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Are sanctioned Russian diamonds reaching the American consumer? “Yes”… and “No”, but for those knowingly involved, Spoiler Alert: you are playing with fire

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It is clear that Russian Alrosa diamonds are finding their way into the global supply chain and via various mechanisms, mostly perfectly legal, end up with a non-Russian country of origin. This article details some of those mechanisms and the possible medium-term consequences, especially for those who are knowingly involved.

By Richard Chetwode, London, 27th September 2022

Look carefully next time you visit an international airport, and you should see the initials SITA on numerous Logos. SITA… or to use is full name, the Société Internationale de Télécommunications Aéronautiques, provides technology and communications services to the airlines industry, which range from enabling an airline to send messages to its pilots, through to providing software to manage the lost baggage service. SITA is to the global airlines industry what SWIFT is to international finance.

Between 2013 and 2018, European based SITA (it’s incorporated in Belgium and headquartered in Switzerland) took on five Middle Eastern airlines as new customers, which set off alarm bells in the corridors of the US Treasury’s “Office of Foreign Asset Control” (OFAC) because these Iranian/Syrian airlines had been designated as Specially Designated Global Terrorists (SDGT). Such so-called “primary sanctions” apply to any person or entity who is designated as a “US Person”.

But in this case, SITA was a European Company providing services outside the US to customers in the Middle East and payments weren’t made in US dollars. What, you might ask, has this got to do with US based OFAC?... let’s come back to that later.

In February this year, Russia invaded Ukraine, and OFAC sanctioned Russian diamond miner Alrosa (33% owned by the Moscow Government) by designating it as a Specially Designated National (SDN)1. Russian banks, which Alrosa’s customers used to pay for their diamonds, were denied access to the SWIFT international payments system. By Executive Order, President Biden banned the import of Russian diamonds into the US and many of the big jewellery brands like Tiffany, Kering, Richemont, LVMH, Signet, Chopard and Brilliant Earth… to name but a few, made it immediately clear they would no longer buy Russian diamonds. Even moving Russian diamonds was starting to prove problematic; Lloyds and the big insurers stopped insuring them, the major western airliners refused to fly them, the major security services companies (like Brinks or Malca Amit) declined to transport them. It seemed that Russian diamonds were being locked out of the global market… so again: what’s the problem?

Well, if you read the London Financial Times, or Bloomberg, or the New York Times… or maybe you are close to the diamond industry, you will probably be aware that Russian diamonds were still both legally and illegally entering the global supply chain. Doesn’t that make a bit of a mockery out of the US’s sanctions? It would seem so – that’s worth investigating.  

The Kimberley Process (KP) requires that any rough natural diamond crossing an international border (the EU is considered to be a single country for KP purposes) must be accompanied by a government issued KP Certificate which states the country of origin. But rough diamonds from different countries are often mixed together for trading purposes, and it is acceptable for KP purposes to classify these parcels as being of “Mixed Origin” …. you can see where this is going… mix Russian rough diamonds with diamonds from another country and they are no longer Russian diamonds.

But there’s an additional problem. When the rules governing the North American Free Trade Agreement (NAFTA) were decided, there was an intense debate (re US import duties) about the "Country of Origin” of Argentinian wool which had been transformed into Yarn, then exported to Canada and manufactured into woollen shirts to be sold in the USA. Was the shirt “Made in NAFTA”… or not? The conclusion was that the “Country of Origin” was where the product underwent a “substantive transformation” – in this case… where the wool was made into Yarn... and this rule has since applied to every product imported into the US… including diamonds. Indeed in 2019 the US Customs and Border Protection (CBP)2 ruled on behalf of a New York based diamantaire, that a parcel of diamonds imported from Botswana, exported to China for blocking and sawing (early stages of polishing) and then sent to India to be laser cut, faceted and polished, had been “substantial transformed” in India, so when they were re-imported into the US, they were now Indian diamonds. So once a Russian diamond is polished, its “Country of Origin” becomes India (or Belgium or Israel…etc).

To use that famous phrase… “Houston… we have a problem” … but there’s also an issue with the scope of the sanctions themselves.

Firstly, the US sanctioned Alrosa but didn’t sanction Grib Diamonds (approximately 5-10% of Russia’s production by value) so Grib Diamonds NV has been perfectly legally (as long as they don’t end up in the US) selling its diamonds in Dubai… once they are mixed with other diamonds, they are no longer of Russian origin.

Secondly, sanctioned Alrosa can still sell diamonds into any of the other major diamond trading centres because none of them have sanctioned Russian diamonds, and once they are polished, they are of Indian, or Israeli origin…etc; and if the diamonds are being sold (let’s speculate) by a company that is not owned by Alrosa, buyers may choose to think they are not breaking any laws (we’ll come back to that). Likewise, there is nothing illegal about Russian diamonds being sold in jewellery in major diamond consuming countries such as China, India, and the Middle East.

Anecdotal evidence from Dubai suggests that they won’t touch Alrosa’s diamonds - contrary to popular perception, Dubai’s diamond business is well regulated, strong on AML and extremely well run, and even though doing so wouldn’t break their own laws, not only will UAE Customs refuse to let them into the country, but the Central Bank has forbidden any UAE banks from providing finance to buy them… and anyway Emirates Airlines refuses to transport them…. Tick one box.

