Open Letter To FinCen Director William Fox

Dear Sir,

Allow me to give you an international perspective on the U.S. Treasury’s anti-money laundering and anti-terrorist financing rules for the diamond and jewelry industry. Last year you personally inspired and challenged the international diamond industry to join the worldwide fight against money laundering and against the financing of terrorism when, during an important presentation to industry leaders, you stressed “the importance of the ongoing dialogue and partnership between the diamond industry and governments of the world. "This partnership,” you said, “is critical to identifying the possible ways in which criminals or terrorists may seek to exploit the most precious of stones, the diamond.”

The international diamond community accepted your challenge. It is with considerable regret and concern that it has now become apparent that your inspiring message was void of meaning. Not only did FinCEN decline to enter into a dialogue with the international diamond community, it has now promulgated a Semi Final Rule which, instead of unifying and galvanizing the diamond and jewelry industry in fighting the serious international threats, have now unnecessarily introduced artificial trade barriers which will not only greatly hurt U.S. jewelry retailers – but, more seriously, clearly signals that the United States is willing to jeopardize the success of the fight by dismissing, ignoring and even rejecting all the efforts made by those very same partners whom you called to action last year.

Nothing obligates FinCEN to consult the international diamond industry – but then don’t invite them to a dialog and don’t seek partnerships. Just to remind you, the Board of Directors of the Indian Gem and Jewellery Export Promotion Council, a body representing the production of some $10 billion of polished diamonds and $4 billion of jewelry (of which some 38% is destined for the United States), formally accepted your invitation to dialog last summer, but your office declined even to react.

More seriously, the Belgian diamond industry and government enacted (in early 2004) and implemented AML/CFT laws and regulations which are far stricter, demanding and stringent than the Semi Final Rule announced by you last week. The Belgian diamond industry’s Compliance Programs include not only all the elements that appear in FinCEN’s Semi Final Rule but go beyond that by including a mandatory Suspicious Activity Reporting requirement (which your rule merely marks as “voluntary”) and unqualifiedly prohibits any trading transaction conducted in cash above a €15,000 threshold.

Not only is there no recognition whatsoever by the U.S. of these Belgian (i.e. European) standards, the Semi Final Rule favors purchases by U.S. retailers from U.S. dealers who are subject to lower compliance standards and discriminates against those foreign suppliers whose proven participation in the fight against money laundering is not only beyond question – but was fully implemented well before any similar obligation was imposed on the U.S. industry – which will not become compliant before January 1, 2006.

The Belgian industry sells billions of dollars worth of polished diamonds to U.S. retailers every year. By having direct access to the overseas source, the U.S. retailers save themselves the added cost of having to rely solely on local U.S. middlemen-importers who don’t add value to the product themselves. Moreover, the fact that the retailer has a choice between a foreign supplier and a domestic middleman dealer also make both sourcing options more competitive. The Semi Final Rule only exempts the retailer from having to implement a costly AML Compliance Program if he buys from domestic suppliers. This will mean that thousands of small retailers will cease their purchases from their traditional overseas suppliers.

Oh yes, the Semi Final Rule enables foreigners to open up offices in the United States. However, this will only add to the costs for the U.S. retailer – and it doesn’t make sense for a fully compliant Belgian diamond supplier (who is “more” compliant than any U.S. dealer) to open up an office in the United States and subject himself to the lesser standards imposed by the Semi Final Rule.

The war against money laundering and terrorist financing is an international one. The U.S. cannot do it alone and it is heartwarming that the international community has risen to the challenge and made it a truly global war. It should be a source of pride and satisfaction that in the diamond industry FinCEN has found countries and partners which see it as their own civic responsibility to join the fight. That FinCEN chose to introduce unnecessary, discriminatory (and probably “illegal” – this will have to be decided in international courts or appropriate forums) trade barriers upsetting time-honored relationships between thousands of retailers and their foreign suppliers, represents a tragic setback in the fight to which we are all committed.

Mr Fox, you and your colleagues may be aware of the alarming fact (reported in the media) that not all companies in Europe are content with their very strict compliance rules, but they have accepted them. Your Semi Final Rule will encourage those who would like to weaken the rules by allowing them to correctly note that the United States, rather than recognizing their efforts, has decided to “penalize” those countries which have a stricter compliance regime than the U.S. by refusing to introduce some form of reciprocity in the compliance arrangements. Instead of using the enormous U.S. leverage provided by representing half of the world’s diamond consumer market, FinCEN rules turn this great advantage - for no reason – into a missed opportunity.

You told a gathering of international diamond industry leaders that you “recognize that this is a global issue” and that “it is important that we first understand and then work with our colleagues around the globe to address the challenges that confront the global community.” You added “we are not so arrogant that we pretend we can address this problem alone. We are acutely aware that we cannot be successful in our mission without assistance and commitment from the private sector.”

Through books, articles, presentations, and in many other ways, the diamond industry’s leadership, the industry ’s financing institutions, and yours truly have echoed your call for a partnership approach. You and FinCEN have been portrayed as leaders in the global fight and we still think you are. However, your Semi Final Rule has emptied this “partnership approach” of any meaning – and has reduced the unified global fight to an unjustifiable, discriminatory and economically senseless protection of U.S. middlemen in the trade – at the expense of the U.S. jewelry retailer.

Even if we were to ignore the commercial aspect, how does FinCEN interpret its own call for international partnership and a global fight if the implementation of the strictest compliance rules in the other diamond centers only invites “retaliation” instead of “reciprocity”? Why would industry participants in countries which are not yet compliant continue to urge their respective governments to impose and implement a regime? Why lose support from these natural allies? Why would the industry in a country like India (still non-FATF) seek cooperation if their compliance is not assisting them to play on a commercially level playing field?

Sir, you are to be congratulated on the time and efforts you and your colleagues have devoted to ‘learning’ the intricate industry’s issues. Amending the commercially discriminatory Semi Final Rule will undoubtedly represent a gigantic step forward in winning our global fight.

We wish you and your colleagues utmost success.

Sincerely Yours,
Chaim Even-Zohar