HomeNewsAnalysisBreaking Down the Chain of Illegal Gold in Peru

Breaking Down the Chain of Illegal Gold in Peru


Two seizures of illegal Peruvian gold have reportedly been traced to a Russian businessman who was part of an exploitative export chain in Peru that reaches all the way to Switzerland. The seizures shed light on the workings of an illicit trade worth more to Peru than cocaine.

The Russian, Oleg Lipin, is considered one of the biggest providers of illegal Peruvian gold exported to Switzerland, reported newspaper El Comercio, which chronicled the seizures of the metal that took place last month and in November 2012 as part of its long-running investigation of the industry.

Peru is known for its coca production, which, according to the United Nations, became the largest in the world last year. But with government-estimated profits of up to $3 billion a year, illegal gold is thought to be worth twice as much as the country's cocaine trade.

The country legally exported 150 tons of gold in 2012, making it the largest gold-producing nation in Latin America and the sixth largest in the world, as reported by the watchdog group Verite. The Minister of Energy and Mines said that year that, with illegal mining taken into account, Peru would be the fifth largest producer in the world. Research by Verite and others indicates that around 20 percent of Peru's gold exports are produced illegally, most in the departments of Madre de Dios, Puno and Arequipa.

A Complex Web Reaching to the Top

Lipin's operations were typical of the way the illegal gold market works. The seizures from Lipin, in which a total of around eight kilos of gold were confiscated, led police to a company named Suwit Mining and Services. El Comercio said the company was set up by Lipin in 2006 when he bought a mining concession near Puerto Maldonado, the capital of the remote jungle region of Madre de Dios, Peru's illegal gold mining heartland.

Over the following six years, the company failed to declare any production with Peru's Energy and Mining Ministry (Minem), though that changed in 2012 when Suwit registered on the formal list of major gold producers in the area. That year, Lipin declared production of 207 kilos of gold, said El Comercio.

After the November 2012 seizure, Lipin told police that the confiscated gold had come from his legal concession, but an inspection revealed no recent mining activity in that location. The investigation revealed the gold had come from La Pampa, a center of illegal mining near Puerto Maldonado, according to El Comercio.

Financial records obtained by Peru's anti-money laundering body, the Financial Intelligence Unit (UIF), reportedly showed Suwit received $3.4 million through 64 bank transactions between May and August 2012. Most of that money, around $3.2 million, came in the form of transfers or deposits from the AS Peru Corporation, while the rest came from Universal Metal Trading. According to El Comercio, Suwit currently has an official value of $26.5 million.

AS Peru Corporation and Universal Metal Trading are the major exporters of illegal gold from Madre de Dios to Geneva and Zurich, as El Comercio reported last year. In 2012, these companies sent more than nine tons of metal to Swiss refineries PAMP and Metalor, said the newspaper. Universal Metal Trading exported 19.2 tons of gold, worth $901 million, to Switzerland in 2011, making it the country's biggest exporter.

Extensive fieldwork carried out by Verite, a US-based fair labor non-governmental organization, found that Universal Metal Trading sourced gold from Madre de Dios, where 97 percent of the metal is mined illegally. The trade there has devastated the rainforest, contaminated water supplies and drives forced prostitution and labor in extremely hazardous conditions.

In March 2012, Luis Zavaleta Vargas, then-director of Hydrocarbons at the Minem, was forced to resign and charged with tax evasion after El Comercio revealed he owned Universal and his brother ran the company.

Gold's 'Illegal' Origin

Gold production is Peru is a complex patchwork of mines, miners and processing plants of different types, sizes and levels of legality. Interwoven with those extracting and processing the gold are the concession owners and a network of middle men known as "acopiadores," who buy and sell the mineral, and "facturadores," who provide fake receipts for gold produced at illegal mines.

Technically all miners and companies who are extracting gold from concessions they do not own and do not have official authorization to mine -- along with a raft of other paperwork such as an approved environmental impact study and water rights -- are working illegally.

But many of these are impoverished individuals who have worked the same land for years making just enough to support their family. Many may have "permission," but not the long list of documents required. Others are working in conditions of debt bondage. The vast majority are working in highly dangerous conditions.

As Verite explains, the government has set a series of deadlines for miners to complete the formalization process, but has been forced to repeatedly push it back in the face of widespread violent protests. However, while informal mining provides one of the few sources of employment in the area, its black market nature also makes it ripe for exploitation along the entire distribution chain.

'Gold Capos'

Above the individual miners are those who run small-scale and medium mines or own concessions. This is where more traditional "illegal" activity begins to take place, even in those companies that do own the concessions from which they are extracting.