But the market tittle tattle is that a number of sales have quietly taken place in Antwerp, where Alrosa’s diamonds have long been important to the economic survival of the Belgium diamond trade. Indeed, one of the reasons why the EU has not as yet banned the import of Russian diamonds is because of the potential economic damage to Antwerp of such a ban, with little damage to Russia who would simply sell them elsewhere.

The gossip is that a small group of Indian/Israeli diamantaires had been buying these diamonds at around 80c on the dollar (though payment is in €uros), funded by certain non-US banks, with the diamonds flown via certain friendly countries and transported by a non-US based security company. No EU law has been broken.

Likewise, it’s perfectly legal to trade Russian diamonds in India (where 96 out of every 100 diamonds are polished); in July, the Reserve Bank of India (RBI) announced that Indian diamantaires could pay for Russian rough diamonds with rupees. So Russian diamonds can be flown to India direct (or via a friendly country), where they can be purchased by a small group of, let’s guess 5-10 Indian diamond manufacturers who might have set up new companies whose sole purpose is to buy Russian diamonds at arm’s length, and once polished, their “Country of Origin” is India.   

How damaging is this? Well, it’s clearly not good, except that unlike 25 years ago, the industry has the tools to mitigate this, but first a caveat… … today we need to agree that it is very difficult to track the smallest, tiniest diamonds – huge volume, tiny value, so let’s deal with the important part of the market, i.e., everything but those.

The good news is that it is possible to track a natural diamond’s provenance. If a retailer wants guaranteed provenance (and many do), the first point of reference is the paper trail which comes from auditing the invoices way back to when they were mined, each of which state the “Country of Origin” … if a retailer requests that the diamonds do not come from Russia, that request will be made back down every stage of the pipeline. Diamonds originally classified as “Mixed Origin” without additional evidence of origin, will not be accepted… and industry insiders know which companies are polishing Russian diamonds.

New technology also now exists to track a diamond from the moment it was mined right through to the consumer purchase. De Beers for instance, is rolling out its Tracr programme; Tracr is the currently the world’s only distributed diamond blockchain that starts at the source and provides tamper-proof source assurance at scale. If you aren’t using it… you should be. Other companies are looking at alternative blockchain or audited Chains of Custody… and the World Diamond Council is (slowly) rolling out its new System of Warranties across the industry.

Trust the big brands!... most global brands (De Beers Jewellers, Tiffany, Cartier…etc), have very robust sourcing programmes… (including sustainability principles and Codes of Ethics that all suppliers and sub-contractors have to sign up to). De Beers ForeverMark (FM) makes a promise that an FM diamond was ethically and responsibly sourced in (and only from) Southern Africa and Canada; the CanadaMark programme guarantees Canadian provenance…. UK high end jeweller Boodles’ “Peace of Mind” collection only sells diamonds from Petra Diamonds’ famous Cullinan mine in South Africa…. the list goes on and on.

So where does that leave us. No one buying Russian diamonds wants anyone to know who they are… no surprise there! When Bloomberg publicly named Indian companies Kiran Gems and Shree Ramkrishna Exports as two of the largest buyers and India’s IndusInd Bank as providing the funding, they’ve probably scared the living daylights out of them. The European banks seem to have stopped funding purchases in Antwerp, even in Euros, for fear of US repercussions. Grib has had to cancel its recent Dubai sale because one of the US corresponding banks which provided US dollar transactional services refused to fund the last sale for some customers. The EU seems to be reconsidering sanctioning Russia diamonds, so maybe the net is closing in; but there’s always someone willing to take the risk, and the rumour is that sales into India continue.     

But there is also a bigger point, and this brings us back to the story of OFAC, SITA and the definition of a “US Person”. OFAC claimed that SITA met the definition of being a “US Person” simply because their messaging system passed through a MegaSwitch in Atlanta, the technology was originally based on US-origin software, and their baggage handling used a back-up server in the US.

A “US Person” covers all US citizens, dual citizens, permanent residents, and entities organized under U.S. law, all of whom must comply with U.S. economic sanctions in all their activities, anywhere in the world3. For those who have purchased sanctioned Russian diamonds, not using US dollars and far away from the US, a word of warning: if you have a board member, director or an employee with citizenship or a green card, or you have management or marketing in the US, or you have subsidiary there, or maybe you just sell your products there, use US origin software (e.g. Microsoft)… or even use a shared service (as simple as using a US-based server)… then OFAC may already have jurisdiction.

At some point, OFAC is going to have worked its way down its list of priorities and arrive at “diamonds”, and then for those involved… all hell may very well break loose.

 

Richard Chetwode is Chairman of Namibian Diamond Mining Company Trustco Resources, Chairman of the Advisory Board of Australian technology company Yourdiomonds.com and a non-executive director of property company Roystonea Ltd, as well as consulting to several diamond (and other) businesses. All the opinions in this article are his own.

 

1 Blocks any assets or entities owned 50% by Alrosa or Sergei Ivanov and prohibits any US national from providing (or receiving) “funds, goods, or services”. 7th April 2022.
2 “RE: Country of origin determination for diamonds”. Ruling by Steven A. Mack, Director, National Commodity Specialist Division. CBP. NY307372. www.customsmobile.com/rulings/docview?doc_id=NY%20N307372&highlight=7102.39.00%2A
3 “The Aggressive Extraterritorial Reach of U.S. Economic Sanctions: Foreign Company Exposure to OFAC Enforcement”. The National Law Review. 15th April 2020. www.natlawreview.com/article/aggressive-extraterritorial-reach-us-economic-sanctions-foreign-company-exposure-to.