Fraudulent activity in South Africa’s second-hand gold market has been happening for years. But the details contained in a 2021 judgement suggests that the scale of this trade may be truly staggering.

The Yacoob judgement refers to the South African Revenue Service (SARS) withholding Value Added Tax (VAT) refunds, totalling R1.8 billion, claimed by Germiston-based gold trader Rappa Resources. Rappa’s guilt or innocence has certainly not been proven in court and the Yacoob ruling – that it is ‘inherently unfair’ for SARS to withhold VAT refunds while the revenue authority’s investigation is incomplete – is in fact a win for the gold trader.

The type of fraud raised in this case has been understood for years. All gold mined in South Africa is processed at a single point – by Rand Refinery in Germiston – before export or local sales. The refinery also processes gold mined in other African countries, notably Ghana and Mali. While it is difficult to get precise figures, a volume of gold – equivalent to perhaps one-third of South African production – is turned into bullion Kruger Rands by Rand Refinery’s partner, the SA Mint. The original bullion Kruger Rand (introduced in 1967) contains exactly one ounce of 22 carat gold and is considered legal tender which means that those who purchase it (including members of the general public) do not pay VAT.

Gold exports are also zero rated for VAT. However local gold dealers, who buy local second-hand gold scrap for reprocessing, are required to pay the standard 15 percent VAT. If, however, the gold is exported the company can claim a refund from SARS. The SARS investigation into Rappa Resources, parts of which became public in the case ruled on by Judge Yacoob, revealed that the tax authority is contesting a claim, by the gold trader, for a VAT refund of R7 billion for the period January 2019 and March 2020. SARS is essentially saying that no VAT was paid on the original purchase of ‘scrap’.

Although the gold price and Rand value both vary over time, a conservative estimate (assuming a gold price of US$1 800/oz) suggests that Rappa Resources is claiming a VAT refund for exporting about 50 tonnes of gold. That figure is slightly above half the tonnage mined in the country in 2020 and has to have set alarm bells ringing. In fact when the figures for another apex gold trader, Aesha Refineries (which appears to ceased operations since the SARS investigation became public knowledge), the export figure rises to 83 tonnes per year.

Last year, Rand Refinery estimated the legitimate South African gold scrap market to between two and five tonnes. This would suggest the difference is made up in illicitly-sourced gold for which there are two main channels – illicit artisanal mining conducted in discontinued mines and illegally smelting bullion Kruger Rands. In terms of the South African Reserve Bank Act of 1999 (which consolidated older legislation), it is illegal to smelt, or in fact alter in any way, any legal tender, which includes bullion Kruger Rands.

The essence of the problem is the hundreds of second-hand scrap dealers which are all-but unsupervised. The case overseen by Judge Yacoob mentions 65 other companies which are implicated. There are many smaller dealers below this. Anyone walking down St. Georges Mall in Central Cape Town is likely to be approached by a person handing out pamphlets offering to buy ‘scrap’ gold. These dealers are required to pay VAT on any gold purchased and the overwhelming suspicion is there is very little compliance. Somewhere between their operations and the aggregation for export lies an entire industry generating false VAT documentation.

The SARS investigation suggests that many of these small companies are false fronts. Some individuals named as directors deny any involvement, some addresses given to SARS or used for banking purposes have been found to be false or non-existent while payment for ‘scrap’ gold is usually in cash or via third party bank accounts.

A report by the AmaBhungane Centre for Investigative Journalism lists three ‘second tier’ suppliers, responsible for most of the supposedly ‘scrap’ gold supplied to Rappa Resources. Among their shortcomings are SARS findings of fictitious payments, directors with convictions for illegal dealing in precious metals and what AmaBhungane describes as ‘a massively convoluted supply chain to throw off authorities’. All three outfits are accused of dealing in (allegedly smelting) mainly (VAT exempt) bullion Kruger Rands.

There has been some emphasis on the alleged shortcomings of Rand Refinery in the saga. This is somewhat unfair as Rand Refinery puts considerable effort into ensuring the integrity of its own supply chain, making sure, for instance, that illegal artisanal gold is not laundered through its operations. Its efforts cover also Ghana and Mali and to expect it also police the industry downstream of its operations would be onerous. That is appropriately the responsibility of SARS and the South African Police Service’s Directorate of Priority Crime Investigation. Both institutions require rebuilding in the wake of the state capture era.

The role of illicit artisanal miners – Zama Zamas – is not dealt with in the court papers, presumably because there is no paper trail. Research by the European Union funded ENACT project estimated that the shadowy industry mined at least 34 tonnes of gold between 2021 and 2016. The industry is notoriously unsafe (for miners), exploitative and violent. There is also a very limited understanding of how it launders its product.

South Africa is no longer a major gold producer, ranking only 11th in the world, and literally orders of magnitude behind China, Russia and Australia, the world’s three biggest producers. But the legacy of South Africa’s one-time dominance has gifted the country a number of strengths. One is Rand Refinery, the only London Bullion Market Association (LBMA) accredited refinery in Africa and one of five ‘benchmark’ refineries in the World. Another is the Kruger Rand, probably the world’s best-known gold coin – ahead of the American Gold Eagle, Canada’s Golden Maple Leaf, Australia’s Kangaroo, China’s Panda and Sovereign (not to be confused with the 15th Century coin of the same name). It is a branding icon. But being caught up in the VAT fraud being perpetrated in South Africa’s gold market could do incalculable damage.