Powerful families, politicians and foreign groups are among the so-called "gold capos." This group is a chief beneficiary of the aforementioned billions in profits from small to medium-scale informal mining operations, in which forced labor and child labor are prevalent, and bribery or threats are used to bypass supposed regulations.

SEE ALSO: Coverage of Mining

Verite received reports of Russian, Chinese and Brazilian armed groups buying up concessions and forcing people to work, employing Peruvian guards who appeared to have military training.

"Conditions were much worse than we expected," said Verite lead researcher Quinn Kepes. "Verite has done research on forced labor in places like Bangladesh, Guatemala, Bolivia, Liberia, and the US. I haven’t seen anything this bad."

In addition to human trafficking for forced labor, mining camps in Madre de Dios are also often home to brothels offering trafficked women, and there is evidence of drug traffickers laundering proceeds through mines in Puno. These are just two other examples of criminal activity intersecting with Peru's mining industry.

From Processing Plant to International Market

Once the gold has been mined -- either in the form of ore encased in hard rock chiseled out of the ground or sediment mixed into sand and dirt and sluiced from a river -- it heads to a processing plant. The handover provides more opportunities for exploitation.

Only gold that comes with a receipt proving its provenance from a formal mine is legally allowed to be sold. Subsistence, unformalized miners, cannot provide receipts, nor can miners working for small and medium-scale companies who are paid in gold, a common practice in the informal sector. They are beholden to the acopiadores or the processing plants, who will take the gold without a receipt, but at a low price. Often, extra charges will be applied if the gold offered is deemed to be of "low" quality.

The processing plants are also exploitative. Employers use forced labor, often under extremely hazardous working conditions, with processors operating unprotected amidst cyanide and mercury.

After the gold ore is extracted from the rock or from the dirt and sand, it travels to the international market. Processing plants and acopiadores pay for fake receipts from the facturadores to be able to sell the gold. It may be passed along a chain of several acopiadores or sold directly to large-scale buyers and export companies, such as Universal Metal Trading, which allegedly exported Oleg Lipin's gold. Some is turned into jewelry in Lima before being exported.

This process of legalizing illegal gold is finished abroad, primarily in Switzerland, which refines around 70 percent of the world's gold. Melted down by international companies -- which are technically required to monitor their supply chain -- the dirty gold gets mixed into the clean. There is no way of tracing it back to its country and region of origin.

While there are a number of international corporate social responsibility programs for companies that refine and sell gold, such as the Responsible Jewellery Council and the London Bullion Market Association Responsible Gold Guidance Programme, they are voluntary.

"There's this very clean, crisp image of 'Swiss gold,'" Kepes told InSight Crime. "But if we take this figure that 20 percent of Peruvian gold is mined illegally, and the fact that Peru is the fifth largest producer of gold worldwide, then a significant amount of gold being consumed worldwide is being produced in illegal gold mines in Peru. If we say even one percent of the gold in all of our wedding rings comes from an illegal gold mine in Peru where these horrendous things are taking place, then that's a pretty powerful thing."

'It's like the war on drugs'

Back in Peru, it is an immensely challenging issue to tackle. With billons of dollars at stake, it is no surprise that corrupt state officials and security force members facilitate the illegal gold trade at every level: "Gold is like drugs," one high-level government official in Cusco told Verite.

SEE ALSO: Peru News and Profiles

The government wants the $250 million plus of annual tax revenue that the gold mined illegally would bring in if it were legal. But corruption is even worse on a local level than on a national level. Many areas where illegal mining takes place have very little state presence and resources.

"How are you going to tell a labor inspector that has to pay his own gas and pay to send his paperwork back to Lima to go into a remote mining area being protected by armed guards, where any outsider trying to enter is shot?" asked Kepes.

The Ministry of Labor has demonstrated a commitment to improving the horrendous conditions and exploitation that the workers suffer, said Kepes, including recognizing the existence of forced labor in illegal mining, establishing a new National Plan to Combat Forced Labor, and re-centralizing the labor inspectorate to combat corruption and improve efficiency. However, the subject has not been included in government roundtables on how to formalize the market.

Meanwhile, the High Commissioner of Mining Formalization within the government reiterated last month the authorities' will to fight the illegal trade, stating they were stepping up controls on gasoline provision and air travel in illegal mining areas. The latest deadline for informal miners to complete their formalization process is April next year, while the government has set itself the deadline of 2016 to have all small-scale mining operations under regulation.

It's an extremely ambitious goal, admitted Kepes.

"It's going to be tough. It's like the war on drugs: there's a lot of money to be made, a huge profit margin that fuels corruption and bribery and unscrupulous criminal elements that are involved," he said.

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