How Jewellery Industry Is Vulnerable to High Money Laundering Risks?

In March 2024, the Hong Kong Customs and Excise Department eliminated the country’s largest gold smuggling attempt, approximately 146 kg of gold that was worth nearly 84 million HKD.

This shows that businesses that are typically viewed as non-financial are often considered the best platform for carrying out financial crimes such as money laundering, and the jewelry industry is one of them.

The jewelry business, with its glittering allure, finds itself as an unexpected ally to money launderers.

From gold bars to sparkling diamonds and precious metals plays a critical role in laundering illicit funds to other jurisdictions.

That is why the Financial Action Task Force has classified precious metal dealers as designated Non-Financial Business Professionals (DNFBPs) and recommended that they implement an AML risk-based approach to prevent their platforms from being used for illicit fund movements.

While non-financial businesses also follow AML regulations, the $50,000 threshold set by the US Patriot Act for implementing an AML program makes it easier for money laundering activities like smurfing and structuring to occur in the jewelry business, particularly with gold and diamonds.

Though, launderers have various methods to move illicit money, but, gold and diamonds remain the top choice of money laundering schemes because of their small sizes and high value.

How?

Read this article to find in-depth insight into it.

Money obtained through corruption, drug trafficking, and terrorist activities is often invested in gold and diamond purchases to make it clean.

A 2024 report by Swissaid revealed that in 2022 alone, approximately 435 metric tons of gold, valued at over $30 billion, were smuggled out of Africa, with the United Arab Emirates (UAE) being the primary destination. Over the past decade, more than 2,500 metric tons, worth over $115 billion, were illicitly exported to the UAE.

What Are Precious Metals and Precious Stones?

There is no single global definition of precious metals and stones (PMS). The U.S. defines precious metals as those with a purity of at least 500 parts per thousand, including certain alloys.

Precious Metals

Precious metals including gold, silver, and platinum have been treasured throughout history for the perfect mix of style and usefulness. Gold, in particular, is synonymous with wealth and financial security.

Its physical properties, high value, easily moldable, and corrosion resistance make it a favorite in jewelry-making and as a store of value.

Due to their high value in global trade, these metals are the favorite choice for laundering activities.

Precious Stones

Precious stones are highly valuable assets and are often used for the illicit movement of money, they hold a particularly dominant place in the global jewelry trade.

Diamonds, rubies sapphires, and emeralds have very rare real-life use, in fact, they are attractive tools for launders for hiding illicit funds.

Due to their high value-to-weight ratio, precious stones are easily transported, concealed, and traded internationally.

This portability, combined with the subjective nature of their valuation, makes them an attractive tool for criminals to launder money by hiding or inflating their worth.

The Dark Side of Jewelry Business

Seeing a person at the airport wearing a luxury watch studded with 20 million dollars in diamonds raises the chances of laundering millions of dollars without AML checks.

In general, it could be more than just wearing the watch; it could be an attempt to transport millions of dollars in precious metals obtained through illegal money.

However, in most cases, compliance officers at airports will not see it as an attempt at money laundering or financial crime.

criminals can easily mix illicit money with the financial system by reselling or transporting it to other countries, by investing in the jewelry business.

Why Do Criminals Choose the Jewelry Business for Money Laundering?

1. The Appeal of Portability and Value

Precious metals and gemstones are more than just symbols of owning wealth, however, they are also ideal modes for laundering money.

Criminals are drawn to their easily moveable and universal value. A small packet of diamonds or a gold bar can hold millions of dollars in value, making it easy to transport across borders undetected.

2. Opaque Pricing Fuels Exploitation

Unlike standardized commodities like currency, the price of a diamond or a gold necklace could be too high depending on the market trends.

This subjectivity creates opportunities for criminals to manipulate valuations and conceal illicit funds.

For example, a $50,000 diamond might be invoiced as a $10,000 stone, allowing the remaining $40,000 to evade scrutiny.

Banks are subject to stringent Anti-Money Laundering regulations, but many jewelry businesses have historically operated with less regulatory oversight. The high-value nature of transactions and cash-heavy operations provide an ideal choice for blending legitimate sales with illicit funds.

