Risk indicators for DPMS – Strategic Analysis by UAE FIU
Why did UAE FIU perform the strategic analysis of DPMS?
Given the fact that precious metals and stones are being highly exploited by criminals to launder money given their size and high liquidity, and the fact that UAE is one of the biggest marketplaces for precious metals and stones trading, the UAE Financial Intelligence Unit (UAE FIU) has recently conducted a strategic analysis of data about Dealers in Precious Metals and Stones (DPMS).
The Strategic Analysis Report lays down the UAE FIU’s objective for conducting this analysis of the DPMS sector as under:
- To enhance the understanding of ML/FT vulnerabilities associated with precious metals and stones,
- Developing ML/FT trends, typologies, and red flags indicating exploitation of precious metals and stones and the DPMS sector.
The methodology adopted by the UAE FIU for the strategic analysis of the DPMS sector
The UAE FIU’s strategic analysis is conducted based on the information gathered from the reporting entities operating as DPMS and other relevant stakeholders for January 2021 to June 2022.
The UAE FIU reviewed the below-mentioned data to analyze the ML/FT trends prevalent in the DPMS sector:
- Dealers in Precious Metals and Stones Report (DPMSR) filed on the goAML portal indicating cash and wire transfer transactions above the prescribed threshold,
- Suspicious Transaction/Activity Report (STR/SAR), filed either by the DPMS entities or with a “Reason for Reporting” indicating the abuse of precious metals and stones,
- Information exchanged between UAE FIU and counterparty FIUs around gold smuggling, illegal mining of precious metals, gold theft, etc.),
- Information received from domestic authorities – Public Prosecutions, Police Departments, and the Ministry of Interior (MOI) related to an investigation of money laundering and terrorism financing offenses,
- Ministry of Economy’s (MOE) information about DPMS registered in the UAE and MOE imposed sanctions, fines, and warnings to DPMS entities,
- Information received from the Federal Customs Authority around ‘Cash declarations’ wherein the purpose mentioned is related to precious metals and stones.
Conclusions of the UAE FIU’s strategic analysis of the DPMS sector
The Strategic Analysis Report addresses the ML/FT typologies and red flags associated with the DPMS sector in the UAE. As per the UAE FIU’s analysis, the following are the major ML/FT typologies or patterns abused to launder money through the DPMS sector:
Trade-based money laundering
- Using DPMS entities as “front” to launder the illegal money using trade-based money laundering methods like incorrect invoicing, phantom shipment, or fictitious supply transactions.
- Use of multiple DPMS entities as a ‘Corporate Vehicle’ to disguise the source of funds by creating multiple layers by way of transferring a large sum of money amongst the entities without any business rationale.
The trade-based money laundering is widely used in the DPMS sector to launder money, wherein the transaction is manipulated to transfer the funds from one person to another and from one country to another.
Other widely exploited trade-based money laundering techniques are:
- To move a large sum of illicit funds from one country (importer) to another (exporter) by over-pricing the commodity supplied compared to its market value.
- Raising multiple invoices on the importer for the same set of products and receiving the payment using different methods to avoid the attention of the authorities.
- Representing the duplicate or fake stones as original and precious stones to bag transfer of large amount from buyer to seller.
- Trade-based money laundering often involves tax evasion, either by short declaring the import quantities or under-pricing the imported goods to avoid paying a large sum of taxes on the import of precious metals.
Money laundering through “foreign currency exchange”
- Indulging employees or third parties into the conversion of foreign currency exchanges without getting the name of the DPMS entity involved anywhere. Here, multiple individuals are involved to avoid reporting threshold and justify the source of funds and purpose as under:
- Source of funds used for currency conversion: salary income or savings
- Purpose of currency conversion: travel or family upkeep
- DPMS is undertaking many foreign currency transactions, mainly in cash, without any logical business transaction or for a quoted reason like foreign suppliers only accepting cash, etc.
Generally, it has been seen that one currency can be converted into another currency without any involvement of a regulatory authority. Moreover, the conversion of cash currency legitimizes the source of such converted currency, as generally, the party offers receipt of such conversion.
