Bullion analyst Sanjiv Arole explores the shifting dynamics in the gold trade, highlighting the concerns of industry stakeholders and examining potential paths forward in a landscape marked by increasing compliance requirements.
Greek philosopher Heraclitus is credited to have said that “The only constant in life is change”. However, it is universally true that change is always opposed tooth and nail by all. In cricket for instance, the Decision Review System DRS was opposed by most countries, including India. It was opposed on the grounds that it was not a 100% fool-proof system. India was the last country to accept the DRS system for review of umpiring decisions. Now, the DRS changed the way cricket was played in a big way. Prior to DRS, for LBW decisions umpires invariable gave the benefit of doubt to the batsman. But the DRS changed all that. Cricket became more attractive as pad-play a ploy to thwart bowlers went out of vogue. Even line decisions, no-balls and wide-balls can now be reviewed in some tournaments. As a result, gamesmanship (a term to camouflage cheating) by players to put pressure on umpires has reduced. The way the game is being played too has drastically changed and in spite of some lacunae in the system and some controversies, the game has become a bit fool-proof.
If one were to only look at the gold trade, not so long the whole trade was up in arms when excise duty on gold jewellery was re-introduced by the government. Retail outlets across the country went on strike for around 46 days. The government did not budge and the trade had to relent. Likewise, the GST on some items, including gold and diamonds was opposed vehemently by the trade. Even now the 3% GST on gold appears to be on the higher side for this high value item. Many still feel that the high incidence of tax plus the high import duty is fuelling the higher smuggling numbers for gold and other such high value items and leading to hawala and giving more scope to the parallel economy. But GST collections are on the rise and everything seems to have fallen in line now.
Currently, there seems to be uproar against recent changes made in the PMLA, 2002 (The Prevention of Money Laundering Act, 2002). The bone of contention in the bullion and diamond trade is the fresh guidelines issued: Anti-money laundering, countering the financing of terrorism, and combating proliferation financing guidelines for dealers in precious metals and precious stones, 2023.
Now, the PMLA (as amended) was brought into force with effect from 1st July, 2005. Necessary notifications/rules i.e., Prevention of Money Laundering (maintenance of records) Rules, 2005 (PMLR) under the said act have been published in the Gazette of India on 1st July, 2005 and from time to time thereafter by the Department of Revenue, Ministry of Finance, Government of India.
As per the provisions of the PMLA, all designated Non-Financial Businesses and Professions (DNFBPs), which include dealers in precious metals and precious stones (DNMS) who are the Reporting Entities (REs), shall have to adhere to client account opening procedures and maintain records of such transactions as prescribed by the PMLA and the rules notified there under. The DNFBPs shall also be required to report specified transactions, including the suspicious transactions with a view to provide a deterrence to the money-laundering and financing of terrorism.
Moreover, The Unlawful Activities (Prevention) Act, 1967 (as amended) requires all dealers in precious metals and precious stones (DPMS), irrespective of whether they are reporting entities under PMLA or not, to prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of the individuals or entities listed in the Schedule to the Prevention and Suppression of Terrorism (implementation of Security Council Resolutions) Order, 2007 or any other person engaged or suspected to be engaged in terrorism and thus prohibits them from entering into a transaction with a client whose identity matches with any person in the sanction list or with banned entities and those reported to have links with terrorists or terrorist organisations. Similarly, all of the above applies to The Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005.
It must be borne in mind that the PMLA has not just been sprung suddenly on the gold and diamond industry. It has been in existence in an earlier avatar since 1967. Now, apart from precious metals dealers and precious stones dealers, even chartered accounts, etc. have come under the purview of the act and come under Non-Financial Businesses and Professions (DNFBPs). They now fall under the REs (reporting entities) and cannot hide behind client confidentiality.
With India being one of the largest consumers of gold (importing on an average 800 tonnes of gold per annum, add the other precious metals and the quantum of precious metals imported into the country is huge) and being the largest processor of rough diamonds in the world (14 out of 15 diamonds being processed in India), the volume of trade could be of gargantuan proportions. The sheer volume of accounts that are to be opened as well as the transactions to be monitored by the DPMS cannot even be imagined. (Here we are talking of only gold and diamonds. But, add other precious metals and other precious stones as well).
