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A Damning Trail of Smuggling, Money Laundering and Kosher KP Certs

19 march 2012

A report just published by the U.S. State Department's Bureau for International Narcotics and Law Enforcement Affairs states: "Existing safeguards do not address the issue of the laundering of diamonds and value transfer through Lebanon directly or by Lebanese buying agents in Africa." The International Narcotics Control Strategy Report Volume II Money Laundering and Financial Crimes report states that "Lebanon faces significant money laundering and terrorist financing challenges; for example, Lebanon has a substantial influx of remittances from expatriate workers and family members, estimated by the World Bank at $8.4 billion in 2010."

Though using dry language, or maybe because of that, the report unfolds like a crime book; adding information that, like pixels on a screen, become a full picture, Edahn Golan says in an article published on www.idexonline.com. The full picture in this case, is where this money is coming from. I hope you are sitting tight.

Source of Illicit Money

"[A] number of Lebanese abroad are involved in underground finance and trade-based money laundering (TBML) activities. (…) primarily from foreign criminal activity and organized crime, and Hizballah [sic], which the United States has designated as a terrorist organization."

These expatriates in Africa and South America have established financial systems outside the formal financial sector. "Lebanese diamond brokers and purchasing agents are reportedly part of an international network of traders who participate in underground activities including the trafficking of conflict diamonds, diamond trade fraud (the circumvention of the Kimberly [sic] process) and TBML."

Where are the Diamonds Coming From?

Back in 2009, an investigative KP team travelled to Guinea after reports of mass smuggling in the region started to surface. It found that starting in April 2007, and at least until the end of 2008, a spike in exports took place. All of a sudden, large shipments of tens of thousands of carats started to be exported.

An analysis of the goods by type found that the make of these exports do not fit the characteristics of a Guinea production. Most of the goods were documented as boart goods worth about $2 per carat. In 2007 alone, the export of boart jumped by about 633,000 carats. In 2008, it was nearly 2 million extra carats.

By comparison, in 2006 the entire Guinea production totaled 473,862 carats, of it boart was just 35,000 carats!

Don't be confused by the low cost of these goods. The total declared value of this jump in exports passed $3 million in 2007 and neared $13 million in 2008.

The Trail Of Goods

Two questions come to mind: where did the goods come from, and where did they go? The consensus among those involved is that most of the goods came from Marange, Zimbabwe. This may have been an important consideration of KP when dealing with Zimbabwe.

To answer the second question, we don't need to go much further than KP's annual data reports. From imports of 186,365 carats in 2006, Lebanon's rough diamond imports surged to 1.7 million carats in 2007 (+816.5%) and to 2.4 million in 2008 (+39.6%).

These goods are not polished in Lebanon, they are exported. Lebanon is an exchange station for the goods. "Existing safeguards also do not address the issue of the laundering of diamonds," states the Money Laundering and Financial Crimes report.

Odd Transactions

One possible reason for this assertion is the stated values of rough exports: they make no economic sense.

In 2006, a "normal" year for the global rough diamond trade, the average value of rough going through Lebanon increased 156.7 percent (!), indeed a fantastic return on investment for the Lebanon "brand," and the wet dream of any Antwerp, Mumbai or Ramat Gan-based rough trader.

In 2007, exports were valued 18.6 percent more than imports. The surprising outcome is what happened since: in 2008 the average value of exports equaled that of imports; in 2009 and 2010 the average value of the goods was actually deflated, declining 40.8 percent and 10.1 percent respectively.

If the transactions don't make sense economically, they must have some other value, for example: money laundering.

The Trail of Goods II

About 3 million carats were mined in Zimbabwe and smuggled into Guinea in 2007-'08,

In Guinea, they were illegally KP-certified for export,

From Guinea the goods travelled to Lebanon as legal goods to transfer value,

From Lebanon, the goods move quickly to other destinations, such as the UAE, to enter the legitimate stream of goods. The report mentions "money laundering vulnerabilities in the UAE include exploitation of cash couriers, the real estate sector, and the misuse of the international gold and diamond trade."

The Road Ahead

If all this looks bad – but old, it isn't. The basis for tracking this activity is existing documents that record lagged data. Nothing indicates that this has stopped.

Zimbabwe consumed much of the attention until now, but it is time to look beyond. A scheduled KP mission to check Lebanon was postponed for various reasons, mostly political. The need for it is clear:

KP needs to crack down on the use of genuine KP certificates with smuggled goods,

KP must examine Lebanon, a KP review mission to Lebanon is necessary,

Place sanctions on countries that allow illicit activities such as smuggling, money laundering and trading in KP certificates,

Consider expanding KP beyond the movement of rough to include the movement of money.

KP was born out of public disclosures and outcries. It is in its DNA to act, or rather react, to make public calls to action. Here is one such opportunity.