The outsourcing of the diamond cutting and polishing business to the Far East and developing countries from places like Israel and Belgium in recent years is among the important factors in the growth of money-laundering in the diamond trade. A report by the Paris-based Financial Action Task Force (FATF), the G-7 Economic Group’s money-laundering and financial corruption watchdog, shows that with much of the diamond polishing business now in China, India, and other developing economies, criminals are taking advantage of more lax regulations to help drug dealers, tax cheats, and even terrorists hide financial transactions.
In the “old days,” Israel, Belgium, and Switzerland were centers of the diamond trade, including diamond polishing, but much of the polishing is now done in the Far East, especially India and China. Israel is still a major importer and exporter of rough diamonds, but has lost significant market share in recent years. In 2012, Israel’s polished diamond exports were down 22% compared to 2011, while net rough diamond exports fell 20.1%. During that period, India’s polished diamond exports jumped 28.3%.
With that, Israel is still a key player in the diamond business. For example, in 2010, Israel became the chair of the Kimberley Process Certification Scheme, which ensures that diamonds mined in conflict areas (“blood diamonds”) are kept off the market.
While there were plenty of under-the-table transactions and attempts at money-laundering when the business was centered in Israel and Europe – some of them successful – the stronger regulation in those countries enabled authorities to keep a lid on the most egregious instances of criminal activity. In a new report on money-laundering and terrorist financing in the diamond trade, FATF cites over two dozen cases in which authorities interdicted money-laundering attempts, such as false documentation, overvaluing diamonds on customs reports, illicit money transfers for diamonds, and techniques. About half the incidents involved Israel or Israelis – but, the report said, the fact that the authorities in Israel were on top of fraud was indicative that the enforcement system was working.
Not so in other new diamond trade centers, such as the United Arab Emirates, which has emerged as the second largest location after Belgium for rough (unpolished) diamond trade. In 2012, the UAE’s rough diamond industry was worth $11.38 billion, versus Israel’s $8.27 billion (Israel was the third largest in this area, after the UAE).
That in and of itself is suspicious, the report said. The UAE has not been a diamond polishing center in the past, and is not known to have cadres of trained polishers, as Belgium, Israel, and India do. What’s even more suspicious, however, is the fact that on average, the value of rough diamonds exported from the UAE is almost 50% higher than the value of imported rough diamonds – meaning that the price on the diamonds jumps just due to the fact that they pass through the UAE.
In fact, says the report, “for 2011, the average price per carat for export in the United Arab Emirates is 74% higher than the average price per carat on import. These are the same rough stones going in and out only they are sold at a much higher price, an increase that perhaps includes more than the entire production chain mark.”
How to explain the markup? The report doesn’t make any judgments (although, it says, perhaps 15% of the markup could be attributed to “handling fees”), but is keeping its guard up. “Since the United Arab Emirates is not a polishing center the added value for the diamonds going in and out of the country is unclear and would merit further investigation,” the report says.
Overvaluing diamond shipments was not limited to the UAE, the report said; it was also prevalent in India and Hong Kong. According to the report, several Indian diamond importers tripled the price per carat of diamonds they had imported from Hong Kong.
Among the countries that supplied information to FATF on diamond money-laundering in their jurisdictions, the report said, were Canada, Israel, Netherlands, Russia, South Africa, Sierra Leone, United Kingdom, and United States of America – but not India, China, or UAE.
The portability of diamonds and the fact that much of the business is still conducted in cash makes them perfect for money-launderers to smuggle money out of or into countries in order to avoid taxes, or hide illicit income, such as that from the drug trade. FATF research findings, the report said, “noted criminals’ use of diamonds as a form of currency is a characteristic unique to the diamond trade. Diamonds are difficult to trace and can provide anonymity in transactions.”
In addition, “cases show that the trade in diamonds can reach tens of millions to billions of US dollars. This has bearing on the potential to launder large amounts of money through the diamond trade and also on the level of risks of the diamonds trade.”
If diamonds can be used by criminals to hide income, they can be used by terrorists to transfer money to fund attacks, FATF said. While “documented cases of terrorist utilization of diamonds are few,” the report said, “it should not automatically be assumed that terrorist utilization is uncommon because of the limited case examples that have been published. Often, law enforcement and intelligence organizations have documented the factual details that are not released to the public. Unless the use of diamonds leads to an arrest or criminal charges as the case may be, these details will not be made public.
In addition,” FATF said, “this knowledge may not be shared as willingly as criminal use of diamonds due to national security concerns,” adding that no one should be surprised if such cases do crop up.