(This March 6 story corrects to delete Metalor from fourth paragraph of second section, and edit sixth paragraph of fifth section to clarify suppliers' status)
By Brenna Hughes Neghaiwi, Mitra Taj and Peter Hobson
LA RINCONADA, Peru (Reuters) - From the Andes mountains, thousands of artisanal gold-diggers for years sent fragments of metal to a Swiss valley. There, a refinery purified the gold to sell to banks, watchmakers, fine jewellers and electronics companies. It circulated as ingots, phones and trinkets - some branded with names including Apple and Tiffany & Co.
A trade worth billions of dollars, it was championed by the Swiss refinery, Metalor Technologies, as part of a program with Peru's government to integrate gold prospectors into the economy.
In early 2018, Metalor stopped taking the gold. The reason: It couldn't be sure where the metal came from. Peruvian prosecutors had come to suspect Metalor's main supplier was a front used by criminals to filter illegally produced gold into the world market.
Metalor is not under investigation in Peru, and there is no suggestion of illegality by the refiner. But the story of the project - and of how it was monitored by the companies and regulators involved - illustrates the risks of illicit commerce that lie beneath gold's glamour.
Peruvian authorities are exploring criminal charges against Metalor's supplier, a trading firm named Minerales del Sur, after seizing a cargo worth nearly $4 million destined for Metalor in 2018, prosecutorial and customs documents seen by Reuters show. Customs inspectors found some participants in the program were selling more gold than they could produce, according to customs reports. The prosecutors allege these inflated volumes suggest Minerales del Sur was a cover to launder metal from illegal sources, such as mines financed by narcotics dealers or in banned sites in the Amazon rainforest.
Minerales del Sur, which declined to comment for this article, has told Peruvian authorities it obtained gold legally.
BULLETS THROUGH THE HEAD
As global hunger for gold accelerates, so too do problems in its production.
Industrial mines have long been accused of depriving indigenous people of land, polluting their homes and breeding crime. Now, high gold prices are making it attractive for individuals to try what the industry calls artisanal and small-scale mining. Every year around 500 tonnes, worth $25 billion at current prices, of gold is dug in this way, according to industry estimates - 15% of all the gold that is mined.
Metalor is one of at least five major refineries, including two in the United States, which have come under legal scrutiny in the last two decades after taking artisanal gold from countries including Colombia and Peru, where most of the world's cocaine is produced and narcotics gangs have invested in gold production. One U.S. refinery closed after its employees were jailed for trading illegal and smuggled gold.
This program was supposed to be part of the solution - a state-backed scheme to bring informal diggers into the formal market and improve their conditions.
Minerales del Sur was hired to collect and check gold from small miners across the highland region of Puno, which extends from the fringes of the Amazon to Lake Titicaca. The region's apex, and the source of some of the gold, is a shantytown of about 50,000 people located 16,700 feet above sea-level. Called La Rinconada, it sits below a glacier-capped mountain known as La Bella Durmiente, or Sleeping Beauty.
Said to be the highest permanent human settlement in the world, La Rinconada is no fairytale. Last year, authorities reported rescuing at least 68 trafficking victims from the shantytown's nightclubs. Last April, seven gold miners were found in a tunnel beneath the mountain with bullets through the head.
Media organizations and NGOs repeatedly published reports that Metalor's Peruvian gold suppliers may have been infiltrated by criminals. The Swiss company - which prosecutors estimated processed about 106 tonnes of gold worth $3.5 billion from Minerales del Sur since 2001 - said it was confident of the checks it imposed on its suppliers.
"To our knowledge, we believe that this was done in a proper way," said Metalor CEO Antoine de Montmollin. "But due to the complexity of the supply chain, we cannot have 100% certainty. We await the conclusion of the current investigation."
In 2018, Metalor supplied gold to firms including Tiffany & Co., Samsung Electronics Co. and Apple Inc. Gold is used to conduct electricity in phones and other electronic devices.
Apple said it is committed to setting the highest standards for responsible sourcing, and has stopped working with 60 gold refiners since 2015 because they were unable or unwilling to meet its standards. It declined comment on whether it continued to accept gold from Metalor.
