March 8, 2004
Diamond Trade Still Vulnerable to Money Laundering, Says U.S. Report
The International Narcotics Control Strategy Report of 2003, issued by U.S. State Department's Bureau for International Narcotics and Law Enforcement Affairs, cites the diamond trade as vulnerable to potential money laundering, reports Israel-based Tacy Ltd. Diamond Industry Consultants. The report lists in detail countries where money laundering through diamonds is suspected, but also says it has not been able to prove press reports that al Qaeda and other terrorist groups exploited the West African diamond trade. Here's a recap:
Liberia is described as "vulnerable to money laundering because it has been a major transshipment point for illegal diamond smuggling and illegal arms trading During the Liberian civil war, which was declared officially over on Aug. 11, 2003, diamonds were used on a broad scale to purchase arms and fund the conflict. However, the exploitation and export of Liberia's natural resources, particularly timber and diamonds, has continued. The Liberian government has not met the conditions for becoming a participant in the Kimberley Process Certification Scheme, which requires that certain minimum standards be met in order to assure that diamonds being traded are not conflict diamonds and their origin is known. Diamond traders, including Eastern Europeans and Lebanese, often travel to Monrovia to purchase rough diamonds on the black market and then smuggle and export them out of Liberia, documenting them as coming from some other source, in violation of a United Nations Security Council Resolution prohibiting all trade in Liberian rough diamonds. The undervaluation of diamond exports and use of double invoicing are common tactics employed to transfer value out of the country, often in conjunction with other illicit activities. There continue to be press allegations that al Qaeda has exploited the West African diamond trade, but such a connection has not been conclusively established."
The report continues, "Liberia should enact a comprehensive anti-money laundering regime that criminalizes money laundering and terrorist financing. Liberia should also enforce its cross-border reporting requirements, take steps to properly regulate its diamond industry, and become a participant in the Kimberley Process."
Sierra Leone has a small commercial banking sector and is not a regional financial center. Its loose oversight of financial institutions, weak regulations, rampant corruption, and a prevalent informal money-exchange system create an atmosphere conducive to money laundering.
"Given the importance of the large diamond sector to the economy, the prevalence of money laundering in the diamond sectors of neighboring countries and the loose oversight of the financial sector, Sierra Leone's diamond sector is particularly vulnerable to money laundering. There are also allegations that the diamond trade intersects terrorist financing operations. The diamond trade is susceptible at many levels of exploitation, including cross-border trade, secondary level traders and agents, and suspect buyers. Furthermore, law enforcement and customs have limited understanding and capability to effectively investigate and control money laundering," continues the report. Though there is no specific legislation concerning money laundering in Sierra Leone, the Ministry of Justice is in the process of developing such laws. However, progress towards implementing these laws has been stymied by severe lack of knowledge and technical capacity on behalf of the relevant Government of Sierra Leone Ministries.
The Democratic Republic of Congo, while not a regional financial center, is cited as susceptible to money laundering due to its "porous borders, lack of a financially sound, well-regulated banking sector and functional judicial system, and inadequate enforcement resources. Money laundering in the Congo more than likely involves smuggling proceeds, mostly from illicit diamond sales as smuggling is a widespread crime in the DRC."
Angola is not classified as a regional or offshore financial center and has not prosecuted any known cases of money laundering, but the report says "the laundering of funds derived from pervasive corruption is a concern, as is the illegal trade in diamonds and the usage of diamonds as a conduit for money laundering schemes. It is possible that links exist between the illegal diamond trade and international drug and criminal organizations."
Guinea, in addition to large mining operations, has an industry of small-scale traditional mining. "This industry, which deals primarily with diamonds and gold, lends itself to money laundering, as few records are kept and sales are made in cash. In 2002, Guinean police seized over $1.5 million high-quality counterfeit U.S. currency tied to gold and diamond trade," states the report.
South Africa's position as the major financial center in the region, its relatively sophisticated banking and financial sector, and its large cash-based market, all make it an attractive target for transnational and domestic crime syndicates, explains the report, noting that illicit dealings in diamonds is one type of crimes related to money laundering.
United Arab Emirates, which remains a cash-based society and is considered an important regional financial center for the Gulf region, because of its role as the primary transportation and trading hub for the Gulf states, East Africa, and South Asia, and with expanding trade ties with the countries of the former Soviet Union, it is regarded as having the potential to be a major center for money laundering. Money laundering may take place within the formal banking system, including the numerous money exchange houses, but is believed to be largely confined to the informal and largely undocumented "hawala" remittance system an undocumented and nontransparent system. The UAE government also has admitted the need to better regulate "near-cash" items such as gold, jewelry, and gemstones, especially in the burgeoning markets in Dubai. UAE acceded to the Kimberley Process in November 2002 and began certifying rough diamonds exported from there on Jan. 1, 2003. UAE customs officials may delay or even confiscate diamonds entering UAE from a KP member nation without the proper KP certificate.
India is labeled "vulnerable to money laundering activities" since it is a growing regional financial center. "Some common sources of illegal proceeds in India are narcotics trafficking, trade in illegal gems (particularly diamonds), smuggling, trafficking in persons, corruption, and income tax evasion. Indian involvement in the underworld of the international diamond trade should be examined. India should pursue its efforts to join the Financial Action Task Force. It also needs to quickly finalize the implementing regulations to the anti-money laundering law and bring the new FIU up to speed in order to enhance information sharing with its counterparts around the world." The report does, however, note that India's historically strict foreign-exchange laws, transaction reporting requirements, and banking industrys know-your-customer policy make it difficult for criminals to use banks or other financial institutions to launder money.
Israel is cited as having "made substantial progress enacting anti-money laundering legislation to support its efforts to strengthen its anti-money laundering regime" and was removed from the Financial Action Task Force list of non-cooperative countries and territories in the fight against money laundering in June 2002 and then removed from its monitoring list in the fall of 2003. The report, however, advises Israel to examine the misuse of the international diamond trade to launder funds.