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Money laundering and terrorist financing through trade in diamonds - FATF

04 february 2014

The Financial Action Task Force’s (FATF) latest typologies report has concluded that the diamonds trade is subject to considerable money laundering and terrorist financing vulnerabilities and risks. The FATF is an inter-governmental body established in 1989 by the ministers of its member jurisdictions. It currently comprises of 34 member jurisdictions and two regional organizations, representing most major financial centres in all parts of the world.

The FATF and the Egmont Group of Financial Intelligence Units collaborated on a typologies research project to identify the money laundering and terrorist financing (ML/TF) vulnerabilities and risks of the “diamond pipeline”, which covers all sectors in the diamond trade: production, rough diamond sale, cutting and polishing, jewellery manufacturing and jewellery retailers.

Based on research conducted, analysis of case studies collected by the project team and after consultation with the private sector, the report concludes that the diamonds trade is subject to considerable vulnerabilities and risks. The closed and opaque nature of the diamonds markets and the high value of diamonds combined with a lack of expertise in this area on the part of the authorities have left this industry susceptible to abuse by criminals.

While taking note that the diamonds trade has existed for centuries and had developed a unique culture and trade practices, which have their own characteristics and variations across countries and continents, the report however indicated the many changes in the international diamond trade in the last few decades like, De Beers losing monopoly; entrance of  smaller diamond dealers; diverse distribution channels; new trade centres; shift of cutting and polishing from Belgium, Israel and US to mainly India and China; emergence of smaller cutting centres; cash transactions diminishing; and Internet becoming a diamonds trading platform to name a few.

These significant changes in the "diamonds pipeline" structure and processes raised the question of whether the risks and vulnerabilities remain the same and whether current anti-money laundering / countering the financing of terrorism (AML/CFT) standards and national regulations are sufficient to mitigate the different ML/TF risks and vulnerabilities identified in the research.

The case studies included in the report demonstrate the creative methods that criminals have used to exploit diamonds trade for the purpose of money laundering and terrorist financing. This report aims to help build awareness with the regulatory, enforcement and customs authorities as well as reporting entities about risks and vulnerabilities of the diamonds trade, and how to mitigate them.

Some of the risks and vulnerabilities of the diamonds trade identified in this report are the nature of trade which is transnational and complex, thus convenient for ML/TF transactions that are mostly of international and multi-jurisdictional nature; the use of diamonds as currency is rampant as diamonds are difficult to trace and can provide anonymity in transactions; and Trade Based Money Laundering (TBML)  which is widely used as the specific characteristics of diamonds as a commodity as well as the significant proportion of transactions related to international trade, makes the diamonds trade vulnerable to the different laundering techniques of TBML. In addition, the high amounts in diamond can reach tens of millions to billions of US dollars. This results in laundering of very large amounts of money.

According to the report, the level of awareness about ML/TF schemes through the trade in diamonds, by law enforcement and AML/CFT authorities as well as financial intelligence units (FIUs) is unfortunately limited.

Aruna Gaitonde, Rough&Polished, Mumbai