Moreover, with the increased volume of global trades, the cross-border movement of funds has also risen, leading to increased cases of terrorism financing and laundering funds to invest in unregulated financial centers.
Gold/cash smuggling
- Smuggling gold or illegally transferring the gold from the conflict-affected or high-risk jurisdiction. This smuggled gold or illegally transported gold is sold in smaller quantities to local DPMS entities against cash or is processed and re-exported illegally to different countries,
- Sourcing of gold from miners without adequate due diligence of the miner,
- Individuals smuggle cash (importing and exporting) on behalf of DPMS entities.
Using the network of people, gold and other precious metals are increasingly smuggled from illegal miners, wherein quantities of gold are distributed amongst many individuals to avoid the attention of and reporting threshold before the Customs Authority.
ML/FT risk indicators for DPMS sector suggested in the Strategic Analysis Report
The risk indicators or the ML/FT red flags captured in this report can be used by the DPMS and financial institutions to identify and report any suspicious activities involving precious metals and stones. The following is an illustrative list of ML/FT risk indicators captured in the report involving the abuse of precious metals and stones:
- DPMS entities with complex legal structures, created either to hide the UBO or disguise the transfer of funds,
- DPMS entity formed as a front company to mix the legally obtained funds with the illicit funds,
- Unreasonable behavior of or large complex transactions by newly formed DPMS entities,
- DPMS entities extensively transact in cash,
- Irregular shipping methods inconsistent with the standard business practice of DPMS,
- Inconsistent documentation or forged documents to disguise the transaction,
- DPMS frequently enters into transactions of an abnormally large amount,
- DPMS having multiple bank accounts without any business sense or DPMS entities operating bank accounts in the employee’s name,
- Adverse news about the DPMS’ UBO or senior management,
- DPMS or its UBO or management having close association with high-risk countries,
- Receipt or payment of money to third parties having no connection with the sanctions,
- Transaction structuring into smaller value deposits to avoid reporting threshold,
- DPMS entities extensively involved in cross-border cash movement,
- Frequent deposit of cash amounts into banks or exchange of foreign currencies by DPMS,
- DPMS entities importing precious metals from conflict-affected jurisdictions, or the volume of import is inconsistent with the country of import (having limited mining capacity or no mines),
- Failure to furnish ‘Customs Declaration’ concerning cash deposit related to precious metals/stones transaction,
- DPMS transacting in gold instead of cash/bank transfer,
- Transfer of funds amongst unrelated companies, having no business nexus,
- DPMS or its employees engaging in frequent foreign currency conversions without any business logic,
- Frequent travel to high-risk areas or illegal mining jurisdictions,
- DPMS operates on loans and credit facilities, generally settled before due dates through cash.
The primary reason for exploiting the DPMS sector
Given the peculiar nature of precious metals and stones, the same is most vulnerable in the hands of money laundering, using various methods. We have tried to map the main reason for exploitation against the money laundering technique as under:
Characteristic of precious metals and stones | Money laundering method |
Global currency – Precious metals and stones are widely accepted as a medium of exchange across the globe |
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High liquidity – Precious metals and stones can easily be converted into cash |
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Over-the-Counter – Precious metals and stones trading in not regulated over an exchange platform |
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Easy transportation – Compact size makes its movement easy |
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How AML UAE can help
AML UAE can help you understand the risk indicators and ML/FT red flags specific to the DPMS sector to identify suspicious transactions and take necessary actions to combat the same (i.e., timely reporting to the FIU).
AML UAE also helps DPMS entities (including other DNFPBs) set up an in-house AML compliance department and impart AML training to the employees. We are committed to ensuring your compliance with applicable AML regulations and safeguarding DPMS entities against money laundering and terrorism financing threats.
AML UAE helps you safeguard your DPMS business from ML/FT threats.
Get in touch to know the best preventive and corrective actions.
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About the Author
Jyoti Maheshwari
CAMS, ACA
Jyoti has over 7 years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.