Ostensibly, there is little or no reason for diamonds to become an issue in this report, but in the just-released 2008 edition, one gets the impression that things aren’t well in the diamond world.

There are quite a few findings on which one might challenge their accuracy, but that may be a futile exercise. What is important is that the diamond industry should take note of the concerns identified by U.S. government, as the report generally serves as a basis for decisions on strategies and policies. What it is really troubling is that the report raises doubts about the effectiveness of the Kimberley Process. It is also (too) quick to put the “conflict diamonds” label on diamonds in places such as Belgium, Dubai and elsewhere.

The annual report on Money Laundering and Financial Crimes is a legislatively mandated section of the U.S. Department of State’s annual International Narcotics Control Strategy Report (INCSR). It represents an enormous effort and is based upon the contributions of numerous U.S. Government agencies and international sources. However, the principal contributor is the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which has also issued the Jewelry Rule, requiring the U.S. diamond and jewelry business to adopt AML/CFT compliance programs.

Indeed, FinCEN has been identified as “the primary contributor to the individual country reports.” That makes the U.S. views on the international diamond industry even more captivating – as they reflect the position of the very agency that regulates the U.S. diamond industry’s anti-money laundering efforts. So it is more than just another (major) government report – it clearly reflects the perceptions of FinCEN on the state of money laundering in the international diamond business.

It is important, however, not to lose perspective. As the industry is always concerned about consumer confidence, ethics and best practice principles, we are occasionally overlooking the fact that whatever infringements may take place in our business, they are virtually peanuts when seen in an overall context. The International Monetary Fund (IMF) estimates the magnitude of money laundering to account for about three to five percent of the world’s Gross Domestic Product (GDP). Using 2007 World Bank data, global GDP is approximately $72.3 trillion. In other words, international money laundering can be estimated at between approximately $2.17 and $3.61 trillion a year, which is larger than the current U.S. budget. (Ten years ago, the generally accepted estimate of international money laundering was in the range of $300-$500 billion.)

But precisely because our industry’s possible infringements are so infinitely small in the overall context, we need to be concerned – and certainly not ignore – the significance FinCEN, other US governmental agencies, and the U.S. Department of States give to what is taking place in the diamond industry. The law that mandates the compiling of the annual report does not require a report on the United States, itself. If it would have, the GIA Certifigate scandal would certainly have been included in any reference to the diamond industry.

The report puts major diamond trading countries, such as India, Israel, the U.S., the United Kingdom, South Africa, Switzerland, Russia, UAE, Hong Kong and the Netherlands, on the list of some 50 “major money laundering countries in 2008.” Belgium does not appear on that list. Let’s review some of the relevant country observations.

Country Observations
When discussing Angola, the report identifies “the laundering of funds derived from continuous and widespread high-level corruption as a concern, as is the use of diamonds as a vehicle for money laundering. Angola has implemented a diamond control system in accordance with the Kimberley Process. However, through the method of ‘mixing parcels’ of licit and illicit diamonds and the fraudulent purchasing of Kimberley Process ‘certificates of authenticity,’ the Kimberley Process can be compromised. Corruption and Angola’s long and porous borders further facilitate smuggling and the laundering of diamonds.”

The U.S. report is quite positive on Belgium, after it first dubiously concludes that “most of the ‘blood’ or ‘conflict diamonds’ from long-running African civil wars were processed in Antwerp. Authorities have transmitted a number of cases relating to diamonds to the public prosecutor, and that office is examining the sector closely in cooperation with local police and diamond industry officials.”

While complimenting the Kimberley certification process for “introducing much-needed transparency into the global diamond trade,” the report then concludes in the same sentence that “diamonds of questionable origin continue to appear on the Belgian market.” It then simply charges that “the Government of Belgium (GOB) recognizes the particular importance of the diamond industry, as well as the potential vulnerabilities it presents to the financial sector.” I really wonder who in the Belgian government would have conveyed such view to the U.S. State Department.

The report isn’t generous to India either. “India’s emerging status as a regional financial center, its large system of informal cross-border money flows, and its widely perceived tax avoidance problems all contribute to the country’s vulnerability to money laundering activities. Some common sources of illegal proceeds in India are narcotics trafficking, illegal trade in endangered wildlife, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion.” I fail to understand how diamonds can be viewed as an “illegal gem” in India, and I hope that industry leaders will not fail to press for some explanation.

From the significant diamond countries, South Africa gets, perhaps, the worst criticism as being a center of “international crime groups,” which, naturally, are involved in “illegal dealings and theft of precious metals and diamonds” and a host of other criminal activity.

What troubles me is the apparent lack of evidence and absence of any sense of “proportionality” in the report’s frequent mentioning of diamonds. It reminds me of the rumors about a diamond connection to al-Qaeda and how they helped the Clean Diamonds Act to pass quickly through the U.S. Congress – even though the FBI, CIA and other U.S. government reports (including the 9/11 Commission Report) later conceded that there had never been an iota of evidence to such link beyond one journalist’s report.

