United Arab Emirates

Geographically, the United Arab Emirates (Dubai) lies at a crossroads in the world diamond trade. At the eastern end of the Arabian Peninsula, it straddles the divide between southern producing countries, the Western “old world” diamond centres of Antwerp and London, and the “new world” promise of Mumbai and Shanghai.

Since 2003, Dubai has emerged from obscurity to be the third largest diamond trading centre in the world, trading almost $40 billion worth of stones in 2012--11.5 billion of which were rough[1].

Location is not the only reason for the UAE’s success. Faced with declining oil reserves, Dubai successfully set out to reinvent itself as a regional trading hub, guided by laissez-faire regulations, minimal scrutiny, and generous 50-year tax holidays for companies. Its dual role as a transit hub where diamonds can be revalued – and have their origins disguised – makes Dubai extremely attractive to those seeking to give illegitimate diamonds a new lease on life, or to cheat African producing countries out of taxes which they would otherwise have to pay.

The Issues

Mixed origins – According to the Kimberley Process, all rough diamonds traded in the world are to be accompanied by certificates detailing the value and origins of the stones. Operating properly, the system should be able to stop stones with questionable origins or values that do not match the geological footprint of the country of export. Unfortunately, those seeking to cover their tracks can easily circumvent this system through the use of certificates of mixed origin, gained by routing such diamonds through trading hubs such as Dubai.

Companies, individuals or criminal networks seeking to disguise problematic diamonds will initially ship their stones to Dubai, where the parcels can then be mixed with other shipments. From there, stones are shipped on to other jurisdictions for cutting and polishing, only this time they are accompanied by a KP certificate from Dubai, rather than the initial country of origin. By repeating this process such diamonds become extremely difficult, if not impossible, to trace. This practice is problematic not only because it can be used to disguise purchases from legal, yet reputationally challenged sources (like Zimbabwe’s Marange diamond fields); it can also be used to hide the origins of diamonds which do not meet KP certification requirements.

Undervaluation of diamond exports – Prior to the advent of the KP, African diamonds were routinely bought at bargain prices, and re-priced more accurately as they passed through the diamond supply chain. Doing so minimized export taxes and disguised the margins between the purchase and market price of the stones. The KP’s requirement that diamonds be accompanied by certificates stating the price of a given parcel and issued at the point of origin was intended to make this practice more difficult. In reality, however, the problem continues.

UAE’s biggest draw is its tax free status. Diamonds imported to the UAE from the country of origin can be revalued closer to market price, and re-exported without tax consequences. KP statistics from 2013, for example, show that the average per carat value of diamonds entering the UAE was $74.40, yet the average re-export was $107.05 per carat – a 43.8% increase. The difference was even more dramatic in 2011, reaching 74%, according to a ground-breaking study by the Financial Action Task Force and the Egmont Group looking at the intersection between diamonds, money laundering and terrorism.[2]

In theory, part of the higher valuation can be attributed to washing diamonds and mixing parcels to make them more attractive to onward buyers. Generally this process can result in as much as a 15% increase. However, in practice the “trades” taking place in Dubai are effectively just revaluations occurring within the same family of companies. For example, one company exports a shipment from Africa to Dubai, where another company takes receipt of the diamonds and ships them on to another affiliated company in a manufacturing centre, most often India. Often this re-evaluation comes with little or no value addition being done to the diamonds themselves[3]. In 2013 alone, this price manipulation generated in excess of $1.6 billion in profits in the UAE, and represents a major deprivation for African treasuries which lose much needed tax revenues. Perhaps one of the worst affected countries is Zimbabwe, which lost an estimated $770 million in taxable revenues on exports to UAE between 2008 and 2012 due to an average 50% undervaluation of its diamonds[4]. Several African countries, notably the Democratic Republic of Congo when it was the 2011 KP Chair, have raised this issue within the KP, but face stiff resistance from industry groups.

Lack of enforcement cooperation – Diamonds fuelling conflict is not the only ethical and criminal challenge facing the diamond industry. A lack of enforcement cooperation often allows criminal networks, particularly in politically unstable areas, to launder ill-gotten gains into the legitimate banking system—a practice that accounts for an estimated 2-5% of global GDP, or $800 billion to $2 trillion a year[5]. More rigid banking practices that came into effect after 9/11 have also made international enforcement and intelligence communities increasingly concerned about the role diamonds and other precious minerals play in terrorism financing.

