THE Financial Action Task Force (FATF) and Asia/Pacific Group on Money Laundering (APG), in a joint report, have turned torchlight on direct and indirect taxes frauds associated with gold business.

According to FATF-APG report captioned ‘Money laundering and terrorist financing risks and vulnerabilities associated with gold', "As gold is easy to obtain and conceal, it often forms the basis of tax fraud where gold commodity is purchased and stored legally in foreign jurisdictions. Whilst stored in foreign jurisdictions, markets are set up to sell the value locally. This allows cash to be drawn on the value of the stored gold without actually accessing the gold."

The Report has listed a number of red flag indicators relating consumer and corporate behaviours that should enable the law enforcers and accounting professionals to exercise vigil. One such indicator is a trading company registered in tax haven even though its business relates to another jurisdiction.

The Report notes: "Organised crime groups can misrepresent the purity, weight, origin and value of gold to create profits or to justify the instrument or proceeds of crime. Misrepresentation can also aid in tax fraud as borne out by an Australian case study of fraudulent claims to earn tax credits."

It says: "Australia Criminals can exploit jurisdictional tax schemes in relation to precious metals by combining trading and refining activities. In this case, ‘syndicates' utilised inter-related transactions with associate entities to conceal the true nature of the transactions in order to fraudulently obtain tax refunds or avoid paying the Australian goods and services tax (GST). This process is also known as a ‘missing trader' fraud."

Investigations show that gold bullion is cycled through gold refining entities, with claims that the bullion is broken down into a taxable form prior to being ‘reconstituted'. It is then sold GST-free to a precious metal dealer after GST credits have been fraudulently claimed on the purchase by misrepresenting the nature and status of the transactions. Tens of millions of Australian dollars in GST payments are made on fraudulent claims.

The report has also dealt with exploitation of gold incentive schemes. It says: "Due to the overall demand for gold-based commodities, many jurisdictions see the trade in gold as beneficial to their economy. For this reason a number of jurisdictions have incentive programs usually in the form of tax incentives to help promote the trade. Arbitrage between countries on the different schemes provides opportunities for organised crime to exploit these vulnerabilities by sourcing illegal payments from these jurisdictions for perceived legitimate activity."

A key finding of the report is that gold is an extremely attractive vehicle for laundering money. It provides a mechanism for organised crime groups to convert illicit cash into a stable, anonymous, transformable and easily exchangeable asset to realise or reinvest the profits of their criminal activities.

Another key finding is that the gold market is a target for criminal activity because it is highly lucrative. Understanding the various stages of the gold market continuum, and the types of predicate offending that can occur in each stage, is critical in identifying money laundering and terrorist financing risks emanating from this industry.

The Report points out that "Further research is required to establish the impact of regulation on detecting and discouraging criminal activities in the gold market, and the potential links between the gold market and terrorist financing. Such research into the correlation between financial flows and the gold market will also lead to a better understanding of how criminals use gold and gold products to launder money."