The Perth Mint was warned last year it was potentially breaching commodities laws in nearly two dozen US states by holding gold for customers in its depositary, but failed to publicly reveal the potential multi-million-dollar scale of the issue over a quarter of a century.
In September 2022, the mint publicly acknowledged it was addressing "historic non-compliance issues" with the US laws and had self-reported the issue to US regulators.
But what it failed to mention was that those potential breaches dated back nearly 25 years and covered around 1,500 accounts holding USD $254 million worth of precious metals on behalf of clients.
Those details were contained in documents, seen by the ABC, which were prepared in May 2022 after it received external legal advice about the potential breaches.
It warned it had received advice that some services offered by the mint "have historically and will continue to operate in breach of US law".
The advice warned that even if the mint rectified any issues, it would still potentially be liable for penalties for historic breaches.
But the document recommended it continue to deal with US-based customers as normal, fearing "significant challenges" in closing affected accounts, including tax liabilities for customers if accounts were liquidated.
The document recommended the mint engage with regulators in the relevant US states and propose a plan to achieve compliance.
When asked about the potential breaches, and what the government knew about them as he arrived at Parliament today, Premier Mark McGowan said he had not been briefed on the issue.
"The exact details I'll get you, but as I understand, when they identified these issues they self-reported themselves and these issues have been in place under successive governments, Liberal governments, Labor governments, all the way back to the 1990s," he said.
Mr McGowan, who was the minister responsible for the Mint between 2017 and early 2021, said the government had given the mint $34 million to upgrade computer systems and employ additional staff to fix "whatever issues are there".
The mint says it has limited the ability for customers in relevant states to open new accounts and has closed dormant accounts, while also engaging US regulators.
However, it is not known what steps, if any, have been taken to make previously existing accounts compliant.
Last week the mint was the subject to intense scrutiny following a Four Corners investigation which highlighted concerns around regulatory compliance defences and issues with gold sold to China.
Mint allegedly failed to meet requirement to physically deliver gold
In the precious metals industry, people sometimes purchase gold, which they technically own, but it is stored elsewhere.
They can then sometimes leave it stored, sell it, or trade it, having never even physically held or even seen the gold.
In the US in the 1970s there were problems with fraud, when people would purchase gold which they believed was being stored elsewhere, but in reality it was not, or sometimes it never even existed.
To prevent this, the Model State Commodity Code (MSCC) was implemented in 1985 and has been adopted by 23 states in the US.
At a basic level, the states with the MSCC in place require anyone who purchases gold to receive physical delivery of that gold within 28 days, unless the seller is an "exempt person".
The Perth Mint's Depository Service has a number of platforms that allow customers around the world to purchase gold, which the mint stores in its vault on behalf of the customer.
According to the advice it received, the Perth Mint is likely not an "exempt person" and did not comply with the 28-day rule, because it stored gold indefinitely in Perth.
Of all the 'depository metal' the Perth Mint is holding on behalf of its customers, about six per cent is for clients in MSCC states in the US.
Mint warned against closing non-compliant accounts
Notes prepared in May 2022 reveal that despite the possibility of technically being in breach of US legislation, it was recommended the mint continue to deal with "all US-based customers as normal".
The document also recommended continuing to open new accounts in US states where those new accounts might be in breach of the MSCC.
"[The] recommendation is that Depository continues dealing with all US-based customers as normal as it is not prudent to reject opening of accounts from Model Code states, as the historic liability to Model Code already persists," it read.
"Closing down the 1,500 accounts holding USD $242m in custody, which are currently deemed to be non-compliant with Model Code, would present significant challenges, including from a reputational perspective, as liquidation of the accounts could have material tax consequences for customers."
In a statement to the ABC, the mint said it had taken steps to limit the ability for customers in MSCC states to open new accounts but did not indicate how it had dealt with existing customer accounts.
The minister responsible for the state government-owned Perth Mint, Bill Johnston, was informed of the issue with the MSCC states the following month, in June of 2022.
Minister addresses breaches in parliament
In response to questions from the ABC, the Perth Mint said its "compliance issues" with the MSCC "are a matter of public record", pointing to the organisation's 2021/22 annual report.
Given to WA Parliament in September 2022, the report mentions the organisation would "address historic non-compliance issues with the Model State Commodity Code 1985 in the United States, which we have been proactive in identifying and addressing".
The same day, Mr Johnston told parliament the issue was a legacy issue and only came to light because of due diligence after he became minister.
"The idea that somehow we have lacked diligence is stupid, it is a ridiculous suggestion," Mr Johnston said.
Johnston emphasised that regulators had only taken action in the past where there had been fraud and there was no fraud in the case of the Perth Mint.
"The Model State Commodity Code is designed to prevent fraud. There has been no fraud," Mr Johnston told parliament last year.
