US Treasury Department abandoned major money laundering case against Dubai gold company
23 Sep 2020

By Kyra Gurney, ICIJ, 21 September 2020

ICIJ — After three years of digging, investigators in the United States had accumulated a mountain of evidence that they believed sealed the case against Kaloti Jewellery Group, one of the largest gold traders and refiners in the world.

The Dubai-based conglomerate had become a key cog in the dirty gold trade, buying the precious metal from sellers suspected of laundering money for drug traffickers and other criminal groups, a U.S. Drug Enforcement Administration-led task force determined. Kaloti often paid in cash — sometimes so much it had to be hauled in wheelbarrows — and wired money for suspect clients to other businesses, investigators believed.

In 2014, the task force recommended that the Treasury Department designate Kaloti a money laundering threat under the USA Patriot Act, a seldom-used measure known as the financial “death penalty” because it can freeze a firm out of the international banking system.

But the Treasury Department never took action against Kaloti. Former Treasury officials said a decision on whether to move ahead was deferred for fear of angering the United Arab Emirates, a key U.S. ally in the Middle East. When attempts to convince the UAE to act on its own against Kaloti fizzled, the investigation was mothballed.

Investigators told the International Consortium of Investigative Journalists they were baffled and disappointed. Money laundering cases are extraordinarily difficult to crack and the U.S. has struggled to police the murky gold trade. With Kaloti they thought they had a rare opportunity to send a message to the entire gold industry.

“I was incredibly frustrated,” one former official said. “What’s really sad is a lot of really, really good investigators, some really talented people, put a lot more time than they got paid for into trying to uncover a huge wrong.”

The U.S. investigation of Kaloti has not been previously reported. The outcome points to challenges common to money laundering cases: Investigators must follow money across borders and through companies based in secrecy havens, like Dubai, that have shown little interest in cracking down. Bringing cases against powerful actors also requires political will and agreement among different U.S. agencies with competing priorities.

The investigation came to light in a batch of secret bank filings that describe the flow of more than $2 trillion in suspicious transactions through the global banking system. JPMorgan Chase, Deutsche Bank and other financial institutions flooded the Treasury Department’s Financial Crimes Enforcement Network with warnings about Kaloti, flagging as suspicious thousands of transactions, worth $9.3 billion, that occurred between 2007 and 2015, the reports show.

In some reports, the banks described money flows that they said had the earmarks of money laundering. Several banks launched their own investigations and severed ties with the company — or said they planned to do so.

The documents, called suspicious activity reports, or SARs, were obtained by BuzzFeed News and shared with ICIJ and 108 media partners as part of the FinCEN Files investigation. SARs reflect the concerns of bank compliance officers and are not necessarily indicative of any criminal conduct or other wrongdoing. Some of the documents in the FinCEN Files were gathered as part of U.S. Senate committee investigations into Russian interference in the 2016 U.S. presidential election while others were gathered following requests to FinCEN from law enforcement agencies.

ICIJ confirmed additional details about the government inquiry into Kaloti with nine current or former law enforcement and other officials with knowledge of the investigation, who agreed to discuss it on the condition that their names not be used. They are not authorized to speak publicly about the case and fear repercussions for discussing it.

In a statement, a Kaloti spokesperson said the company “vehemently denies any allegations of misconduct” and has never “knowingly engaged with any criminal or criminal group.” Kaloti regularly conducts “all appropriate and required” due diligence and anti-money laundering checks, including searching criminal and regulatory databases, the statement said, and these checks have “never identified any such criminality, or its likelihood, amongst any active clients of Kaloti’s.” The gold company has never been accused or questioned by any regulator or legal authority “about any material wrongdoing of the kind alleged or any other kind,” the statement said.

A spokesman for the DEA said the Kaloti case is now closed and declined to answer questions about the investigation.

U.S. investigators said they never questioned Kaloti directly. Because the case did not result in charges or a Treasury designation, Kaloti never had a chance to see or challenge any of the evidence investigators had gathered.

Law enforcement has long seen the gold trade as a key vulnerability in the global fight against money laundering. Drug gangs and armed militant groups use gold to launder money and fund conflicts. In the process, they have supported illegal mining operations that destroy pristine rainforest and are hubs for sex trafficking and child labor. In Peru, Latin America’s biggest gold producer and the world’s second-largest cocaine supplier, the illegal gold trade is now twice as big as drug trafficking.

“There is no better mechanism in the world for laundering money than gold,” said David Soud, head of research and analysis at I.R. Consilium, a consulting firm that specializes in analyzing resource-related crime. “It is concentrated, portable wealth, has essentially the same value anywhere in the world, and can be moved outside the global financial system.”