4 Techniques Criminals Use in Jewelry Money Laundering

1. Cash Transactions Without Traceability

One of the simplest methods involves purchasing high-value jewelry with cash. The items are then resold and converted the funds into clean money.

Without robust customer due diligence procedures, the process of monitoring these transactions often goes unchecked.

2. Gold Smuggling and Mixing

What criminals often do is, meltdown smuggled gold and mix it with legally sourced gold, trying to erase its illicit origins.

The gold is then recast into bars or jewelry and sold on legitimate markets.

Buying the gold with illicit funds, reselling it, and mixing the money with legitimate funds makes the monitoring process more difficult for compliance teams.

That is why, gold across the world is often seen as the safe passage of money laundering.

3. Mislabeling and Fake Invoices

Inflating or deflating the value of transactions is another common tactic. For instance, a criminal might over-invoice a diamond sale to inflate its value artificially, which helps them launder more money in the process quite easily.

4. Cross-Border Transactions

The international nature of the jewelry trade makes it particularly vulnerable. Criminals can move diamonds and gold across jurisdictions with weaker AML regulations, laundering funds through legitimate businesses in these regions.

Global AML Regulations & Legislations for Jewelry Business

The vulnerability of jewelry businesses to getting involved in money laundering and terrorist financing is much higher than other DNFB businesses. So, implementing AML regulations isn’t optional but necessary for businesses dealing with precious metal,  to deter criminals from using the precious metal as a source of money laundering.

FATF’s Perspective on the Jewelry Business

Setting AML standards and recommending countries must implement money laundering and terrorist financing regulations are the core objectives of the Financial Action Task Force.

EU AML Regulation For The Jewelry Business

The EU AML regulations for the jewelry business reflect FATF recommendations against money laundering and terrorist financing. Under the 6th AML directive, businesses dealing with precious metals need to comply with AML/CFT measures when transactions equal or exceed 10,000.

USA Regulation For The Jewelry Business

To address modern money laundering crimes, several regulations and frameworks have been put in place.

Jewelry businesses in the U.S. must comply with AML laws under the Bank Secrecy Act, overseen by FinCEN. Jewelry traders handling over $50,000 in transactions annually are required to implement AML regulations, including customer verification, transaction monitoring, and reporting of suspicious activity.

Australia’s Regulation For The Jewelry Business
Jewelry businesses in Australia face strict AML laws!

Under the AUSTRAC, the business selling or purchasing any precious metal over very AUD 10,000 must be reported. A custom-tailored risk management plan is necessary because it’s a frontline defense for a high-risk industry against crime.

AE Regulation For The Jewelry Business

The United Arab Emirates is a country that attracts investors, money launderers, and of course gold smugglers due to its weak AML regulations. However, after recent incidents like Dubai real estate leaks, the country has set the highest standards of compliance under the UAE’s strict AML regulations.

The jewelry business in UAE is subject to Stringent AML regulation under UAE Federal Decree-LAW no. 20 of 2018.

As a compliance officer, it’s crucial to ensure your business meets all legal requirements, including reporting transactions over AED 55,000, conducting thorough Customer Due Diligence (CDD), and verifying the identities of all clients.

The Kimberley Process

The laundering process begins when precious metals, particularly diamonds, have a conflicting background. The Kimberley Process Certification Scheme operates globally and brings together governments, industry, and civil society to eliminate the global trade in conflict diamonds.

The process ensures that participating countries adhere to standards designed to prevent conflict diamonds from entering the international market, by implementing strict certification protocols and regular compliance checks.

Are There Any AML Compliance Requirements For High-Risk Jewelry Businesses?

To comply with anti-money laundering (AML) regulations, high-end jewelry businesses must implement effective AML programs to prevent money laundering and terrorist financing.

Key components of these programs include a comprehensive AML plan, customer due diligence (CDD), and transaction monitoring.

• Comprehensive AML Program

As per the Anti-Money Laundering Act of 2020, businesses that are dealing with precious metals and stones must maintain a written AML compliance program. Such a compliance program must include risk assessments, employee training, an appointed compliance officer, and independent audits.

