Taking Charge In The Industry’s Fight Against Money Laundering And Terrorist Financing

“The governments of the world are in the process of imposing strict regulations on the diamond industry to fight the financing of terrorism. If the industry wants to avoid being faced with unworkable systems, they should enter into dialog with governments to reach the most effective AML/CFT compliance systems. The industry should take its destiny in its own hands and not wait for others to set the rules.”

This message was given at a ceremony at ABN AMRO bank’s Antwerp office this week, where some 120 bank clients and top banking officials attended the launch of a multi-faceted program to raise awareness of the new anti-money laundering (AML) and combating the financing of terrorism (CFT) compliance rules among its more than 3,000 worldwide diamond and jewelry industry clients.

“If we don’t harmonize the rules, the industry will start ‘jurisdiction shopping’, as it doesn’t make sense that in Antwerp the trade in cash above certain thresholds is forbidden, while a few miles north over the Dutch border, it is allowed (and only subject to reporting requirements.),” the audience was warned.

As part of this program, the Bank’s International Diamond and Jewelry Division has released a new 200-page book, entitled “Diamond Industry Strategies to Combat Money Laundering and the Financing of Terrorism”. This publication, written by yours truly, provides players in the diamond and jewelry business with an opportunity to gain a head start in understanding how the war against money laundering and terror financing affects the industry and how to tackle these subjects.

The principal strategy adopted by the world’s governments in the war against terrorism is to cut off sources of finance for terrorist organizations by targeting the various terrorism financing mechanisms. Initially, financial institutions were moved to the frontline of the combat. However, the success of the banking community’s anti-money laundering (AML) and combating the financing of terrorism (CFT) compliance programs caused terrorists to search for alternative financing mechanisms.

Sensing that terrorists are increasingly bypassing banks and are now engaged in trade-based laundering in order to generate funds, the United States has taken the initiative – which has been followed by the European Community and other developed countries – to broaden the definition of “financial institution” and expand some specific banking compliance rules to selected high risks businesses and professions where the penetration of terrorist elements has either been proven or is considered most likely.

This has led to the designation of diamantaires and jewelers as “financial institutions” for the purpose of AML/CFT compliance requirements embedded in various national banking and anti-money laundering legislation. As ABN AMRO Bank N.V., through its International Diamond and Jewelry Group, is financing more than one quarter of the global trade, it recognizes that it can play a critical role in leading its clients forward in meeting these complex industry compliance requirements.

Though clients in the United States have become quite aware of the Rules for the Jewelry Industry which the U.S. Treasury is proposing as part of Anti-Money Laundering Compliance Rules on the industry at large (and it is hoped that Financial Crimes Enforcement Network (FinCEN) will have promulgated its final rules by the time you read these words), the laws and regulations applicable – or in the process of becoming applicable – in other diamond centers are not widely known.

The bank suggests that there is a need for the industry to get involved in the process and engage in dialog with governments to secure both the “workability” of the programs and to achieve some type of harmonization among systems to prevent disruption in the trade.

The bank sees a window of opportunity for the industry to make its views known since in the most important diamond and jewelry trading countries the “fine details”, those final rules applicable to the diamond and jewelry industries, are still in the process of being finalized.

In the United States the government first enacted the relevant legislation (USA PATRIOT Act - mostly a package of amendments to previously existing laws) and then invited industry leaders to make comments on the proposed specific rules. As mentioned, the final rules have not yet been promulgated by the U.S. Treasury’s FinCEN.

In other jurisdictions (such as Belgium) the industry is requesting governmental clarifications since the legislation, as enacted, seems rather impracticable to implement. In Israel and India, two other major diamond centers, the wheels of the relevant legal vehicles move slowly, lagging behind the other major diamond centers.

Some industry specific problems, such as the multi-billion dollar cash-based rough diamond trading environments in certain producing countries in Africa, will require governmental assistance in order to enable the effective implementation of the compliance responsibility imposed upon the industry. For example, some US$2-US$3 billion annually is traded in cash in alluvial small-scale diamond countries such as Sierra Leone, Democratic Republic of Congo, Guinea, CAR, Angola and other West African countries. Hezbollah drug dealers in Lebanon, or for that matter, Miami drug dealers, can send their cash to Freetown or Kinshasa and purchase rough diamonds which are then exported with Kimberley certificates.

The Kimberley Process is concerned with the origins of diamonds; the AML/CFT compliance program focuses on the origins of the money. In the above not so hypothetical example, the launderers can obtain Kimberley certificates and the resulting proceeds become legitimate and enter into the normal trading system – classic money laundering.

As the diamond business in West Africa is very much a monopoly under the control of a number of Lebanese traders, the danger of this being the Achilles Heel in the diamond jewelry system is real and not imaginary.

It is the industry’s task to convince governments to deal with these issues. In the aforementioned situation, closing this huge multi-billion dollar black “cash hole” is not impossible. The U.S. Treasury (i.e. FinCEN), jointly with the State Department and the International Monetary Fund might propose, for example, that any Kimberley certificate from certain problematic source countries should be countersigned by either the Central Bank or a Financial Action Task Force’s (FATF) standards compliant commercial bank certifying that the cash applied for the purchase of those diamonds originates from proper sources. This would be an administrative matter that might be easily accomplishable.

The point that the book wants to make is – and the point that ABN-AMRO wants to underscore -- that if we apply our collective know-how and experience to the issues, the diamond industry can become AML/CFT compliant without major disruptions and at minimum cost. [Compliance will cost money; let there be no illusion that it won’t.]

The increasing perceived linkage between terrorism and the diamond industry, whether proven or not, makes this an issue that cannot be swept aside. Unlike other commodities, diamonds are associated with sentiments such as everlasting value, eternal love, personal commitment and unparalleled beauty.

Maintaining the consumer’s trust and confidence in the diamond product is an absolute prerequisite to the continued flourishing of the industry.