South America’s Gold Supply Chain Poses Big Risks for Procurement, Report Says

If your company sources and buys gold, then the message from some recent research is loud and clear: Watch your step in South America.

The market there and its role in the global gold supply chain is a tremendous cause for corporate concern, according to the Thomson Reuters white paper “Illegal mining in South America and Financial Risk – Taking the Shine Off Gold,” by Brian Huerbsch and Jesse Spiro.

Evidently, the promise of huge profits based on higher gold prices — and fueled by rampant corruption — have created a vast supply chain problem for the continent. The issue plagues Colombia, Peru, Bolivia, Brazil, Ecuador and Venezuela, according to the authors.

Of the various nefarious business dealings that illegal miners undergo in many of these countries, one example is gold-laundering. Heidi Vella, writing for Mining Technology, frames the problem:

“Just as with money laundering, illegal miners and organized criminals try to hide the illicit origins of their gold by mixing it with legitimately mined gold, to then introduce it into the legal international gold market. For refiners and others, this makes it almost impossible for international gold-buying companies to differentiate between legal and illegal gold exports.”

Of course, this gets to the core of a major risk for gold-buying organizations: the ongoing threat of murky supply chain traceability.

Conflict Minerals Compliance: A Brief History

Conflict minerals, or 3TG — tin, tungsten, tantalum and gold — have complicated the lives of U.S. supply chain managers and compliance officers since 2014.

The upheaval is due to Section 1502 of the Dodd-Frank Act, which led to an SEC rule demanding public U.S. companies audit their supply chains and report whether those supply chains are conflict-free. The first deadline for companies to file compliance paperwork with the SEC fell on June 2, 2014.

While compliance has slowly plodded along since then, compliance scores seem to be improving. In addition, recent reporting shows that more than half of companies filing conflict minerals reports are able to determine the source of those minerals. However, Mining Technology quotes Spiro as saying that “more thought leadership on this issue is needed, as well as more awareness in key markets like Europe and North America. … This issue still hasn’t received the level of attention it deserves in major financial markets.”

(All of that, even after the European Union passed its own legislation in 2017 that will require conflict minerals reporting starting in 2021.)

There has been talk of repealing Dodd-Frank — the president has the power to suspend it for two years, and the SEC had come out in early 2017 against enforcing it — but for now, the authors of the whitepaper said, companies sourcing gold even outside the Democratic Republic of Congo (the initial source of conflict minerals targeted by the rule) should bone up on it and other domestic and global regulations.

What Companies Can Do to Prevent Gold Supply Chain Risk

Know your regulations. The white paper’s authors provide a list with which to become familiar, including the EU Conflict Minerals Regulation; OECD Anti-Bribery Convention; OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas; and the Dodd-Frank Act.

Also, be sure to take several key considerations into account. These include:

• Location: The authors recommend asking yourself such things as, “Where is a company doing business? Is the country known for high levels of corruption and poor governance standards? How is the country’s mining industry regulated? Is the country an important processing nation? Where does it source its gold from?” (According to Leo Bonanni, founder and CEO of Sourcemap, speaking to Spend Matters in this article, some of these types of questions could be answered using geographic data visualizations to help procurement understand the need to control these types of risks.)
• Past Behavior and Supplier Reputation: “What is a supplier’s reputation for integrity and conduct? Have there been past violations? What about a supplier’s business associates?” Be sure to perform extended due diligence on all types of third parties, the authors note.
• Politically Exposed Persons and Government Entities: Check out whether “a company or business associate has direct or indirect links to politically exposed persons or local/national state-owned entities (SOEs).”

Ultimately, for companies involved in any part of the gold supply chain, it comes down to deep due diligence and continued monitoring, as a certain degree of risk will always remain.