The International Diamond Trade - A
very rough business
It
is said in the diamond business that each rough diamond crosses at least three
borders before anyone even tries to cut and polish it. In 2012 total world
diamond production of mined diamonds stood at some 128 million carats of
diamonds at a value US14.5 billion. But
the total imports of diamonds as recorded by all countries in the Kimberly
process which exists to regulate ‘conflict diamonds’ was three times this
figure at 393 million carats valued at some $50 billion. So without cutting a
diamond their value had risen from $98 to about $125/carat.
The
first time a rough diamond crosses a border it is from the country of
production in Africa, Canada or Russia to where it is aggregated which was
until very recently in London at De Beers office at Charterhouse. Under the
2011 marketing agreement between Botswana and
De Beers aggregation of diamonds is now returning to its geological home in Africa
ie Botswana so diamonds produced by De Beers in Canada, Namibia and South
Africa will go to Botswana rather than to Charterhouse in London, the former
capital of diamond aggregation.
The
second time a rough diamond crosses a
border it is often traded for ‘cleaning purposes’ i.e. either to clear it of any
possibility that the owner will ever pay a penny in income taxes in another jurisdiction, to gain other commercial
benefits or just simply to launder money
from other businesses and increasingly to
fund criminal activities. The beauty of diamonds lies not just in their
appearance but their high value to weight. This has always made them easy to
smuggle and because of their natural scarcity as well as the De Beers cartel
they were, in the 20th century, a good hedge against inflation and economic and political crises. But increasingly
organizations like the OECD are taking a keen interest in diamonds and their use for money laundering and funding of
terrorism. A major publication by the OECD on diamonds and money laundering is
expected in the coming months.
The
third time a rough diamond crosses a border it is to be cut and that normally
is in India which despite the pretensions of the Southern African countries
like Botswana, South Africa and Namibia is basically where 80-90% of the world’s
diamonds were cut in 2012. India regularly boasts that 14 out of every 15
diamonds set as jewellery in the world were
processed in India. For India diamonds are amongst its biggest export
sectors responsible for exports US$ 43 billion (14% of total exports) in the
financial year 2011-12. Diamond production is one of the leading growth sectors
of India’s economy with an estimated 1 million jobs.
Dubai and Switzerland – laundries of choice?
The
equivalent of about half of the world’s production of rough diamonds passed through
the Dubai Diamond Exchange in 2012. In the 21st century it is
rapidly replacing Antwerp and Tel Aviv as the trading centre of choice. In 2012
Dubai imported some 60 million carats of rough and exported virtually the same
volume. So what were the diamonds doing in Dubai? - The short answer is they were increasing in
value. The average price of the 60 million carats of rough entering Dubai in
2012 was $78/ carat and when the same volume of rough left it was worth $112,
an increase of almost 45% which is what you would expect from trade with a country
that offers businesses a 50 year tax holiday. Make your profits in the tax haven and there
are no issues with those very few countries that are still taxing ‘diamantaire’ on what they say their
income and profits are. Because diamond traders are notoriously economical with the truth when it comes to
the real price of diamonds most diamond jurisdictions like Belgium and
Israel have long ago dispensed with the nicety of even asking ‘diamantaire’ what
their incomes are and have moved to presumptive taxes based largely on turnover.
But
evading income tax in the diamond industry where there are potentially
thousands of different grades of diamond which can make the appearance of low
or zero profits almost pro forma certainly predates the ease and simplicity of
evasion that tax havens like Dubai and Switzerland created. One the most important commercial benefits of
these havens lies in the secrecy they permit when it comes to the corrupt trade
in diamonds. Let us say you are a corrupt official of a diamond exporting
country. Assume that you have a shipment of USD 100 million of diamonds that
you value it at $50 million. This allows the trader to avoid the payment of
export taxes or royalties and to split the benefits with the corrupt official. This
is amongst the more profitable of rough diamond transactions but you need a
place where secrecy is respected and where you can realize the full $100
million value of the transaction by trading with a related company.
Dubai’s
imports of rough in 2012 came from several very conflict prone producing
countries in Africa including Congo (DRC), Zimbabwe and Angola. Not one of
these countries has had a happy history with diamonds and Zimbabwe and Congo
have had their share of problems with the Kimberly process itself. If the
Kimberly statistics are to be believed then three quarters of Zimbabwe’s 12
million carats of diamond exports in 2012 went straight to Dubai. The
importance of Zimbabwe to Dubai is such that permanent secretary of Mines and
Mineral Development in Zimbabwe is, as a regular matter appointed to the board
of the Dubai Diamond exchange. Almost one half of Angola’s production and one
queater of DRC’s production was exported to Dubai and one quarter of DRC total production
of 21 million carats went there as well. But this is by no means where the bulk
of Dubai’s trade is coming from. Of course it would be easy to blame the three
weakest African producers but the real
magnitude of the Dubai’s trade with Africa is small stuff when compared to the
two biggest users of tax free trading environment. – the EU and India. India
imported roughly a quarter of its rough diamonds through Dubai and the rest
from Europe. For Dubai exports to India in 2012 were approximately half of its
total exports of rough. Thus it remains an entrepot for African rough going
into India for processing. The other
main trading partner with Dubai was the EU which has been one of the main
destinations for exports. It is by no means simply Africans and Indians using
Dubai as a laundry service of choice.
Round tripping –scamming the Indian
export incentives
Dubai
also has a thriving polished diamond market where its tax free environment has
lead to massive growth and the country becoming one of the truly great diamond
centres of the world. But there is another reason for this burgeoning trade in
rough and polished diamonds. Until early this year India allowed the import of
polished diamonds duty free while simultaneously providing financing subsidies
to stimulate the exports of the
country’s largest export. The ever industrious Indian diamantaire, developed a
new technique of ripping off their national diamond trading system called
‘round tripping’. The Indian government has long provided subsidized export
credits at subsidized rates for the diamond sector and these subsidies were
very lucrative but dependent on the export of cut diamonds. So some of the
Indian traders would ship the same consignment of cut and polished diamonds
five or six times across the Indian ocean to Dubai claiming export credits each
time. But this illicit trade went full circle because the Indian authorities also
required the Indian cutters to show that they had processed the rough and so
they would have to ‘round trip’ rough diamonds as well as cut and polished and
so volumes in this very rough trade also increased massively until the Indian
government finally imposed a 2% import duty earlier this year on imported cut
diamonds. With gold prices tumbling, import duties on gold in India rising the
Indian government is set to increase the import duty on cut diamonds yet again
to 5% in the coming weeks. As there remain several commercial reasons for round
tripping, not just skimming for export credits, this may decrease the trade
significantly across the Indian Ocean.
Dubai
is by no means the only country that plays the role of entreport for the free wheeling
trade in rough diamonds but it is now by far the biggest. Its importance is a
reflection of the shift in international trade patterns that increasingly excludes Europe and brings Africa and Asia closer together. For
many years Switzerland has performed a similar function. Now Dubai as well as
several provinces in China are starting to swamp the traditional tax havens and
are gaining an important place in the global diamond market. And in the meantime
the world’s diamantaire will continue to claim that they make no profits from
diamonds in the middle of the pipeline and schools and hospitals will not be
built in Africa and India.
These are the views of Professor
Roman Grynberg and not necessarily of any institution with which he may be affiliated.
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