Tiffany said it upheld industry-leading standards aligned with its commitment to responsible sourcing. It said Metalor was among several refiners which provided gold used in non-jewellery items. Its website shows these include $375 golden drinking straws and $1,500 paper-clips.
Samsung declined to comment.
Metalor said its executives and local staff made dozens of visits, including to Minerales del Sur's offices, to ensure suppliers were operating legally. Each time gold was shipped, it also verified documentation to ensure the metal came only from members of the state formalization program.
But Metalor told Reuters it did not inspect mines. And its executives were not aware of two independent audit reports, produced for a Peruvian state firm involved in the program and seen by Reuters, that found flaws which made it easy for gold from unknown sources to be slipped into shipments.
Peruvian prosecutors have said their investigation will remain open in a preliminary phase through 2020. No charges have been issued, and the case may be closed if not enough evidence is assembled.
Peru's Energy and Mining Ministry said it was working on improvements to the program, which it said has helped hundreds of thousands of people. In 2014, the incomes of as many as 600,000 people in Peru depended on artisanal and small-scale mining, according to estimates accessed on Delve, a global platform for information on such mines.
"You're not going to find any country where traceability of small-scale mining is 100% trustworthy," Lenin Valencia, director of mining formalization in the ministry, told Reuters. Small-scale mining is so important to society and the economy that compromises have to be made, he said. "If we stuck to the law, there probably wouldn't be enough jails in the country to imprison so many people."
Minerales del Sur declined to comment. A company representative told a judge in Lima its gold was all sourced legally. Daniel Jo Villalobos, attorney for Minerales owner Francisco Quintano Mendez, did not respond to emails.
Metalor has been owned since 2016 by Japan's biggest gold retailer, Tanaka Kikinzoku, which said it had nothing to add.
A COMPLICATED PLACE
Peru is the biggest gold producer in Latin America. Its illegal gold trade, worth an estimated $4.38 billion in 2015, is at least twice as big an industry as drug trafficking, according to a 2017 report by the Peruvian banking regulator's Financial Investigation Unit.
Energy and Mines Ministry data shows Peru's small-scale miners produced almost 19 tonnes of gold in 2018 - more than any single industrial mine in the country. Just over a third of its informal gold production that year was recorded in Puno, the region that was supplying Metalor.
More than one in three people live in poverty in Puno, a land of rocks shot through with gold. Since 2000, rising gold prices have lured more to try their luck - in riverbeds, the rainforest, and in tunnels dug so haphazardly they risk collapse.
To extract the metal, some use toxins including mercury which they sluice into waters such as Lake Titicaca, where studies have documented high levels of heavy metals in fish. On satellite maps, pools near mining areas show up sulphurous yellow and neon green.
Miners in La Rinconada melt ice from the glacier to process ore. Yellow plastic bags of garbage slide uncollected down the snowy slopes; raw sewage collects in the hollows. The main drag bristles with black-market pop-up stalls marked "Compro Oro" ("I Buy Gold") where men and women sell specks of metal.
Metalor's supplier Minerales del Sur had two gold-buying outlets in La Rinconada. Its headquarters in the town of Juliaca were shuttered when a reporter visited in June. A man who answered the door said the company was no longer operating.
Metalor showed Reuters data from its suppliers in the last four weeks it took gold from the Peruvian program. Almost one-third of the nearly $30 million worth of gold sent to the refinery in Switzerland over those four weeks came from suppliers who were identified in the Peruvian prosecutorial documents as "suspicious," based on customs inspectors' findings.
La Rinconada produced only a small share, according to the records. It's hard to be sure of the provenance: Customs inspectors found some of the names on the list were not producing gold where they said.
For example, in March 2018, Metalor accepted more than 40 kilos of gold (worth about $1.7 million) from a company outside La Rinconada which customs officials said in a report later that year they couldn't find at the address listed. When the inspectors phoned, the person they reached told them the firm was currently "at the investment stage," the report said.
Last June, a Reuters reporter in La Rinconada watched as hundreds of police officers in riot gear swept through the shantytown. A court had ordered miners out of ground owned by a local family.
