A vast and growing river of gold, much of it illegal, is being mined in the Philippines by Chinese companies and is pouring into Hong Kong before most of it is transshipped into China.

With an estimated US$1 trillion in untapped mineral resources in the Philippines according to the Mines and Geosciences Bureau, Chinese mining companies, many of them operating illegally, have been exporting gold, nickel and other precious minerals out through the island country’s porous coastal ports, where there are no customs officials and plenty of bribable officials to turn their eyes the other way.

That isn’t to say all of the gold exports are illegal by any means. During President Benigno S. Aquino III’s state visit to China last year, four Chinese mining companies agreed to invest US$14 billion in mineral extraction between 2011 and 2014.

However, as of now, of the gold registered as leaving the Philippines, only 3 percent of the exports are registered with customs officials. Gold purchases by the Bangko Sentral ng Pilipinas, the Philippines central bank, from small-scale miners in the first quarter of 2012 declined to just 618 kg with a value of P1.35 billion (US$32.3 million), down from 7,943 kg valued at P14.11 billion during the same period in 2011 The other 97 percent arrives in Hong Kong without being taxed by the government in Manila, resulting in a massive tax loss.

According to records with the Hong Kong Customs and Excise Department, although they don’t give the direction or source, gold shipments into Hong Kong skyrocketed by 215 percent to HK$70.63 billion (US$8.22 billion) in the first six months of 2012 and exports from Hong Kong rose by 89.1 percent, to HK$27.5 billion.

The Philippines is the third biggest exporter of gold coming into Hong Kong after Switzerland and China itself, according to official data, with shipments rising to a peak of 81.5 tonnes in 2010 against just 11 kg nine years earlier, according to a Reuters report on Aug. 23. Shipments from the Philippines were steady at 81.2 tonnes in 2011.

It isn’t just gold. The Philippines Department of Environment and Natural Resources estimated in 2008 that 3 million tonnes of mineral ores processed in China were unaccounted for by Philippine authorities.

At the heart of the problem in the Philippines is a regulation requiring that the central bank impose a 2 percent excise tax along with a withholding tax of 10 percent – without the governmental clout to enforce the law. Miners simply ship the gold out through the porous coasts. In the second quarter of 2012, according to the country’s central bank, gold sold from small-scale miners dropped by 98 percent, an indication it is likely moving offshore illegally.

It is important to note, however, that while the gold may be leaving the Philippines illegally, that doesn’t mean it arrives illegally in Hong Kong. The customs and excise department said in an email that, “According to available Customs records, we do not have allegations or intelligence on smuggling trend or case seizures related to gold smuggling from Philippines to Hong Kong. Trade statistics showed that gold consignments imported from Philippines into Hong Kong had been declared."

Hong Kong has become so important a transshipment point for gold that in July, the Israel-based Malca-Amit Global Ltd announced on Bloomberg that it had opened a bullion storage facility capable of holding 1,000 tonnes at any given time – 22 percent of the gold in the fabled US storage facility at Fort Knox, Kentucky. A company official declined to comment on either the direction in or out of gold and other valuables shipments.

The Philippine mining industry itself has been a disaster for decades. Widespread public outrage pretty much shut down conventional mining because of the despoliation caused by the industry. Offences included driving indigenous peoples off mining lands without compensation, leaving abandoned mines to deliver up a toxic mix of poisonous minerals into rivers and streams, and other shortcomings that earned the industry the implacable enmity of the Catholic Church, the communist New People’s Army, environmentalists, populist local leaders, human rights activists and indigenous peoples, among others. NPA guerillas, either because they are denied extortion money or to further their aims, regularly descend on mining operations and destroy fleets of expensive mining vehicles.

Ironically, it is not an enmity that does not appear to extend to Chinese miners. None of the formidable forces arrayed against the multinationals appear to have taken up the fight against the misuse of the indigenous mining permits, apparently because of a belief that small-scale miners should be allowed to dig where they want.

Thus there are at least 26 Chinese mining companies registered operating legally in the Philippines, digging not just for gold but for iron ore, nickel, copper, manganese, lead, zinc, chromite and cobalt, according to a confidential report obtained by Asia Sentinel.

Some of China’s largest gold producers have established operations in the Philippines. Zijin Mining Group Company Ltd signed with the Philippine government in 2011 to invest US$1 billion in gold and cooper exploration over the next five years. In March 2012 the company announced it would spend US$872 million to acquire gold and copper assets in Southeast Asia, particularly Indonesia and the Philippines.

Other major Chinese mining deals in 2011 include Wei-Wei Group’s US$100 million nickel processing plant in Masinloc, Zambales Province, and Jiangxi Rare Earth and Rare Metals Tungsten Group Co Ltd’s US$150 million nickel exploration and cobalt processing project in Botolan, also in Zambales Province.

Among the agreements signed by Aquino in China are partnerships between China’s Jichuan Group Ltd. and local mining companies Macro Asia Corp. and Tranzen Group Inc; Jichuan’s project with Philnico Industrial Corp., Eramen Minerals Inc. project in Zambales with a Chinese mining company and the partnership between Oriental Peninsula Resources Group Inc and Chinese firm Yun Feng for a mining project in Espanola in Palawan Province.

However, illegal Chinese companies have also found an inroad into Philippine mining through intermediaries who hook them up with small-scale miners legally allowed to mine under the People’s Small-Scale Mining Act of 1991. Obtaining a conventional mining license can take five to 10 years and is enormously costly. Getting a Filipino proxy to buy a small-scale permit directly from local government units costs as little as about PHP10,000 (US$241). An environmental permit costs about US$350 at the provincial level.

Once the small-scale Filipino miners gain their permits, the Chinese companies arrive with large-scale equipment with the capacity for major development. Mining by its nature is an environmentally devastating. Tailings can leak arsenic, dams to hold polluted groundwater are usually inadequate and often fail, large diggings can cause landslides, etc. Chinese companies commonly use explosives and heavy equipment, drastically exceeding the volumes permitted by the regulations, which are designed for pick-and-shovel miners and small crushers.

The Chinese mining companies have found a mother lode in the numbers of Filipino local officials in on the take, offering bribes to avoid paying taxes and operating without regard for environmental laws. The result has been ruined rivers and despoliated wilderness.

For instance, according to the results of a private investigation made available to Asia Sentinel, locals in Zambales Province, where Chinese companies Wei-Wei Group, Jianxi Rare Earth and Rare Metals Tungsten Group Ltd and Nihao Mineral Resources, in cooperation with Jiangxi, operate small-scale mines, say “blood colored” water is going over the riverbanks and inundating rice fields, killing corps. In addition, locals accuse the mining companies of denuding the forests and operating illegally in watersheds which devastate the land below them with pollution.

The Chinese companies often operate under the names and licenses of their domestic subsidiaries. Oriental Synergy, which has its own mineral production sharing agreement in Surigao del Norte to mine nickel and cobalt, has partnered with another firm, Macao Quanta, which has a production sharing agreement assigned to a Filipino partner, Minahang Bayan ng Mamamayang ng Dinagal Island Cooperative. Nihao Mineral Resources, the Filipino partner of Jiangxi, in turn operates under another production sharing agreement with yet another Filipino company, Mina Tierra Gracia Inc. although mining laws assert that permits are non-transferable.

An indication of Chinese participation in small-scale mining showed up in February 2011 in Camarines Sur, when a Chinese national was crushed to death by a huge boulder on a mine supposedly registered to a small-scale miner under the name of Benito Salandanan of Bicol Chromite. The mining site was actually being operated by a company called Prime Rock Mining.