Compliance Risk and Diligence
Complying with anti-money laundering and anti-bribery and corruption regulations.
As the COVID-19 crisis prompts consumers to re-evaluate priorities, the diamond sector, like many others, is experiencing the harsh consequences of these changes, with the largest five diamond producers having piled up USD 3.5 billion in inventory since the beginning of the pandemic.1 These recent difficulties add to longstanding reputational issues exemplified in the January 2020 bankruptcy of Swiss jeweler De Grisogono. In the wake of the “Luanda Leaks” scandal, De Grisogono filed for bankruptcy after Sindika Dokolo, husband of the former Angolan President’s daughter Isabel dos Santos, was accused of receiving several millions of dollars in brokerage fees paid by the Angolan government for the acquisition of this company.2
Despite their famed durability and iconic claims of “foreverness,” diamonds have endured a fragile reputation. Brutal, diamond-funded civil wars fought in the 1990s across Angola, Liberia, and Sierra Leone have tarnished the image of a gem historically more associated with fairy tales and royal dynasties. More recently, in its 2018 List of Goods Produced by Child or Forced Labor, the U.S. Department of Labor identified abusive labor practices in diamond mines across Central and West Africa, and noted that deaths or injuries due to dangerous working conditions remain frequent.3,4
In 2003, the UN implemented the Kimberley Process Certification Scheme (Kimberley Process), which mandates all parties involved in the diamond supply chain to pledge not to source so-called “conflict diamonds.” While the Kimberly Process remains the only international standard for the diamond industry as a whole, its failure to provide full transparency on diamond supply chains and the refusal by key stakeholders to expand on its narrow definition of conflict diamonds, leaves those involved in the sector open to reputational and legal risks, including human rights violations, criminal activities and links with conflict and corrupt government officials.
Legislators and regulators are increasingly scrutinizing the integrity of global supply chains and a number of new laws, regulations and non-binding protocols relevant to the diamond industry are emerging. However, these new regulations, such as the 2021 EU Conflict Mineral Regulation, are targeted at other specific conflict minerals and not at the diamond sector. The effect of the loosely regulated nature of the diamond industry underlines the importance of enhanced due diligence to identify and mitigate supply chain risks in a sector that often crosses high-risk and opaque jurisdictions.
Our experts outline risks to companies operating in the diamond sector, steps companies are taking to improve their processes and ways to conduct effective due diligence.
Identification of the Ultimate Beneficiary of Diamond Proceeds is Critical
The Kimberly Process defines conflict diamonds as diamonds used by “rebel movements […] to finance armed conflicts”.5 However, with the decline of warfare in Africa, since the end of the 1990s diamond revenue primarily funds coercive governments, and yet this shift remains unaddressed by the Kimberley Process definition.6,7,8,9 While doing business with governments rather than militias is less of a risk, government-owned mining companies and foreign officials involved in diamond transactions are particularly vulnerable to bribery and sanctions, as well as money laundering, fraud and corruption.
An Extensive Understanding of Country-specific Bribery and Corruption Risks is Particularly Invaluable in the Diamond Sector
Many of the largest diamond-producing countries, including Russia, Angola, the Democratic Republic of the Congo (DRC), Zimbabwe, Guinea, Sierra Leone and Brazil, rank towards the bottom of Transparency International’s 2019 Corruption Perception Index.10 Anti-corruption laws with extraterritorial reach, such as the U.S. Foreign Corrupt Practices Act, have been applied with success to bribe payments made to acquire diamond mining rights abroad. For example, in 2016 the U.S. Department of Justice fined Och-Ziff Capital Management Group LLC USD 213 million after the company admitted it had paid bribes to senior government officials through intermediaries in order to secure diamond mining rights.11
Kimberley Process-compliant Certification is Not a Guarantee of Ethical Practice or Sanctions Compliance
For example, although the UN withdrew many of its sanctions following the emergence of the Kimberley Process in 2003, from 2005 to 2014, the U.S. and the UN maintained sanctions targeting the diamond sector in countries including Côte d'Ivoire.12 Today, diamonds mined in Zimbabwe are subject to “withhold release orders” issued by U.S. Customs and Border Protection, which ban such diamonds from crossing U.S. borders due to the suspected use of forced labor.13
The U.S. has also issued targeted sanctions against specific individuals and companies involved in diamond trading due to suspected bribery, terrorism-financing and human rights abuse. These include Israeli mining mogul Dan Gertler, who has been targeted by sanctions since December 2017 under the Global Magnitsky Act over alleged bribery in exchange for mining contracts, including for diamond mines in the DRC.14 Elsewhere, U.S. sanctions on diamond trading have also targeted governments, such as that of Venezuela.15 These sanctions are particularly relevant when considering the fact that many diamond mines are wholly or partly owned by local governments, as with Russian diamond miner ALROSA and its Botswanan competitor Debswana. Government stakes in these entities imply frequent involvement by politically-exposed persons. In such jurisdictions, taking basic compliance measures – such as watch-list screening of companies and affiliated individuals – allows investors to choose their local partners and vendors with increased confidence.
Diamonds Remain Highly Attractive to Organized Crime
High value, portability, lack of regulatory framework and traceability, stable and indexed prices are all appealing factors for those tempted to use diamonds in illicit transactions outside of the formal banking system and as a store of value for criminals, terrorists and tax evaders alike. Conflict diamonds remain easy to transport undetected before being reintroduced into legitimate supply chains, thus increasing money laundering risks.16,17,18 Although Kimberley Process stakeholders indicate that the percentage of conflict diamonds in circulation has been reduced to less than one percent, several critics have disputed this, including Kimberley Process architect Ian Smillie who estimated this to be between five and ten percent.19,20
From diamond mine to customer, each stone passes through thousands of hands and crosses countless borders before reaching the consumer.21 This vast supply chain implies an inherent opacity, multiplying risks, including those deriving from the ownership or jurisdiction of third parties in the supply chain.
