Swiss exports so far in 2014 to SFR32.1 billion . Of this and to date, shipments to India have reached nearly SFR7.3 billion.
Immediately after taking over as minister, India’s Finance Minister Jaitley had written to the Swiss authorities seeking details of the unaccounted money stashed in Swiss banks.
Some analysts have termed the move as a bid to uncover the possibility of Indian black money stashed in Swiss banks. Reports have indicated that much of this money is being re-routed back to the country in the form of gold, especially because of the tough stand of the newly installed Indian Government.
The research body, Centre for Global Development, too, has alluded to the same in a study. The report said India’s financial savings has been falling relative to the GDP, even as gold imports were steadily rising. This, it felt, was a sign that the gold economy was based significantly on unaccounted resources.
Incidentally, India’s share of gold imports has doubled in the last 14 years. Despite a 400% rise in the rupee and the gold price in the last ten years or so, gold demand from Indian consumers remains robust.
The National Democratic Alliance government led by Prime Minister Narendra Modi, after being sworn in in May, had made it clear that on top of its agenda was the issue of black money stashed abroad. It has even constituted a special task force to investigate the entire issue.
On its part, Switzerland has committed that it would  cooperate in India's fight against black money and has also invited an Indian delegation to visit Berne for discussions in this regard.
However, a new strategy of `layering' through gold and diamond trade has come to light at Swiss banks, to thwart any attempt for identification of real beneficiary owners of funds entrusted with them. Layering is a key stage in money laundering and involves moving illicit funds around the financial system through a complex series of deals to complicate the paper trail.
Data showed that while the United Kingdom and Hong Kong were two big export markets for Switzerland's gold, accounting for 139.4 tonnes and 84.6 tonnes, respectively, the gold demand from India has leaped to new highs.
Incidentally, gold exports to India in January 2014 stood at less than one billion Swiss francs, but has been consistently rising since then.
In contrast, Switzerland's overall bullion exports had risen in February to over SFR8 billion, from about SFR7 billion, but fell for three consecutive months thereafter to SFR3.7 billion in May.
In June, Turkey came a distant second after India with less than SFR500 million of Swiss bullion exports. Other major destinations were UAE, Singapore and Hong Kong, as also major economies like US, UK, China, France and Germany.
Could it be black money (illicit funds) being  routed to the country? Though the Swiss say it is too early to see any nefarious pattern in the high export, Anne Cesard, deputy head of communications at the Switzerland State Secretariat for International Financial Matters, was quoted in a newswire report as saying that both these issues should not be linked at this point of time.
India’s black money (illicit funds) is estimated to be about 8% of its GDP (or nearly $1.9 trillion in 2013, and exists mainly due to corruption and the existence of large scale cash transactions.
According to a report by the Washington based  non-profit research and advocacy organisation Global Financial Integrity, between 2002 and 2011, nearly $344 billion of illicit money moved from India to various tax havens. Another estimate by the Associated Chamber of Commerce and Industry of India says nearly $2 trillion of black money from India is stashed abroad.

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