The trade feels that the entities could find this burden impossible to handle. As most of the clerical work could only be done by junior staff members, the burden of responsibility would be enormous on the said entities (DNFBPs). It could increase the cost of doing business manifold as well. It would also entail appointing a senior manager/director to oversee the daily monitoring process. Moreover, the trade believes that the dealers, etc. (DNMS) were in the business of buying and selling precious metals as well as rough stones as well as polished stones. They simply did not have the ability or wherewithal to being a sentinel for the authorities. They were not qualified to be investigating agencies for the government. It was all just not feasible to execute.
However, there is another school of thought as well. The contention here is that since we are Indians, we should respect Indian laws. We have a responsibility to report as REs under PMLA. Sustainability reporting has also been made compulsory for top 500 listed companies as well. Therefore, it is imperative for Indian bourses as well as commodity exchanges to recommend to its clearing members as well as good delivery refineries to maintain records and report on the same as REs under PMLA. Hopefully, even the GIFT City-based India International Bullion Exchange (IIBX) too respects the Indian laws and make similar recommendations to all its members on similar lines. The entities would be more like a bank, especially in their reporting. Therefore, there is no need to make a hue and cry about it. It is doable.
Then, in view of the Risk Based Approach (RBA) adopted by the Financial Action Task Force (FATF) for dealers in precious metals and precious stones and the recommendations made by it, these guidelines in the context of existing anti-money laundering law in the country, have been issued for the reporting entities (REs) in respect of PMLA and for all dealers in precious metals and precious stones under Unlawful Activities (Prevention) Act (UAPA) and the Weapons of Mass Destruction Act (WMDA). The guidelines provide an overview on the background and essential principles that concern ML (Money Laundering), TF (Terrorist Financing) and PF (Proliferation Financing) under PMLA, UAPA and WMDA as a detailed account of the procedures and obligations to be followed by all DPMS in combating risk of ML, TF and PF. The bottom line is that it is an international obligation. Quite simply put, precious metals and precious stones dealers have to run their organisations like a bank now. They have to look at KYC of all customers, even those with very low value or zero.
In the past, the maxim was, “Let hundreds of criminals go scot free, but no innocent should be punished”, but now things have changed. It is for the accused to prove his innocence, he is presumed to be guilty unless proven innocent. The system has turned on its head. The government has shown its resolve when it squashed the trade protests against imposition of excise duty. Even a 48-day trade bandh by retailers could not budge the authorities. It is quite capable of forcing a bitter medicinal pill down the throat of patients if it feels that is warranted. The trade should be pragmatic and point its genuine difficulties in executing the provision of the act while reporting on the same by REs under PMLA.
In many ways, the government has made, both the gold and the diamond trade, at various times, to swallow the bitter medicinal pill (excise duty, GST, now PMLA et al). The authorities (mainly the bureaucrats) often view the gold (other precious metals as well) traders as being smugglers, hawala racketeers, round-trippers, opposing implementation on hallmarking since 2007, etc. and being responsible in making the parallel economy more robust. This bias against the bullion trade continues despite better communication with the trade and more two-way dialogue between the government and the trade. Although, the diamond trade is far better represented by its export trade body and the government often consults with it. The trade still receives jolts from the government at various times. The authorities hold a grouse against the trade for not calling out on the scamsters who went absconding from India. So, what then is a way out of this rigmarole?
There is merit in the recommendation made in some quarters for the trade (both gold & other precious metals and diamonds) to have self-regulatory organisations (SROs). It is very true that SROs should have been put up by the trade quite some time ago. Is it already past that stage? Has the government gone too far ahead with its stringent laws? But, then as they say; it is better late than never. These SROs should not only recommend best trade practise for the trade, but also try and weed out the black sheep in the trade. The SROs should be proactive and ensure that trade does not need any policing by the government. The ecosystem should be evolved in such a manner that the government is not required to bludgeon the trade into submission for every small change in laws, taxes, etc. The trade on its part should ensure that the businesses in the trade are not only run efficiently, honestly with the best trade practises acceptable internationally, but they should appear to be so for one and all. The government on its part should then be provided with an atmosphere of trust that encourages it to have minimal or zero interference in the running of the trade. It appears to be a utopian dream as of now. But, not an improbable one!