By Joshua Gibbons - About.Ag - for CoinWeek ....
When I first heard about Peruvian gold smuggling early last year, I didn't really believe it. I was talking to the owner of a bullion dealer that I suspected was in financial trouble, and he said that NTR Metals was caught smuggling $20M of gold from Peru. Not seeing anything about it on the Internet, I assumed he was just trying to sidetrack me.
While his facts weren't accurate, it turns out that there is some truth to it ($18.8 million of gold was seized in 2013, on its way to six different refiners).
But that $20 million number pales in comparison to recent news.
In early March, Bloomberg broke the news that NTR Metals bought over $3.5 billion in South American gold in the past four years. And court documents report something even stranger: an FBI agent confirming that NTR Metals had $300 million of gold stolen from them in Peru. Could that be a massive courtroom error (referring to a $3 million share of the $18.8 million of seized gold), or was there really a $300 million gold heist that never made the news?
Who are NTR, Elemetal, and OPM?
To start learning about NTR Metals and Elemetal, it helps to get a basic understanding of who and what Elemetal is. With over 45 company names involved, a subsidiary that is publicly traded--and Elemetal not always using its own naming conventions--it is easy to get lost. Elemetal, LLC is a privately owned company, and the parent company of everything else (it is essentially NTR Metals with a new name). Among other things, it owns the various NTR Metals companies (now called "Elemetal Direct"), Ohio Precious Metals (OPM, now called "Elemetal Refining"), Provident Metals (also called "Elemetal Online"), and DGSE (a publicly traded company, of which it owns a majority share). There are also other divisions, including wholesale trading, futures trading, vaulting, minting, and recycling metal.
Subsidiary NTR Metals Miami is the office that was at the center of this controversy. Although the three employees that were arrested are referred to as being part of NTR Metals Miami, they spent most of their time in Peru and Colombia.
NTR Metals started 2012 doing about $1.2 billion of revenue annually. It was in 2012 when NTR Metals changed its path, from a run-of-the-mill wholesale bullion operation to a true bullion conglomerate. Ohio Precious Metals (OPM) and NTR Metals merged in April 2012, touting that they would produce "about 10% of the world's recycled gold".
By the end of 2012, they were using the Elemetal name.
In 2012, NTR Metals Miami had imported over $273 million of gold from South America. U.S. authorities believe that at least part of the $73M of gold NTR imported from Peru in 2012 was illegal gold ("illegal gold" refers to gold that was mined or obtained illegally, and does not necessarily mean that it was illegal to import). Prior to 2012, NTR imported virtually no gold from Peru.
In 2013, NTR Metals Miami imported at least $1.1 billion of gold from South America, mostly from Peru. Clearly, the NTR/OPM merger was working well: they could both import and process a lot of gold. NTR Metals imported over a third of the gold that Peru exported in 2013, and a quarter of the gold that Ecuador exported.
In July of 2013, NTR formed NTR Metals Zona Franca S.A.S, an office in Colombia, that over the next two years would help NTR import $1 billion of gold from Colombia. Colombia is even trickier than Peru for gold dealers: experts estimate around 80%-88% of gold mined in Colombia is mined illegally.
Most of 2013 appears to have been a great year for NTR Metals, expanding rapidly in the South American market. But their luck changed in December, when Peruvian authorities confiscated $18 million of illegal gold that six different exporting companies tried to get out of the country. The metal was destined for four importers: Kaloti Metals & Logistic, NTR Metals, Akam Asset, and Italy's Italpreziosi. This seizure made the news in Peru, but there was little mention of it anywhere else.
Peru started cracking down on illegal gold starting around 2012 and it really shows in 2014, when Peru's gold exports went down by 70%.
In 2014, NTR Metals lost most of its Peru gold business ($79M in 2014 compared to $980M in 2013) but made up for that loss by doing $337M of business in Ecuador, $270M of business is Bolivia and $268M of business in Colombia (three of the four countries that border Peru). NTR Metals' overall imports of gold from South America in 2014 stayed at a similar level to what they were in 2013.
However, in September NTR Metals got the first sign that they had an enemy: an email was sent to NTR Metals by someone claiming to be from a team "working for peace in Colombia". The email accused NTR Metals of participating in money laundering and financing terrorism (NTR ended up filing a defamation lawsuit in Colombia, stating that most or all of the claims were false). At least one of the three NTR Metals Miami employees that was recently arrested this year got a copy of that email.
Then in December, one of the three NTR Metals Miami employees sent his co-workers a link to an article by a Peruvian news source, discussing illegally gold mined in Bolivia being exported in 2014 to the United States through Peru. The article mentioned NTR Metals as one of the destinations for this gold (although NTR Metals could not have handled much of it, as they had reduced their gold imports from Peru from $980M in 2013 to $79M in 2014).
It was also in December that Harold Vilches, the "star" of the Bloomberg article "How to Become an International Gold Smuggler", first started doing business with NTR Metals. Although Chilean prosecutors claim to have evidence that NTR was aware the gold was illegal, the criminal complaint against the three NTR Metals employees does not appear to mention any such evidence.
2015 appears to have been another good year for NTR Metals in South America. Their business in Colombia grew significantly, from $268M in 2014 to $722M in 2015, despite the increased intensity of the defamation campaign against them (the group started a blog in 2015 making their defamation more public).
Media attention focused on gold smuggling grew as well. Several articles appeared in the media in 2015 suggesting ties between NTR Metals and illegal gold. For example, in June 2015, Peru's Ojo Publico published an article about the illegal gold trade in South America and how it gets to LBMA-approved refiners, which mentioned NTR Metals. Fortunately for NTR, the media attention is in South America, not the United States.
