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Not a New “Blood Diamond” Case: Reassessing the Impact of the FATF Report

11 march 2014

When in late January the Financial Action Task Force (FATF), an inter-governmental group created to fight financial frauds, released a report on money laundering and terrorism financing through diamond trade, the industry reacted with ill-concealed disdain.

The report, drafted by the FATF together with Egmont Group of Financial Intelligence Units, was largely based on publicly available information, as well as on reports provided by a selection of those countries and organisations most involved in diamond trade. 

From the data obtained, the FATF tried to assess the extent of illegal financial practices inside the diamond business. The report spotted and analysed 38 potential cases of money laundering that took place in the last decade. On the other hand, no direct evidence of terrorism financing was found.

On the basis of the information gathered and analysed, the report argued that “diamonds can be used to earn, gain or store value, and are easily moved or smuggled. Their low weight, very high value, high durability, exchangeability for other commodities, ability to remain undetected, changeability, unsteady price and the ease in which they can be traded outside the formal banking system are just some of the characteristics that make them vulnerable to ML/TF and other crimes such as theft”.

The worrying conclusion was that “the diamond supply chain in all of its stages, from production to consumption, can be the gateway to profitability, for laundering proceeds of crime, for ML and for moving proceeds of crime into the financial system”.

Such trenchant judgment on the weaknesses that would permeate the whole pipeline provoked an immediate reaction by some of the most relevant diamond players.

The World Federation of Diamond Bourses reacted with a harsh press statement earlier in February, accusing the FATF of “releasing a report to the media that is fraught with unfounded accusations and inaccuracies”. According to WFDB president Ernie Blom, the FATF deliberately ignored assistance provided by the Federation, which could have helped in correctly framing the problem.

The AWDC accused the report of missing the mark: “the lack of information concerning certain countries cannot deem it as representative for the whole industry”. Specifically, the FATF report was blamed for putting in the same basket countries that implemented serious anti-fraud regulations and countries that never did, avoiding pointing out the differentiation between them, and portraying the entire diamond industry as flawed.

The general feeling was that of having been unfairly accused of grave misconducts, just at a time when the industry deserved to be praised for the efforts it put in increasing transparency and empowering corporate social responsibility.

Considering how hard the industry had to fight, and to a certain extent is still fighting, to get rid of the ghosts of blood diamonds, this reaction appears legitimate. Back then, the presence of an extremely limited, but not easily identifiable, amount of conflict diamonds in the pipeline brought the whole industry on the brink of collapse.
 
At a first glance, the money-laundering/terrorism-financing problem exposed by the FATF bears several similarities with the scandal of conflict diamonds. Just like the former, this is also a case of sporadic misconducts, in which organized crime or single individuals utilize diamonds for illicit purposes.

But similarities end here. By looking at things from the larger perspective of international financial crimes, one can easily see how this is not just a problem for the diamond industry.

Businesses such as restaurants, hotels, law firms, currency exchange offices, football clubs, and many others have been the subject of FATF reports, which highlighted structural vulnerabilities to financial fraud schemes.

None of them suffered major drawbacks in terms of popularity or customer trust. Indeed, the FATF’s main concern is technical, rather than informative. The final aim is to detect potential vulnerabilities related to various financial activities so that governments and anti-fraud institutes can take the necessary precautions.

The proof of that is that the FATF report did not produce any negative impact in the media. As a matter of fact it did not have any impact at all. In the past month not a single national or international media agency thought that the report was worth any mentioning. The debate on the report has been strictly confined to diamond operators and specialised press, but never reached the general public.

This does not mean that the report is not relevant for the industry, or that it could be elegantly ignored. It just means that there is a need for serious discussions among professionals in both the diamond sector and in anti-fraud institutions on how to curb risks of organised crime insinuating in the pipeline.

Paradoxically, if one good thing emerged from this story, that is the reaction of the diamond industry to the FATF report. It is somehow the proof of how much this sector cares about keeping its own reputation clean. In an era where many other businesses in the mining and manufacturing industry still fail to give answers to the need of transparency and accountability, diamond players were ready to take up this new challenge.

Matteo Butera, Rough&Polished