On several occasions American and European enforcement agencies have formally, yet unsuccessfully, requested information and investigative cooperation from UAE on diamond-related cases. PAC is aware of one precedent setting case involving a Belgian based diamantaire believed to be funnelling laundered money to Hezbollah. Despite repeated and high level requests for cooperation, the Belgian authorities were consistently ignored by the authorities in Dubai. The UAE is also known to have temporarily provided safe haven to Viktor Bout, the notorious Russian gunrunner subject to an international arrest warrant for supplying weapons to a litany of African rebels, including those responsible for the destructive diamond fuelled wars of the late 1990s.

Doing business at whatever costs may also explain part of Dubai’s meteoric rise to prominence. In keeping with its status as an offshore tax haven, Dubai ranks as one of the most secretive jurisdictions in the world, scoring 79 out of a possible 100 on the Financial Secrecy Index in 2013.[6] Rules, including those of the Kimberley Process, can also find themselves open to interpretation. Take for example Noora Jamsheer, the former head of the Dubai Diamond Exchange. Jamsheer resigned her position in 2007 because she was “unwilling to make compromises and overlook suspicious shipments of diamonds”. She cited at least two cases where suspicious shipments of rough diamonds were released by executives despite her objections. She also claimed to have been frequently offered “commissions” to overlook problematic shipments.[7] During the height of the KP embargo against Marange diamonds from Zimbabwe, the UAE was also the preferred destination of illegal or smuggled goods. This included a $157 million shipment which Dubai was forced to seize but later lobbied KP members to release in June 2011, over the objections of many countries.

Because of these factors, PAC gives the UAE a High risk rating.

Recommendations

  • The DMCC should publicly explain what accounts for the difference in values between original imports and re-exports.
  • All diamond shipments must be opened and revalued upon entry to verify their true value. Those with gross valuation differences should be sent back to the country of origin so authorities there can appropriately tax them. Exporters who consistently engage in undervaluation should have their names shared with authorities in the country of origin.
  • The government of the UAE should commit to cooperating with outside enforcement requests, including sharing relevant information and assisting in investigations related to illegality in the diamond sector
  • Considering the growing concern about the intersection between diamonds, money laundering and terrorism financing, the UAE needs to put greater safeguards into its system. This should include discontinuing the current practice that permits diamond transactions to be made in cash, rather than through formal banking channels.
 
Further Reading
“The US State Department has explicitly pointed to the gold and diamond trade as being areas in which the UAE is vulnerable to money laundering”, City of Gold, Global Witness
 
 
The complex nature of the global diamonds trade means that those seeking to prevent money laundering through the use of precious stones require a significant degree of international cooperation to achieve their aims. “Difficulties in the international exchange of information and the use of tax havens are major obstacles in the detection and prosecution of money laundering through trade in diamonds” (p.137)
Money Laundering and Terrorist Financing Through Trade in Diamonds
Financial Action Task Force and the Egmont Group
 
 
Disappearing revenues from the Marange diamond fields have been well documented, and strong evidence shows that these funds have gone to support the abusive regime of Robert Mugabe and his cronies. Accomplished through a combination of mispricing and outright smuggling, the UAE was one of the biggest conduits through which illicit Marange goods entered the legal supply chain. PAC estimates that as much as $2 billion in taxable revenue was lost to the Zimbabwean government between 2008 and 2012, nearly half of which ($770 million) was the result of price manipulations in Dubai.
 
Reap What You Sow: Greed and Corruption in Zimbabwe’s Marange Diamond Fields
Partnership Africa Canada
 
 
 
 

[2] Money Laundering and Terrorism Financing Through Trade of Diamonds, FAFT-Egmont Group, October 2013, p.
[3] Money Laundering and Terrorism Financing Through Trade of Diamonds, FAFT-Egmont Group, October 2013
[4] KP statistics. This figure also comprised part of the $2 billion Partnership Africa Canada estimates has been plundered from Zimbabwe between 2008-2012. See  Reap What You Sow (2012), available here: http://www.pacweb.org/images/PUBLICATIONS/Conflict_Diamonds_and_KP/Reap_What_You_Sow-eng-Nov2012.pdf
[5] The United Nations Office on Drugs and Crime. Money Laundering and Globalization https://www.unodc.org/unodc/en/money-laundering/globalization.html
[6] Tax Justice Network. Financial Secrecy Index – 2013 Results http://www.financialsecrecyindex.com/introduction/fsi-2013-results
[7] Wikileaks.org Former Dubai Diamond Exchange CEO Alleges Slack Controls On Conflict Diamonds http://wikileaks.org/cable/2007/06/07DUBAI394.html