During its first years of operation, the Kimberley process (KP) was considered a trailblazer as a multi-stakeholder processes. However, its merits have dwindled on nearly all fronts: it is failing both to meet its own mandate – to keep blood diamonds off women’s fingers – and to deal with emerging threats and vulnerabilities linked to diamond governance. The calls from a rising tide of NGOs are strong: the KP is failing – it should be brought in line with international standards in resource governance, in particular the OECD Due Diligence Guidance.
Whilst the KP restricts itself to “conflict diamonds” – dug up by rebels fighting the State (not eachother) – the OECD Guidance covers different types of violence and actors that could be associated to resource exploitation – torture and mass killings by state forces, war crimes and crimes against humanity, forced labour, worst forms of child labour. Offences that have long been uncontroversial as part of states’ obligations under various international agreements. Furthermore the Guidance includes risk mitigation measures to avoid money laundering, to which global diamond trade is also extremely vulnerable. The framework equips interested parties with a broader range of instruments to deal with such risks in the minerals trade.
The KP is currently in a reform year. This presents an enormous opportunity to keep the KP fit for purpose. Within the KP civil society has worked tirelessly to promote effective diamond governance, which is in tune with the current challenges, such as tackling smuggling, undervaluation and illicit financial flows. Some contend that this goes beyond the scope of the KP, but these practices seriously undermine the functioning of the KP by creating channels for conflict damonds to flow – and so they do, from rebel-held eastern CAR.
Stating that merely 0,2% of global production is problematic in terms of conflict diamonds[1], is wall papering over the serious deficiencies in global diamond trade practices. At various stages of trade there are opportunities for smuggling, theft, mixing of uncertified stones with certified ones, and undervaluation by under-reporting/under invoicing the value and quantity being exported. All these factors compromise transparency and traceability. They render certification purely notional.
Conflict diamonds from the Central African Republic, which is partially embargoed, have found their way into global supply chains via smuggling routes and non-transparent international trading centres. There is a high risk for smuggling in countries with unstable contexts characterized by porous borders, weak governance and established routes. Recently diamonds from Central African Republic (CAR) have been trafficked out of the country via Cameroon, DR Congo, Sudan and Chad. Smuggling has a negative impact on state revenues, the local economy and livelihoods of local communities.
Upon arrival in the commercial centers like Dubai, the origin of diamonds is obscured in the sorting and trading process. Consequently a shipment can be exported with a KP-certificate of mixed origin, without detailing the specific origin of all stones contained in the shipment. This renders traceability and certainty for buyers and consumers downstream null and void.
One effective tactic to side-step KP-certification is the undervaluation of rough diamonds, which gives rise to illicit financial flows. The hotspot appears to be Dubai which has the status of a free trade zone providing a loose fiscal regime and regulatory environment. For the purpose of profit maximization several international diamond companies set up subsidiaries in Dubai. Dubai’s extended financial and legal secrecy allows for widespread tax evasion and avoidance by under invoicing the value of diamonds, mostly from Africa. This is exemplified by the large price changes between import and export of rough diamond in Dubai, which is hovering around a whopping 40%. Afterwards, the same secrecy can be relied upon to divert the proceeds into accounts across the world. This is particularly problematic for developing economies, since the undervaluation of exported diamonds leads to extraction of substantial profits and tax revenue from those economies.
Despite commitments in enhancing internal controls the Financial Action Task Force and the Egmont Group assert that trading centres like Dubai and Antwerp remain vulnerable to money laundering as well as terrorist financing, with Dubai representing a significantly higher risk because of its free trade zone status and the widespread practice of transfer pricing. So beyond the producing countries there is a risk of financing violent activities due to the opaque nature at various stages in the international diamond trade.
Tackling these problems and strengthening resource governance would allow developing countries producing diamonds to reap the development dividend of the stones, making them a catalyst for enhancing livelihoods locally. Cutting the illicit edges and polishing up the murky side of diamond trade is crucial if policymakers are genuine about precious stones contributing to the Sustainable Development Goals.
Press Releases; French & Dutch
[1] De Tijd, « Waar zijn al die Bloeddiamanten ? », 23 January 2014, https://www.tijd.be/opinie/analyse/Waar-zijn-al-die-bloeddiamanten/9455002