With falling demand, the rise of consumer conscientiousness and the success of lab-grown diamonds, since 2019 some industry leaders have been developing their own initiatives to improve transparency in the sector. While these initiatives are crucial in gaining the trust and confidence among a new generation of consumers, relying on self-imposed regulatory standards creates loopholes that a coherent due diligence process can address.
Cut diamonds or rough diamonds affixed to jewellery do not require a Kimberley Certificate. Once cut, gemological specialists can no longer determine a diamond’s origin.
Kimberley Certificates are not issued for individual diamonds but for bulk shipments of rough diamonds when these are shipped across the mining country’s national border. However, before this, diamonds often pass through various hands domestically. For example, in the DRC, diamonds reportedly change hands eight to ten times before being issued a Kimberley Certificate in the capital Kinshasa, when they are ready for international shipment. This greatly increases the potential exposure to high-risk third parties along the supply chain.22 Furthermore, once the diamond shipment arrives in another country, this second country is thereafter listed on the certificate as the exporter, interrupting the traceability chain.
Major diamond producers have sought to remedy the issue of poor traceability. Since January 2019, Tiffany’s & Co., the world’s largest jeweller by sales23 has allowed customers to filter diamonds by provenance on its website.24 De Beers, the world’s largest diamond producer by value25,26 also announced a provenance program in April 2019 under which it would label its diamonds’ provenance. However, these suppliers often group several potential countries of origin under the designations “from Diamond Trading Company (DTC)” or “Botswana sort”27,28 to denote diamonds from mines in Botswana, Canada, Namibia and South Africa.29,30
Kimberley Certificates do not detail the individual mine or mining company from which the diamonds were sourced. This facilitates diamond smuggling, the process of funnelling illegally mined and conflict diamonds into shipments of conflict-free diamonds and prevents consumers and other stakeholders from making informed decisions.
While the new standards adopted by major diamond producers allow consumers to find out general information about individual mines, including compliance and safety certificates,31 an individual diamond cannot always be traced back to its mine or even country of origin. Moreover, many well-known diamond producing conglomerates mine their rough diamonds in jurisdiction-specific joint ventures with third parties. These intra-group sales and ownership structure complexities within large diamond producers further blur the traceability chain.
In light of the shortcomings of the Kimberley Process certification and other private initiatives, companies can benefit greatly from conducting more agile supply chain due diligence to combat those risks generated by reduced traceability and the high number of jurisdictions and third parties involved in the supply chain. This can be achieved by applying more holistic due diligence strategies: screening identified vendors, monitoring reputational risks through local sources and harnessing relevant language and research capabilities.
The absence of industry-specific mandatory due diligence legislation for the diamond sector leaves supply chains exposed to environmental issues and human rights abuses that are not covered by the Kimberley Process. Yet, diamonds have consistently been excluded from efforts to better regulate the supply chains of extractive industries. Concurrently, mechanisms intended to support the Kimberley Process (such as the World Diamond Council’s System of Warranties and the UN Guiding Principles on Business and Human Rights) have been voluntary and non-binding.32,33
As we have explored, this has confounded attempts to improve standards of transparency and environmental and human rights protections within the diamond industry, exacerbating legal and reputational risks to businesses. In comparison, on the far end of other extractive supply chains large multinational groups have been increasingly scrutinized on their human rights track record. For example, in December 2019, human rights advocacy group International Rights Advocates launched proceedings against Apple, Google, Microsoft, Dell and Tesla, alleging the use of child and forced labor in cobalt mines in the DRC.34
Despite the lack of an effective normative framework in the diamond industry, several regulators, lawmakers and international organizations have begun to apply due diligence processes to address human rights issues in the supply chains of other minerals, namely tantalum, tin, tungsten and gold (collectively known as “the 3TGs”). For example, the EU Conflict Mineral Regulation, effective 2021, and the London Metal Exchange Responsible Sourcing initiative, effective June 2022, will require that all players in the 3TG mining industry adopt the OECD’s five-step risk-based Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas when trading the 3TGs.35,36,37
Meanwhile, lawmakers, regulators and investors alike have shown a growing interest in developing cross-sector environmental, social, and governance (ESG) principles, which stand to bring human rights and environmental standards in the diamond industry to the level of other mining-based industries. Recent examples include Hong Kong Stock Exchange ESG Reporting Guide of 2019, the French “Devoir de Vigilance” Act of 2017 and the Dutch Child Labor Due Diligence Act of 2017, the latter of which look set to be followed by new European Union legislation in 2021, mandating that European companies extend their existing compliance-based due diligence programs to address a full spectrum of ESG risks, including those that are prevalent in the diamond industry.
Due to media censorship and government interests, factual information about day-to-day activities and potential regulatory violations at the mines may be unavailable in the public domain. Discreet reputational inquiries about the mines’ operations and senior management could provide insight into whether adequate standards are being maintained.
If you would like to find out more about how Kroll is supporting companies in the sector to apply a holistic compliance due diligence program to their supply chains through vendor screening, on-the-ground investigative research, and targeted public record research to trace beneficial ownership, understand country-specific challenges and uncover ESG risk issues, please contact Kroll’s Compliance Risk and Diligence team via the contact details provided below.
Complying with anti-money laundering and anti-bribery and corruption regulations.
Screening and enhanced due diligence solutions tailored to need and country/jurisdiction.
Supporting corporate third-party management programs to drive risk-based due diligence decisions.
Establishing policies and programs to prevent fraud and comply with regulations globally.