This was the year when things really started to change.
There do not appear to be public sales figures regarding NTR Metals imports from South America this year. However, in May 2016, the three NTR Metals employees that were recently arrested discussed how they were not importing as much metal as in the past. Then in June 2016, the employees discussed an article on illegal gold exported from Ecuador; thankfully, while it mentioned a competitor of theirs, it did not mention them.
Around June 1, fraud charges were filed against Harold Vilches. NTR Metals stopped doing business with him and suspended all operations in Chile.
But of all the information I have seen regarding NTR Metals in 2016, the most important was from February, when NTR Metals Zona Franca S.A.S. (Colombia) filed legal paperwork to try to identify the people responsible for the defamatory websites.
Their attorney wrote (in Spanish):
"It is also not surprising that [the defamers] would try to generate a hostile environment toward the oversight authorities so that they would start investigations against my clients and, with that, finish off its business."
A year later, the attorneys' prediction had come true. Investigations were started, arrests were made, and Elemetal Refining's gold and silver processing shut down.
By October 2016, the FBI and the U.S. Attorney had gone to Chile to interview Harold Vilches. In December, they brought Vilches to the United States to discuss his situation with a grand jury. By the end of the year, NTR Metals was well aware of the investigation, providing details to the FBI via subpoena.
Everything began to unravel on March 9, 2017 when Bloomberg came out with their "How to Become an International Gold Smuggler" article that introduced the United States to the illegal South American gold trade. In the article, Harold Vilches had a lot to say about the involvement of NTR Metals Miami and several of its employees (who denied the allegations).
The day after the Bloomberg article was published, the U.S. Attorney's office filed a criminal complaint under seal, and within days the three NTR Metals employees were arrested and indicted with Conspiracy to Commit Money Laundering. On March 17, Elemetal issued a press release saying that they were cooperating with the government's investigation, and formally closed NTR Metals Miami (which makes sense, as most of their key employees were gone).
Things were bad, but they got worse on March 31 when LBMA dropped both OPM and Elemetal from their "Good Delivery" list (so new bars could not enter the system). Hours later, COMEX followed, saying they would no longer register (warrant) Elemetal bars. This is not normal: COMEX has only done this once with a metals company in the past decade (an aluminum provider). Although COMEX gave a cryptic reason (referring to an "active review under [LBMA's] Incident Management Process"), presumably both LBMA and COMEX felt that there was likely enough illegal gold in the OPM/Elemetal bars to justify removing them.
That was essentially the death knell for Elemetal Refining. The same day they were removed from LBMA and COMEX, they became unable to make payments to customers, and on April 6 sent a letter to customers saying that they were discontinuing their high-grade-metals refining business. Apparently, Scotia Bank (which has a lien on refining metal as soon as it is delivered to Elemetal Refining) discontinued their line of credit and wanted to get paid back. Elemetal said that they are confident that they will be able to pay all their customers within six months, and that by delaying the payments they could avoid bankruptcy (which, they say, could delay payments for years, and as I am all too aware hands out millions of dollars to attorneys and other professionals).
Note that while Elemetal Refining, LLC is shutting down its gold and silver refining, there is no indication that any of their other businesses are affected. I specifically asked Elemetal Vault regarding possible liens on metal stored with them (which is owned by their customers), and they stated that there are no liens nor could there be. And Provident Metals, while they would not answer my questions (which I see as a red flag), appears to be delivering quickly (slow deliveries were the biggest sign of financial problems with Tulving, Bullion Direct, and NWT Mint).
Why Is Illegal Gold Bad?
This really wouldn't be newsworthy if illegal gold were simply gold that was mined and there was a slight violation of the law (perhaps a delivery truck was speeding). But there is a reason that countries are cracking down on illegal gold.
The first (and biggest) problem is that illegally mined gold usually has serious problems associated with it. Most illegal mining companies are extremely irresponsible: rain forests are destroyed; workers are damaged by mercury (in one Peruvian town, 41% of the population -- not just miners -- was exposed to mercury contamination); indigenous populations are forced to relocate; child labor is used; and there are cases of indentured servitude and lots of sex trafficking (reportedly girls as young as 12 years old will get auctioned off).
As if that weren't enough, there are strong ties to drug smuggling and ties to terrorism.
The lesser issue is that NTR Metals, like other refiners, have certifications showing that their metal is from "Conflict-free sources of metal" and "Responsible gold". The Dodd-Frank legislation in the United States requires most larger companies to practice due diligence to ensure that any gold coming from certain countries is sourced properly. As a result, many of these companies make statements regarding the source of the gold, and the statements rely on the results of their due diligence. If they see that their gold refiner has certificates showing that they have been audited and their metal is conflict-free, then they may rely on that. After that, if the auditors for the refiner have been duped then so have all of the refiners' customers, and the refiners' customers' customers, ad infinitum.
What Happens Next?
Customers of Elemetal Refining should get paid within six months, according to the company. I have already heard from one customer for whom this wait will be very difficult: their small business borrowed money to pay someone for gold, and then Elemetal wasn't able to pay them on time, jeopardizing the loan.
There is a chance that Elemetal Refining customers might band together to try to force Elemetal Refining into involuntary bankruptcy, but since Elemetal is confident that customers will get paid within six months, that could easily backfire. Elemetal Refining mentioned that the whole refining process takes about four months, which would explain why it would take that much time to pay customers.
And I always recommend that people use common sense when doing business with bullion dealers, whether you are an individual, a coin store or a bullion wholesaler. The simplest piece of advice? Never place an order so large enough that it will cause you financial harm if something goes wrong.