But the miners refused to move. They massed into a blockade and set off explosions of the dynamite they use to split the rocks. After a two-hour standoff, the police left.
"La Rinconada is a very complicated place," said Federico Chavarry, who has spent the past decade as an environmental crimes prosecutor in Puno. He said the state lacks the resources to rein in illegal trade in the shantytown, because it makes so much money for many people.
"I think it spun out of the government's hands a long time ago."
Valencia at the mining ministry said prosecutors should be more active in controlling organised crime that fuels abuses. "Right now, we don't just have informal economies, we have criminal economies," he said.
In one of two health clinics in the shantytown, physician Nelson Gadea, who has lived there for seven years, said that when he arrived he was shocked by the violence. The mercury the miners use causes mood swings, he said, flipping through pictures on his cellphone of patients disfigured by knife wounds: "I don't go out after 6pm."
Men offer lighted cigarettes and coca leaves to the mountain spirits to win their favour. Women, barred by the men from the mines, scavenge on mountains of scree.
The men "bring the rocks, dump them and we recycle the gold they didn't see," said one scavenger, Carmen Inofuente.
"There've been a lot of accidents, rocks fall on us, there have been deaths, too."
There is no question that conditions in La Rinconada are very difficult, Metalor said; its aim had been to help.
From the Andes to Metalor's headquarters is more than 6,000 miles and a world of contrast.
With views of the Jura Mountains, Metalor's neat lab and offices in Marin-Epagnier, a village at the tip of Lake Neuchatel, sit in "Watch Valley," at the heart of Switzerland's watchmaking industry. The country exported timepieces worth more than $21 billion in 2018: One in every three watches shipped out of Switzerland is made of precious metal.
In a conference room in Metalor's headquarters, CEO de Montmollin - who joined in 2005 and has been running the company since January 2019 - said artisanal gold had made up less than 5% of its annual throughput. Projects to make artisanal gold easier to trace face challenges, he said.
Metalor refines roughly 500 tonnes of gold a year, around one-tenth of the total handled by the main global refineries. To be certain metal has been fairly produced often demands working with small quantities from single, closely monitored mines.
That adds costs that many end-users are not yet willing to pay, de Montmollin said.
Metalor first started buying gold from small miners in Peru in the late 1990s and has experienced problems before: In 2004, U.S. authorities fined one of its subsidiaries for being slow to respond after employees found couriers were picking up gold from the refinery and repackaging it in shampoo bottles to smuggle to South America. The company improved its compliance systems.
In 2007, according to Swiss prosecutorial documents seen by Reuters, Switzerland's Attorney General opened an investigation into two Peruvian mining companies it suspected had laundered drug profits through cash and gold sent for refining to Metalor. Metalor said it stopped buying and refining gold from them in 2007. The Swiss closed their inquiry in 2008.
Jose Camino, Metalor's legal counsel since 2014, said these cases emerged under previous managements and were no reflection of Metalor today.
Instead, Metalor worked with government officials on a new approach: Informal miners in Peru could sell their gold without fear of prosecution if they submitted a sworn statement saying they were committed to establishing legal tax-paying businesses, or becoming "formalised."
A Peruvian state company, Activos Mineros, was tasked with commercialising the gold. In 2014, it hired four companies nationwide to buy it at prices above the black market. Minerales del Sur, which already did business with Metalor, won the tender for Puno: It would check that gold genuinely came from miners on the program, and smelt the fragments it collected into bars. These, it would fly to Switzerland to be refined.
The following year, Minerales del Sur's shipments to Metalor more than doubled to some 16 tonnes, worth over half a billion dollars, according to prosecutorial documents seen by Reuters.
In a press release in 2015, Metalor said the project had implemented "clear reporting and verification of supply chain of minerals."
But the program is flawed, say prosecutors, auditors and the government. One problem, said Valencia at the Energy and Mines ministry, is "basically, anyone could sign up." This means some of those in the program may not be miners.
Another gap: Rather than signing up for taxes and regulation, participants need only swear they intend to work toward that goal.