For these reasons, it is not unusual for a precious metal transaction to attract bank scrutiny. Gold companies are involved in roughly a quarter of all suspect transactions across the FinCEN Files.

But the FinCEN Files show that inquiries into Kaloti went beyond routine monitoring. As the U.S. investigation was gaining momentum, concerns about the company’s business practices also made headlines in the United Kingdom.

In 2014, a former partner at EY’s Dubai office reported that Kaloti had accepted gold exported from Morocco disguised as silver, with falsified paperwork. Auditors at the global accountancy firm, formerly known as Ernst & Young, also discovered that Kaloti had purchased gold from Sudan — where the precious metal has financed a militia group under investigation for genocide — without properly vetting its suppliers, according to the former EY partner. The following year, Kaloti’s refinery lost an important industry accreditation.

A spokesperson for Kaloti said the company has not been found by any regulators, international bodies or auditors to have conflict minerals, “or even the likelihood of such,” in its supply chains.

Kaloti has managed to maintain business ties with major corporations, including the Swiss refiner Valcambi, according to Global Witness, an anti-corruption advocacy group. Kaloti recently opened a new refinery in Dubai.

General Electric, Amazon, General Motors and dozens of other U.S. companies reported that Kaloti may have processed or provided gold as part of their supply chains in 2019, according to paperwork filed with the Securities and Exchange Commission.

GE and General Motors said they do not source gold directly from Kaloti. GE said it had asked the supplier who reported using Kaloti to remove the company from its supply chain. Amazon, GE and General Motors said they are committed to having an ethical supply chain.

Dubai gold rush

Gold courses through the global economy. Investors trade contracts pegged to future deliveries on major commodities exchanges in London, Chicago and Shanghai. Banks buy it from mining companies and other suppliers to resell to manufacturers, which turn it into wedding bands and iPhone circuits. Middlemen hawk it in late-night infomercials.

The price of gold can fluctuate greatly. It rose to $1,895 a troy ounce in 2011, fell to $1,062 in 2015 and is now hovering around $1,900. And yet it is often seen as a haven by investors spooked by volatile markets. That’s partly because the metal has staying power. Gold has underpinned world powers as distinct as 16th-century Spain, which built a global empire with gold looted from Latin America, and the 21st-century United States, which holds more than 261 million troy ounces (8,000 metric tons) worth more than $11 billion in government vaults.

For Munir Al Kaloti, the founder of the Kaloti Jewellery Group, gold was the foundation of a business empire.

Al Kaloti fled Jerusalem to what is now the UAE in the 1960s, when it was still a dusty backwater with few paved roads. He got his start scavenging scrap metal and later imported goats for the then-ruler of Dubai, he said in a 2013 interview with a local news site.

In 1988, Al Kaloti opened a jewelry shop with his son-in-law, who had trained as a jeweler in Italy. It wasn’t long before they were buying gold. “People carrying scrap gold and gold from mines in Africa and Asia were coming in more and more and they are asking who can handle this, who can buy this?” Al Kaloti recalled in the interview. “So we said: ‘Why not?’”

Over the next quarter-century, Dubai grew into a major financial and business center. It also became an important hub in the gold trade, aided by low tax rates, proximity to Africa and Asia, and a reputation for secrecy.

In 2000, the Kaloti Jewellery Group began trading gold bars. By 2008, it was making its own bars at a refinery in the neighboring city of Sharjah. It soon became one of the largest gold trading and refining conglomerates in the Middle East, with branches in Asia. Still, it remained a family business: Munir Al Kaloti’s son-in-law served as the general manager. One of his sons operated a gold buying office in a crowded Dubai souk.

Behind the scenes, Kaloti’s dealings had started to attract the attention of U.S. law enforcement.

Operation Honey Badger

In late 2010, a DEA-led task force in central Florida started getting calls from DEA agents investigating a money laundering scheme that spanned five continents as part of a law enforcement campaign called Project Cassandra.

An international criminal network was piping illicit cash from Colombian cocaine sales in Europe to Africa, where it was combined with proceeds from used-car sales in Benin, prosecutors later alleged. Cash couriers connected to Hezbollah, a Shiite militant group and Lebanese political party backed by Iran, allegedly moved the cash to Beirut in exchange for a cut.

The Lebanese Canadian Bank, based in Beirut, and money exchange businesses allegedly wired hundreds of millions of dollars to the U.S. for the criminal network to purchase still more used cars, completing the money laundering cycle. The network also sent funds through the bank to consumer goods companies in Asia to buy products that were shipped to South America and sold to pay cocaine suppliers.

Read more at the International Consortium of Investigative Journalists

RiskScreen: Eliminating Financial Crime with Smart Technology

Advance your CPD minutes for this content, by signing up and using the CPD Wallet