Customer’s Customer Compliance Issue

MSB Talk 4

I was reading an interesting article entitled ‘ Argor-Heraeus Rejects Allegations on Congo Conflict Gold’ By James Kraus of Bloomberg  – Nov 4, 2013.  Essentially, a non-profit Swiss organization by the name of TRIAL was accusing Argor-Heraeus SA , a Swiss gold refiner of illegally refining gold originating from the war torn – Democratic of Congo for the years 2004-2005.

TRIAL is stating the Argor-Heraeus refined close to 3 tons of gold pillaged from an armed group which used the gold proceeds to finance its operations.  From the article, Argor-Heraeus received the questioned gold from its customer Hussar Limited.

My commentary of this article is not to give my opinion as to whether the TRIAL accusation is true or not.  My interest is solely from a ‘Know your Customer’ point of view.  Most compliance experts would agree that a rigorous Know Your Customer policy would be one of the most important criteria in protecting an institution against money laundering or the financing of terrorism.

Should Hussar Limited have been the customer and thus delivered the gold for refining at Argor-Heraeus then the latter institution would have executed the KYC ( Know Your Customer) due diligence on the former institution.  Apart from the obvious customer identification and verification procedures,  Argor-Heraeus would have evaluated Hussar’s own compliance procedures on its own customers.   And most likely this documentation would have been satisfactory and thus Hussar would have passed the Customer Acceptance process for Argor-Heraeus.

But now it appears that the gold actually came from illegal sources via Hussar Limited and then passed on to Argor-Heraeus.   The question now becomes as to how much should Argor-Heraeus have to know as to its customer’s customer.  And should Argor-Heraeus have actually o assessed whether Hussar Limited was adhering to its own AML policy of accepting gold from only legitimate sources.  This is a tough call especially at least in the beginning stages of the transaction history.  Now, maybe if the transaction kept on continuing over time with larger volumes, then ‘red flags’ would have appeared.

Then once ‘Red Flags’ appear, the institution has to impose enhanced due diligence which perhaps Argos-Heraeus did.    And it does appear that Argor-Heraeus must have been concerned because by 2005 it had terminated the business with Hussar Limited.

Of course in retrospect, it is so easy to say the Argor-Heraeus should have known from the beginning that the origin of the gold was from illegal means.  And this observation could or could not be true  – I certainly do not know.  And we have to remember that the incident occurred in 2004 and not 2013 where we now work in a heightened state of compliance alert.  This situation is of interest because as a financial institution today, we just cannot take for granted anymore as to the compliance acceptance of a customer.  Now, unfortunately we have to run the extra step of actually knowing our customer’s customer compliance with laws.

– Allan Ramlall

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