If they do, their names are listed in a "Commitment Register" at the mining ministry. Miners with such sworn declarations have in effect been shielded from prosecution for illegal mining.
That, said environmental crimes prosecutor Chavarry, has created an atmosphere of impunity. He said he, too, had tried in vain to enforce the law in La Rinconada. He once seized a truck with 200 kilos in contraband explosives. "They didn't let me take it," he said of the suspects. "They threatened to burn the truck, to burn me alive and to burn the police officers supporting me alive."
Peru's deadlines for miners to formalise have been repeatedly extended. So far, about 9,000 people have formalised out of around 200,000 on the Commitment Register nationwide, said Valencia.
Metalor's gold came from suppliers on the Commitment Register or who had been formalised, which was the basis of its assurances that its suppliers were legal. "We were checking all the documentation one by one," said Camino. To this day, Metalor said, all but one of the suppliers are still listed on the Commitment Register.
But Metalor's checks missed flaws flagged years ago. An auditor's report, reviewed by Reuters, found problems already in 2015, a year after the program started.
The auditor, Rejas, Alva y Asociados, sent inspectors to Minerales del Sur's operations in the region. In sites including La Rinconada, they found many miners worked mainly as unpaid labourers for contractors, which sold gold to suppliers on the register.
It's a system called "cachorreo" - a term with no direct translation from Spanish - and miners in La Rinconada told Reuters it is still widespread. Companies with legal concessions rent tunnels to contractors who hire hundreds of miners - as well as the women scavenging for rocks on the mountainsides - to extract metal.
Most of the time, the concession-holders take all the miners' rocks but do not pay them for an initial period. This is illegal, said Cesar Ipenza, a lawyer and an expert on illegal and informal mining.
But after labouring for a while for the concession-holder, diggers are free for a short time to take whatever they can carry. Instead of wages, benefits, or social security, they live by crushing and processing the rocks and selling their gold to "Compro Oro" stores.
La Rinconada miner and labour activist Filiberto Arapa said that of the estimated 18,000 miners in the shantytown, only about 3,000 are legal. "The legal workers have their documents and benefits," he said. "The rest don't even know who they're working for."
Metalor said it had not been aware of the practice.
Several miners in La Rinconada said they were not interested in formalising.
"If you work for a formal company, you receive labour benefits but make less," said Martin, a 36-year-old former farmer. He said he digs for one day in six entirely for himself and pockets between 1,000 and 2,000 soles a month. Peru's minimum wage is 930 soles, or $275. "For me, it's better to make a little more" by mining illegally, he said.
A second audit of the program, also reviewed by Reuters, found more gaps.
During 2015 and 2016 the auditor, Inveritas Global Holdings, visited the 10 biggest gold suppliers in the scheme - five in Puno, and five in the Amazon region - and found four of Minerales del Sur's top five suppliers in Puno were booking big sales without mining at all. It also found Minerales del Sur had not provided evidence it checked its suppliers.
"They're using their sworn declarations as legal guise to commercialize gold of unknown origins," concluded the report, which states that it was sent to Activos Mineros in May 2017.
Activos Mineros said it could not comment in detail while the investigation is underway. But it said none of the companies it hired had criminal convictions when they tendered. Minerales del Sur, it added, did not come under investigation until July 2018 and has not registered any transactions in the program since then.
Valencia said the mines ministry did not see the audit reports, and Metalor executives told Reuters they had not seen them either.
Metalor said it had been reassured the program was working by Activos Mineros' decision in 2018 to renew its contract with Minerales del Sur. "If you renew the contract, that means that everything is okay. If not, you don't," Camino said.
The refinery said it will focus in future on gold from industrial mining companies, whose origin is clearer. It was a difficult decision, it said - in part because Metalor pulling out of the Peruvian program means that buyers with less concern for good practice will step in.
"It's better to be part of something which is not perfect, but that at least things are improving, than doing nothing," said de Montmollin. "We regret the decision, because gold will find its way, either way."
(Brenna Hughes Neghaiwi reported from Marin-Epagnier, Mitra Taj from La Rinconada, Peter Hobson from London; Additional reporting by Antoine Harari in Lausanne; Edited by Sara Ledwith)