The U.S. government report doesn’t mince words about the Dubai diamond business. “Dubai remains the center of the UAE’s burgeoning diamond trade, although new facilities are springing up in the Emirates of Ajman and Ras Al Khaimah as interest spreads in the lucrative business.” After discussing the quite elaborate legal frameworks, the report zooms in on a single smuggling transaction that was caught in 2006, when “Russian customs officials reportedly apprehended an air passenger from Dubai after he tried to smuggle 2.5 kilos of diamonds into the country. There are also reports that diamonds are increasingly being used as a medium to provide counter valuation in ‘hawala’ (informal remittances) transfers, particularly between Dubai and Mumbai.”

The alleged premature release of two questionable parcels is then cited to “indicate continuing weaknesses in the [Kimberley] process.” A World Diamond Council report (?) was said to quote a local company that “stated that they had in their possession large quantities of African diamonds without Kimberley Process certification.” I find that hard to swallow.

Israel’s diamond industry fared well in the report. It cited the first reading in the Knesset (Parliament) of a bill that imposes anti-money laundering rules on the diamond sector. The report also states that Israel’s “Customs Authority continues to intercept unreported diamond shipments, despite the fact that Israel imposes no tariffs on diamond imports.”

Focusing on Lebanese Traders in Africa
The considerable attention the report is giving to diamonds in Lebanon might make one conclude that it is a major diamond trading center. It is not. The U.S. government recalls old information on diamond smuggling from the Congo, simply concluding that it has “serious doubts on Lebanon’s commitment to counter the trade in conflict diamonds.” It then cites the “consistent reports that many Lebanese diamond brokers in Africa are engaged in the laundering of diamonds—the most condensed form of physical wealth in the world.”

While describing the apparent, effective Kimberley Process operations at Beirut International Airport, the report nevertheless laments that all these “safeguards do not address the issue of smuggled diamonds, the purchase of fraudulently obtained Kimberley Process certificates, the laundering of diamonds, or value transfer via the diamond trade.”

“Lebanon has a large expatriate community throughout the Middle East, Africa and parts of Latin America. They often work as brokers and traders. Many Lebanese ‘import-export’ concerns are found in free trade zones. Many of these Lebanese brokers network via family ties and are involved with underground finance and trade-based money laundering. Informal remittances and value transfer in the form of trade goods add substantially to the remittance flows from expatriates via official banking,” says the report to Congress.

“Expatriate Lebanese brokers are actively involved in the smuggling and laundering of diamonds in Africa. There are also reports that many in the Lebanese expatriate business community willingly or unwillingly give ‘charitable donations’ to representatives of Hezbollah (which is based in Lebanon). The funds are then repatriated or laundered back to Lebanon.”

Deterrence and Convictions are the Objectives
It isn’t so simple to place all these “findings” about diamonds in a proper perspective. It is clear that there is no other commodity in the world that has voluntarily embraced such a high level of monitoring of the flows of goods and moneys, or has adopted voluntary warranties along the value chain, while the governments in the countries where we operate have legislated dedicated diamond industry anti-money laundering regulations.

There are many factors that are simply beyond the controls of the diamond industry players, especially in Africa. The report signals that there are jurisdictions which are having trouble converting their anti-money laundering policies and programs into investigations, prosecutions and convictions. “In some cases”, says the report, “the lack of enforcement is due to lack of capacity, but in far too many others it is due to a lack of political will.”

Virtually all diamond dealers in the U.S. and in the main trading partner countries have some kind of AML/CFT program, do client and supplier due diligence, report suspicious transactions – but, sometimes, this all seems frustratingly irrelevant in the total scheme of things. One of the concerns expressed in the report is that too many jurisdictions are getting caught up in the AML/CTF process and losing sight of the objective.

Financial intelligence is simply the process; the means to an end. Rather, says the report, “the objective continues to be anti-money laundering and counter-terrorism finance convictions. Convictions, combined with asset seizure and forfeiture are the true deterrents, the most meaningful ‘measurable,’ and the bottom line. Far too many jurisdictions continue to fall short in this regard.” This is so true.

With all the criticism and concerns about the diamond industry, one cannot escape the conclusion that the international diamond industry is doing its part. How can we impact the policies of governments such as DRC, Angola, Sierra Leone, South Africa, Russia and other relevant countries? The party that seems to be miserably failing is government, which is the only authority that can deliver indictments, convictions, asset seizures, etc. – but not just overseas.

Let’s look at the U.S., the “author” of the report and leader in spearheading the international war against money laundering. As we have noted in last week’s column, New York diamond industry leaders are literally pleading and lobbying government to investigate and bring to justice those involved in one of the industry’s most serious bribing and laundering scandals. When you actually think about this, it is both strange and sad. But it is the way it is.

Have a nice weekend.