Last October, we reported that the world's oldest gold trader was for sale after a massive money laundering scandal may have terminally crippled one of the most iconic names in the business. According to the Financial Times, Canada’s Bank of Nova Scotia was exploring options for its gold business ScotiaMocatta, including a possible sale of Canada's most popular precious metals trader. As reported at the time, Scotiabank made the decision to sell ScotiaMocatta following a massive money laundering scandal centered on a U.S. refinery that involved smuggled gold from South America.
The ScotiaMocatta business, a mainstay in PM trading, is one of London’s main gold trading banks and is being sold by JPMorgan.
As the FT further reported, while physical gold trading has been in a cyclical decline in recent years, the “straw that broke the camel’s back” in prompting the sale was Scotiabank’s lending to Elemetal, a precious metals refinery in Dallas. Scotiabank was one of its biggest lenders, they said. The problem emerged in March, when US prosecutors accused workers at a subsidiary of Elemetal, NTR Metals in Florida, of a money laundering scheme using “billions of dollars of criminally derived gold” mostly from Peru.
This is where the story took a turn into a slightly surreal detour.
NTR imported more than $3.6bn of gold from Latin America between 2012 and 2015, the court documents allege. Two of the accused, Samer Barrage and Juan Granda, pleaded guilty to a charge of money laundering in plea deals. After the story came to light in March, Elemetal was kicked off the London Bullion Market Association’s “Good Delivery List” of gold refiners.
To be sure, this was an almost instant death sentence for the company as buyers will usually only buy gold from a refiner on the list. Indeed, in the same month, New York’s Comex futures exchange said it was no longer taking gold from Elemetal for delivery against futures contracts in the world’s biggest gold futures market.
And this is where the scourge of gold rehypothecation emerged, as in the scandal surrounding Elemetal, it became impossible for holders of Elemetal gold to sell the gold bars on, leaving them sitting in bank vaults, according to traders quoted by the FT. Buyers are reluctant to take the gold, given the investigations.
This means that hundreds of millions in loans made to Elemetal by ScotiaMocatta are suddenly stuck in limbo. It also means that one of five bullion banks that settle gold trades in the London market, the world’s largest, has effectively been blackballed. It was built on the 1997 purchase by Scotiabank of Mocatta Bullion, which traces its roots back to 1671. And with Mocatta crippled, Scotiabank, which has the biggest foreign presence of any Canadian bank, is focusing its international strategy on the Pacific Alliance, a Latin American trade bloc comprising Mexico, Peru, Chile and Colombia. It will also hope to find a willing Chinese buyer for the gold trading operation.
Well, fast forward 4 months later, when the sale process of the terminally tainted Scotia Mocatta appears to have failed, because according to Bloomberg, Bank of Nova Scotia "plans to keep" its ScotiaMocatta metals trading business, ending months of speculation on a potential sale.
The Canadian bank wasted no time to give the failed sale process a favorable spin:
"We recently concluded a strategic review of this business and I’m pleased to confirm that most of our key services and our key markets and key clients will be continuing," Dieter Jentsch, group head of global banking and markets, said Tuesday on a conference call with analysts.
The bad news: Scotia Mocatta will now see massive layoffs: "We will be exiting some markets, we will be simplifying our product suite, and we’ll be much more judicious about our allocation of capital and liquidity."
As Bloomberg reminds us, Scotiabank acquired the London Metal Exchange gold-dealing unit from Standard Chartered Plc two decades ago.
The business has more than 160 employees and 10 offices worldwide, including New York, London, New Delhi, Mumbai, Hong Kong, Shanghai and Singapore, according to the bank’s website.
And so the chapter on the world's oldest gold traders comes to a close: ScotiaMocatta traces its origins to 1671 and is one of a dozen firms behind the London gold fix. It’s also part of a group of nine banks that sets the silver price in London. And, in light of the ongoing scandal that may have permanently tainted Scotia, preventing it from winning new warehousing business, the fabled history of one of the most venerable precious metal traders is likely to come to an end in the very near future.