"On those occasions where prosecutions have arisen from failure [to follow the law] there has been fraud. The opposite is not true.
"The fact that there is no fraud here means that it is quite likely that there will not be a penalty for our legacy non-compliance."
However, the new documents reveal the scale of the potential breaches, and the risks taxpayers faced.
Another internal document from May 2022 showed that addressing concerns about the MSCC would affect 917 clients with nearly $285 million of precious metals held in the mint.
The mint estimated it could lose between USD $1.6 million and $3.5 million a year if those clients were to "exit".
Compliance with US law 'not clear' as early as 1998
That same document details how Perth Mint's Depository Service began in 1994, with high-net-worth individuals, who were recorded "off-system in paper ledger books for privacy reasons" and by 1998 there were about 150 clients using the service.
That same year, the mint launched the Perth Mint Certificate Program — which allows clients to buy gold, but instead of receiving the physical gold — the client is issued with a certificate detailing the amount and type of precious metal the Perth Mint is holding on their behalf.
When that program was being set up in the late 90s a legal issue of concern that was raised was whether the program would be in breach of the MSCC.
The answer back then was that it was "not clear".
Mint documents detail how at the time, it took a "risk-based" view and one of the reasons it decided to proceed was because the mint was owned by the government and guaranteed by WA taxpayers.
"Guarantee means no risk of loss to clients which was the main focus of [the] MSCC," the note reads.
The "government guarantee" is still listed today on the Perth Mint website as one of "four reasons to invest in the certificate program".
'It is not acceptable', expert says
Financial regulation expert Nathan Lynch said the mint should not have seen the government guarantee as reducing its liability.
"Government bodies should be held to a higher standard because they operate with the trust of the community, and the entire state's reputation is on the line," he said.
"On top of that, taxpayers are ultimately liable for any financial penalties and we know US regulators hand down the biggest penalties of any financial regulators in the world."
The document seen by the ABC indicated that "engagement" with US state regulators was "likely to be received favourably" and that the mint "may receive 'cooperation credits' … if it voluntarily discloses previous breaches of the law and proposes a plan detailing how it will achieve compliance in the future".
"In most cases, enforcement actions and criminal prosecutions have been in scenarios where the defendants are alleged to have committed fraud in addition to violating the Model Code's prohibition on offering or selling commodity contracts without an applicable exemption, or without being registered."
Mr Lynch said while regulators generally did offer leniency when organisations self-report, they have to do it as soon as they become aware of issues.
Potential breaches a 'succession of failures', says Opposition
WA Opposition Leader Shane Love said it was "staggering" the mint had potentially been in breach of the US laws for a quarter of a century.
"That's why we're calling for a [royal] commission into the Perth Mint," he said.
"It's a succession of failures over decades, and under various governments, most notably under the current government."
Mr Love said the limited information the government initially released about its potential compliance issues with the MSCC amounted to "drip feeding information".
"Really, it would be in the Perth Mint's interest to be as open as possible at this point and really exhibit that it was making the changes necessary to restore public confidence in what is basically a taxpayer guaranteed and taxpayer-owned institution.
"Those issues that were raised on the ABC News need to be re-examined, and it just is another example of a continual flow of events coming from Perth Mint."
Mr Love said while neither the Premier nor Mr Johnston could be expected to know of the issues 25 years ago, it did indicate "a problem there with the ... understanding of the organisation about its requirements".
Speaking in Perth, federal treasurer Jim Chalmers said recent reports, including allegations the mint may historically not have complied with Australian anti-money laundering and counter terrorism funding laws were "incredibly concerning".
"I am confident that my state colleagues are taking the matter seriously, as is the federal government," he said.
"AUSTRAC has appointed an auditor to assess the mint's compliance with all of the various arrangements, including the anti-money laundering arrangements.
"That report is due to AUSTRAC soon and when we get that report we'll obviously consider it."
Mint expected to comply, state government says
A state government spokesperson said the mint was responsible for its own activities.
"The government reiterates its expectations for the mint to comply with all its legal obligations in the various jurisdictions in which it operates," the spokesperson said.
The mint's document said that it would take "at least 12 months" to engage with 23 different state regulators about the compliance issues, at the same time it worked with partner companies in the US to see if they would be willing to help the mint comply with registration requirements.
In response to ABC questions, a spokeswoman for the Perth Mint said last year the mint undertook a review of regulatory requirements in the US jurisdictions where it offers depository services.
"The Perth Mint self-reported the issue and has been proactively engaging with relevant regulators in the applicable US states to remedy any unintended breaches of the MSCC," they said.
"Once we became aware there was an issue, we took steps to limit the ability for customers in MSCC states to open new accounts. We have also been closing down dormant, zero-balance accounts held by customers in MSCC states.
"Importantly, the Perth Mint is confident that no US investors have been harmed by this oversight."
