ScotiaMocatta Gold Scandal
ScotiaMocatta, which is the world’s oldest bullion trading company, is currently on the sales block. The company is a division of Bank of Nova Scotia (NYSE:BNS), which is one the largest Canadian banks, based on its market cap size.
BNS decided to put the division up for sale following a massive money-laundering scandal at ScotiaMocatta. The scandal involves a U.S. precious metal refiner, smuggling, and money laundering from South America.
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The proper method of acquiring bullion was not followed, and the metal was coming from individuals who were linked to drug trafficking and other criminal activities. Of course, this is not great news for the business, shareholders, or anyone else who was involved.
BNS has a market cap of more than $70.0 billion; will this controversy impact that market cap? How will this impact the company’s present and future business operations? Will ScotiaMocatta still sell precious metals? What are the next steps that will be taken by BNS?
All these questions and more will be looked at in depth and answered below. But first, let’s take a look at the overall picture of the company.
Bank of Nova Scotia Business Overview
Headquartered in Canada, BNS is considered Canada’s most international bank. The company’s operations are very diverse as well, including personal and commercial banking, wealth management services, private banking, investment banking, and capital markets segment.
ScotiaMocatta has been part of the BNS network for almost two decades. There are 10 ScotiaMocatta offices around the world; its largest office is in London, England.
ScotiaMocatta is focused on precious and base metal trading, financing, hedging, and physical metals distribution. Other services include investment and corporate banking, research reports, derivatives trading, foreign exchange trading, and mining and project finance.
Mocatta was a stand-alone company at one point, and has been operating in the bullish segment of the market for more than three centuries.
ScotiaMocatta Laundering
The scandal broke out in March, when U.S. prosecutors accused NTR Metals of money laundering. NTR, which is a subsidiary of Elemetal LLC (based in Dallas), was allegedly using gold to move money across borders and preventing the tracking of cash movement.
NTR metals allegedly imported more than $3.6 billion of gold from South America between 2012 and 2015—the majority of the gold coming from Peru. According to the case, the yellow precious metal was being illegally purchased and mined, meaning there were no permits or licences. This resulted in no tracking of the origin of the bullion. (Source: “Salesman Who Bought Gold in Jungle to Fight Laundering Case,” Bloomberg, March 20, 2017.)
According to prosecutors, the scheme was centered on drug traffickers and other crimes by the owners of the bullion. However, there have been no charges laid in this case that are directly related to any drug activity.
Here is how the operations were allegedly set up: NTR Metals would purchase gold from illegal mines in the Amazon rain forest and bring it to the United States. Then NTR would arrange to refine the metal and certify it under the NTR brand. Then the gold was sold in the U.S. to ScotiaMocatta and NTR Metals would get a service fee. Once the gold was sold off, the funds were sent to individuals who were linked to drug trafficking and other crimes in South America area.
So far, three individuals have been charged in the case. Initially, Juan Pablo Granda and Samer Barrage were charged with conspiracy to commit money laundering. One month later, charges were also laid against Renato Rodriguez.
Barrage and Granda both pled guilty to the charges of money laundering, so they were convicted. Rodriguez was released on a $100,000 bond and is going to fight his charges in court. (Source: “Two Miami men convicted of laundering billions in Amazon gold,” Miami Herald, September 5, 2017.)
When news broke out that the companies were involved in money laundering, NTR Metals and Elemetal were kicked off the London Bullion Market Association’s “Good Delivery List” of gold refiners. This pretty much will close the door on their business of certifying bullion.
Another a scrapped relationship is with the New York Comex Futures Exchange, which has said it will no longer accept any gold from Elemetal. The New York Comex Exchange is the biggest gold futures market in the world.
Another impact is on current holders of bullion that was certified by NTR Metals. Buyers and traders are afraid to purchase that gold, due to the bad reputation of the company. This will result in those gold bars remaining in bank vaults, or individuals selling that bullion below market value.
Scotiabank Next Steps
Before the news of money laundering came out, the Bank of Nova Scotia was already looking to sell its ScotiaMocatta division. It had hired JPMorgan Chase & Co. (NYSE:JPM) as an investment bank to broker a deal to sell the unit to a Chinese buyer.
There are now two possible scenarios: 1) ScotiaMocatta is sold off and BNS has no more exposure to the bullion segment of the market, or 2) no sale can be made, so BNS keeps the business unit and shrinks it.
By selling ScotiaMocatta, there could be a deflated value being agreed upon, due to the scandal. There could be more charges coming out, which would again hurt the overall business value.
It also doesn’t help that gold has been trading at prices that are off of its highs from six years ago. There is not as much demand for the metal as there once was.
I don’t believe that BNS will shut down the division and take a full write-down of the business. There is still value in the business, whether the right buyer comes along or it stays with BNS and operates as a smaller entity.
How Will Bank of Nova Scotia Be Impacted?
When news about the possible sale of ScotiaMocatta first came into the spotlight, BNS stock ticked higher. If the sale of ScotiaMocatta does close, it could effectively help the bottom line of the business over the long term.
The majority of the Bank of Nova Scotia’s present and future revenue is tied to everyday services, such as retail banking, fees from investment products, and the credit spread from loans and mortgages. Therefore, the sale or downsizing of the bullion business should not be a concern from an investor’s perspective.
A sale would allow the company to focus on growing its core assets and making more investments into future growth areas. This would include enhancing its technology and driving down overall business operating costs. This would then reflect in higher margins for the business.
The impact toward the corporation’s market cap will not be known until there is a deal reached or if there is a change in the size of the business.
However, even though the future looks bright, the same cannot be said about the present. There is still a financial relationship with NTR metals, which means there could be loans outstanding that were used as leverage against the bullion that was refined or being held by the company. Since NTR Metals has lost its “Good Delivery List” status, it means the value of the gold will not be looked at with the same confidence as before.
Therefore, in the short term, BNS could see a write-down, which would be a one-time charge that negatively impacts earnings. However, if the sale of the business occurs, it will help raise some capital to offset those negative effects.
Will ScotiaMocatta Still Sell Precious Metals?
If ScotiaMocatta is not sold off, the business unit will continue to operate as it is doing in the present. The only change that could be expected is a reduction in the number of office locations and employees.
If the business unit were to be sold off, it would continue to operate in the precious metals segment of the market. But there could be a few changes, first being the name of the division. The “Mocatta” part of the name might remain, but “Scotia” would be removed. Or there could be a whole new name and rebranding effort.
How Will the Precious Market Look Different After a Potential Sale or Downsize of ScotiaMocatta?
Another possible affect of the ScotiaMocatta laundering scandal would be JPMorgan and HSBC Holdings plc (ADR) (NYSE:HSBC) seeing an increase in their precious metals trading. These two companies are presently the largest such companies in the London market.
Since the Bank of Nova Scotia hired JPM as an investment banker, it is highly unlikely that JPM would purchase ScotiaMocatta, due to conflict of interest. That would only change if JPM stepped down from its status as investment banker and make an offer to buy the unit.
