"Like it or not, compliance to official requirements for a clear audit trail of one’s processes is now an integral part of a diamantaire’s business. You could say compliance is the 'Fifth C' of the business", writes Pranay Narvekar, partner at Pharos Beam LLP and an independent consultant to the diamond industry. Narvekar, in his article "How Compliance Became The ‘Fifth C’ In Diamonds", outlines the changing landscape of the diamond industry with regard to compliance, starting from the Wild West days of obscure transactions that were common practice less than 20 years ago, to increased scrutiny and more robust anti-money laundering legislation which has become the norm.
The diamond industry has long been a global trade, with its distinctly different activities - such as mining, trading, manufacturing and jewelry making - taking place in very diverse locations. "Less than 20 years ago", he writes, "a diamantaire could easily have bought diamonds from a supplier in one location, have them shipped to another location and perhaps a company distinct from his own firm, which was doing the ordering and paying." What was common practice not so long ago is now viewed as a money-laundering process. "The banks and financial institutions would not participate." One of key elements of this transition is the Financial Action Task Force (FATF), an intergovernmental organization the G7 countries set up in 1989, and which issued its first guidelines in 1990. The initial guidelines covered banks and financial institutions, adding terrorist financing to its mandate in 2001, and in 2004 adding to its scope five designated non-financial businesses and professions, including dealers in precious stones and precious metals. Since then, all diamond and jewelry industry stakeholders across the globe have had to follow FATF guidelines.
"Initially", says Naekar, "diamond and jewellery industry stakeholders only had to implement customer due diligence or “know your customer” procedures for cash transactions above $15,000. Even that was a shock. Banks routinely supplied clients with cash to travel and pay African suppliers with limited banking access or to settle up immediately when taking delivery of hand-carried parcels. But compliance was mandated and by 2006, all stakeholders had to have clear anti-money laundering (AML) procedures in place." The FATF updated its recommendations in 2012, placing greater emphasis on beneficial ownership information. "The guidelines also proposed a risk-based approach should be followed to identify and address AML risks like politically exposed persons (PEPs)."
"It is important to note", he adds, "that the FATF does not set laws itself, but only provides guidelines or recommendations and participant governments are expected to legislate their own domestic laws in line with the recommendation." Fast-forward to October 2013, the FATF and the Egmont Group, a group consisting of Financial Intelligence Units of all countries, published a typology report titled Money Laundering and Terrorist Financing through Trade in Diamonds. "It made suggestions to mitigate the risks, including extending legislation in our trade to non-cash transactions, more harmonious AML/CTF regulation across countries and greater international cooperation and information sharing."
Full Compliance The New Normal
"The diamond sector is already witnessing greater scrutiny by governments," Navekar concludes. In the US, Cartier was fined for an AML procedural lapse in 2017. In Belgium, there are reports of AML spot checks being conducted by authorities in the diamond district with companies being fined for not having adequate KYC information. In India, the government appointed a regulator for AML related laws for the gems and jewellery sector. The recent financial scandals in India will probably precipitate tougher scrutiny by the regulator. Governments are already working on the next round of AML legislation with the EU taking the lead. These include a reduced cash threshold for reporting of transactions, expanding the definition of people covered under PEPs, establishing central registries of beneficial owners and strengthening the risk-based approaches apart from looking to integrate new technologies like biometrics etc.
Going forward, companies in the diamond sector across the globe, regardless of their location, will have no option but to enhance their AML awareness and processes and institute a clear risk-based AML policy, with adequate KYC information, decision hierarchy, enhanced due-diligence guidelines, transaction monitoring and reporting mechanisms. The transition will have its challenges, especially for smaller companies, but it will eventually lead to transparent and compliant trade."