Averting Antwerp’s Apocalypse

The European Union was in the vanguard of both the Kimberley Process and the enactment of anti-money laundering compliance rules. The Belgian government, as a responsible member of the European single market, passed all the necessary legislation after allowing for a considerable transition period. Now Antwerp is fully compliant. End of story? No. It is merely the beginning of the next story.

After having become compliant, the challenge now is how to erode somewhat the very strict compliance, without actually being viewed as non-compliant. The diamond industry now realizes – as it should have before the laws were enacted - that there are serious discrepancies between what it calls “customary diamond industry practices” and present legal requirements. The board of directors ofAntwerp’s Diamond High Council appears convinced that if no dramatic changes are made to the present compliance environment, this may lead to a decline of Antwerp as the world’s leading diamond market. With the emergence of Dubai, for the first time ever the rough diamond trade has an alternative to Antwerp, argues the HRD in meetings with the government. Antwerp seems to be panicking. Any student of the diamond industry’s history will recognize that diamond centers rise and decline. No center has, however, such a long and successful history as Antwerp - this city has seen peaks and lows, but has always survived.

May it be different this time? Is the apocalypse inevitable? To avoid such doomsday scenarios from becoming reality, the industry asked some time ago for governmental aid. We don’t want to comment on the merits of a wide range of measures proposed by the industry – and some of them make a lot of sense – but merely want to reflect on the compliance issues.

The first question one should ask – and that is not only a question for Antwerp but rather for every center – is whether the compliance environment is “good” or “bad” for business. The HRD argues, for example, that the “client identification” requirements in the anti-money laundering compliance rules, are seen as “offensive” by clients. Relations are based on trust; asking to see a passport, making a photocopy of passports, etc. is something, says the HRD, that foreign clients often find so insulting that it invites a reaction of “if you don’t trust me, then do not do business with me.”  The HRD also says that many traders are afraid to ask big customers to identify themselves. Some large dealers we contacted strongly disagree. “Our clients show considerable understanding. They understand that we must abide by the law,” said one Antwerp sightholder.

The big customers live in a post 9/11 global environment and, when explained properly that this is the law, it is hard to conceive that this will create resentment. It does, of course, create an administrative burden – and a cost. We have written in our diamond industry compliance book (“Diamond Industry Strategies to Combat Money Laundering and the Financing of Terrorism”) that the cost for becoming compliant can be considerable and in a low margin environment, this may represent a significant obstacle.

The HRD reportedly informed the government that the duty to report suspicious activities to the government goes against the industry ethics in which one doesn’t “snitch” on one’s colleagues to government. (I would have gone a step further and argued that in certain religions you are almost forbidden to inform on one’s fellow soul brothers to the government.) However, in modern society, no one is allowed to passively witness crimes without intervention. Suspicious activities (i.e. suspicion of terrorist financing) may lead to major atrocities and no one should ask government to be “exempt” from such reporting requirements. It seems to us rather problematic to ask the government to be released from a basic civic duty.

The HRD is also believed to be seeking a relaxation of the prohibitions on cash transactions. Here the same could be argued – facilitating cash transactions may lead to other undesirable activities. The HRD wants the government to “relax” some of these rules, as they are believed to be inconsistent with the customary practices of the industry. One might easily argue the other way around: global realities have changed, and the industry will have to adjust to these global realities. The HRD is well-positioned to lead the industry forward – and it ought to embrace such a challenge.

Indeed, it may well be so that the survival of Antwerp is at stake – in a different way than suggested by those who want to relax the rules. Allowing deviations may backfire – and that may adversely impact business, especially with the United States.

The net effect of government acquiescence to these specific industry requests is an erosion of compliance standards. This, theoretically, would protect Belgium against unfair competition from centers which maintain lower standards. Though we understand that reasoning, we are not sure we share that argument – even though we could see that some good people (and even governments) would have sympathy for such a position. One might, however, argue the other way around. Belgium’s prompt enactment of the relevant anti-money laundering laws in a manner which is fully consistent with the country’s international obligations and commitments may well have greatly enhanced Belgium’s status in the worldwide diamond industry.

The main diamond producers (Rio Tinto, BHP Billiton and De Beers), other major diamond industry players, international suppliers and buyers, would not have continued their strong support and active presence in Antwerp if the Belgian government would have failed to create the present legal environment. The United States, at some point, could have imposed prohibition on imports from Belgium. We don’t know – but expect that at some point, the U.S. would not have tolerated a weak compliance regime in the world’s largest diamond trading center. Belgian diamantaires may well live under the strictest anti-money laundering laws of any diamond center – that should be a source of pride rather than a reason for complaints.

The industry doesn’t operate in isolation. If diamantaires were exempt from compliance, how would other industrial or service sectors deal with it? Are banks ready to continue to serve clients which deal in huge cash transactions with third parties on which no adequate due diligence has taken place? It is my personal belief that in the long term, a diamond trading center that is seen as fully compliant will have a much more promising future than a center which is seen as more relaxed. I fully respect those who think differently – even though I think they may be wrong. [A BHP Billiton executive said to me recently that the high standards of Antwerp’s compliance regime are one of the reasons they are – and will remain - in Antwerp.]  Good compliance is an asset, not a liability.

It should not conveniently be forgotten that all compliance measures mentioned hitherto – including the Kimberley Process certification scheme – were enacted to meet Belgium’s European and international obligations.  As the world’s single largest diamond trading center, it ought to be seen as a source of national pride that the Belgian government secured the timely enactment of the required legislation.

We are not sure that relaxing some of these compliance rules will actually secure “the future” of Antwerp. To the contrary, we believe that country compliance is an asset – and that eventually all countries will operate on the same or similar levels. The diamond industry in Antwerp is so large, so dominant, so resilient and such a central force in the industry that it is also a matter of noblesse oblige – Antwerp couldn’t afford to be otherwise. We would suggest to the Belgian leadership to do anything to remain at the forefront of the continued changing compliance environment and guarantee a flourishing future for Antwerp through ever-enhancing its position as a responsible, respectable, trustworthy diamond center, characterized by a trading community that adheres to the global diamond industry’s highest standards and practices.

The Belgian government should be encouraged to assist this vital industry and trade – but relaxing compliance rules is not the way to do it.

Have a nice weekend.