• Risk Assessment: A thorough evaluation to identify specific money laundering and terrorist financing risks. This helps prioritize actions and allocate resources effectively.
• Customer Due Diligence (CDD): Jewelry businesses are required to establish Customer Due Diligence (CDD) procedures to confirm customer identities before making any transaction, which involves collecting and verifying personal details.
• For high-risk individuals, such as politically exposed persons (PEPs) or those engaged in large transactions, enhanced due diligence is necessary.
• Transaction Monitoring: Monitoring systems track transactions for suspicious activities. Therefore, jewelry businesses must have a transaction monitoring system to detect unusual patterns of transactions for further investigation.
• AML Compliance Officer: A designated officer should oversee the AML program, ensuring adherence to regulations and staying updated on industry changes.
• Employee Training: Regular training ensures staff can recognize red flags, understand due diligence requirements, and report suspicious activities.
• Independent Audits: Periodic audits assess the program’s effectiveness, identify weaknesses, and recommend improvements.

Comprehensive AML Screening Features of AML Watcher for DNFBPs

AML Watcher offers comprehensive Anti-Money Laundering (AML) screening solutions tailored to Designated Non-Financial Businesses and Professions (DNFBPs), including the jewelry sector.

The services are designed to mitigate money laundering risks through several key features:

1. Global Sanctions Screening

• Access to real-time updated sanctions databases covering over 235 jurisdictions.
• Inclusion of country-specific sanctions lists and international frameworks like OFAC, EU, and UN lists.

Value for DNFBPs:
Screens customers or entities flagged by regulatory authorities, ensuring AML compliance with sanctions regimes.

2. Comprehensive Watchlist Screening

• Access to over 1,300 global watchlists and 200+ sanction regimes across 235+ countries.
• Jurisdiction-specific and industry-relevant lists are included to ensure accurate coverage.

Value for DNFBPs:
Real-time screening ensures DNFBPs remain compliant with constantly evolving sanctions and watchlist updates.

3. Politically Exposed Persons (PEPs) Screening

• Screening against a broad database of PEPs categorized by risk levels 1-4 (domestic, foreign, high-ranking officials, and local officials).
• Coverage includes known associates and family members of PEPs.

Value for DNFBPs:
Enables DNFBP businesses to detect relationships with politically exposed individuals, a key risk factor in money laundering.

4.Ongoing Monitoring

• Continuous re-screening of customers and counterparties to capture any updates in their risk profiles.
• Real-time alerts for new sanctions, PEP status changes, or adverse media mentions.

Value for DNFBPs:
Ensures ongoing compliance without the need for manual re-checks, reducing operational overhead.

5. Customer Due Diligence (CDD)

• Screen clients against a robust database of sanctions, PEPs, and adverse media lists to identify high-risk entities and ensure regulatory compliance.

Value for DNFBPs:
Accurately assess risk levels of clients and meet AML requirements using sanctions databases comprehensive database screening tools.

6. Transaction Monitoring

• Leverage database screening to cross-check entities involved in transactions against global watchlists, ensuring compliance with evolving regulations.

Value for DNFBPs:
Flag high-risk transactions efficiently and maintain compliance without the need for additional systems or tools.

7. Customizable Risk Parameters

• Risk-scoring engines allow nonfinancial businesses to define thresholds based on transaction types, industries, or jurisdictions.
• Automated detection of red flags, such as frequent high-value transactions or links to high-risk regions.
• Industry-specific insights help address vulnerabilities unique to each DNFBP type.

Value for DNFBPs:
Tailored risk settings improve efficiency by focusing resources on high-risk cases, reducing false positives.

8. Adverse Media Screening

• Data-driven tools scan global and local news domains for mentions of customers or entities linked to financial crimes.
• Sentiment analysis categorizes mentions (e.g., negative, neutral, positive) for actionable insights.

Value for DNFBPs:
Provides AML risk assessments, ensuring businesses are not unknowingly linked to negative public exposure.

9. Batch Screening

• Ability to upload large datasets for simultaneous screening against sanctions, PEPs, and adverse media databases.

Value for DNFBPs:
Streamlines AML compliance for DNFBPs managing high transaction volumes or extensive customer bases.

10. Localization and Jurisdictional Flexibility

• Database configurations to align with local regulations and language requirements.
• Regional insights for businesses operating across multiple jurisdictions.

Value for DNFBPs:
Ensures compliance with specific regional AML requirements, such as country-specific sanctions lists or industry norms.