Case Study: Trust Isn’t a Compliance Strategy
Luc had seen many red flags in his career, but this one glinted with complexity. The email came from a regional compliance team monitoring activity in a neighboring high-risk jurisdiction. A dealer in precious metals and stones—an existing client of the bank—had just processed a large gold transaction: €28,000 worth, bought in cash from a walk-in customer. The deal raised no alarms locally. After all, the customer was introduced by a longtime family friend of the dealer. There were no KYC checks, no verification of source of funds, and no real documentation—just trust and a handshake.
Luc raised an eyebrow. In the EU, such a transaction is anything but standard. He brought the case to Ella and Marcus, both senior members of the EU compliance risk advisory team. Ella had previously overseen onboarding reviews for high-value traders and didn’t mince words:
“Personal referrals don’t override AML requirements. Dealers in precious metals and stones are considered obliged entities under the EU AMLD. A €28,000 cash deal, from an unknown individual with no background verification? That’s a classic trigger for Enhanced Due Diligence.”
Marcus, who specialized in cross-border risk, agreed.
“Especially in high-risk jurisdictions, the FATF flags dealers like this as prime targets for money laundering—gold is liquid, valuable, and often used to obscure illicit finance. It’s a risk-based obligation, and this screams high-risk.”
Luc’s team recommended a full review of the dealer’s recent transactions and AML controls. The transaction was escalated internally, flagged for potential suspicious activity, and ultimately resulted in a Suspicious Transaction Report (STR) filed with the local Financial Intelligence Unit (FIU). Further investigation revealed a pattern—several high-value cash purchases over the last three months, all from loosely documented sources.
Regulatory Insight: CDD in the Precious Metals & Stones Sector
Who Is Covered?
Under the EU’s Anti-Money Laundering Directives, particularly 5AMLD and 6AMLD, dealers in high-value goods—including those trading in precious metals, stones, and jewelry—are designated as “obliged entities.”
This means they are subject to:
- Customer Due Diligence (CDD)
- Suspicious Activity Reporting (SAR/STR)
- Record-keeping
- Enhanced Due Diligence (EDD) for high-risk transactions
Key CDD Failures in the Case
1. No Verification of Identity or Source of Funds.Even with a referral, the dealer failed to identify or verify the customer's identity. For transactions over €10,000 or multiple linked transactions exceeding that threshold), CDD is mandatory.
2. No Business Rationale or Documentation.There was no explanation provided for the source of the gold, the customer's business activity, or reason for the transaction. This lack of transparency should have prompted further inquiry.
3. Operating in a High-Risk Jurisdiction. The dealer’s jurisdiction had previously been flagged by the Financial Action Task Force (FATF) for weak AML controls, potentially appearing on its "grey list" or "black list" or exhibiting characteristics like high corruption. This alone should have triggered Enhanced Due Diligence.
4. Over-reliance on Personal Referrals.Trust-based networks can be exploited for illicit purposes. Regulatory frameworks require objective evidence, not subjective trust.
What Should Have Happened Instead?
CDD Measures
- Verify customer identity with official documents.
- Understand the purpose and nature of the transaction.
- Obtain information on the source of wealth/funds.
EDD for High-Risk Scenarios
- Conduct deeper verification, applied proportionately to the assessed risk of the customer and jurisdiction.
- Seek supporting documentation for the asset's origin (e.g., invoices, customs declarations).
- Monitor for patterns (e.g., repeated high-value purchases, structuring).
- Be alert for red flag indicators specific to precious metals and stones, such as: unusual payment methods (e.g., large third-party payments, virtual assets with no clear link); transactions inconsistent with the customer's known business or personal profile; customer reluctance to provide required information or documentation; and frequent changes in transaction patterns, sizes, or counterparties without clear justification.
Report Suspicious Transactions
If something doesn’t add up—like unexplained value transfers or transactions with no economic logic—a Suspicious Transaction Report (STR) should be filed with the national FIU.
Conclusion
In the world of compliance, personal relationships and long-standing trust can create blind spots. But regulations are clear: CDD must be performed on all qualifying transactions, regardless of how "safe" a customer may appear.
The case of the gold dealer underscores a key lesson: compliance isn’t about who you know, but what you can prove. In high-risk sectors and jurisdictions, overlooking due diligence opens the door to money laundering, regulatory penalties, and reputational damage. For Luc and his team, this case reinforced the need for vigilance—even when the deal shines.
