Justice Needs To Be Done – Without Damaging Noises or Loss of Perspective

A question: Which draft law counts more than 20 pages, numbers 29 articles, and contains some 116 sub-clauses? Answer: The new proposed anti-money laundering (AML) regulations for diamond merchants in Belgium. Compared to this draft law – which is about to be signed by the king – the U.S. diamond and jewelry AML/CFT regulations are, how to say it nicely, “nursery school” stuff. These regulations deal with detailed aspects of the diamond industry’s AML/CFT regime, such as the identification of customers, obligations with respect to alertness, information and record storage, suspicious activities reports, staff training, notification and reporting requirements, confidentiality, supervising authorities and sanctions.

            These elements are included in virtually every AML/CFT regime, but the “severity test” is in the details. To mention just one example: when trading with an overseas company, the client identification requirements demand the identification of the ultimate persons who are behind various corporate screens. Companies ultimately owned by off-shore entities will need to disclose the actual people who are shareholders in these entities. But that isn’t enough. When dealing with a company one must know, i.e. demand to get documents, showing who actually has the authority to act on behalf of such a company.

            The identification requirements are exceedingly strict and address all various scenarios, including non face-to-face transactions. However, there is an escape clause, (Article 11) which states that if it is absolutely impossible to identify the final beneficiary (the ultimate natural owner of the client company), the diamantaire “must take all reasonable measures to find the information in a different way through reliance on other documents or sources which are reasonably reliable and trustworthy.” If that is impossible, the diamantaire must prepare a written report on all the attempts made to obtain the identity and insert that report in the client’s dossier. The diamantaire can then proceed to deal with the company. Of course, if there is any suspicion of money laundering or terrorist financing, there is no way one can proceed with the transaction – unless not carrying out the deal would tip off the client of the supplier's suspicions. 

Business with African and some other rough source countries (Russia) will be quite complicated by a very strict “politically exposed person” regime. Article 14 notes: If there is an indication of trading activities with entities in which there is any involvement of prominent government officials (or daughters and sons, their spouses or living-in partners, etc), military officials, persons holding positions in state-owned companies or regulatory bodies, etc., the diamond merchant must among other things verify the source of the money these individuals use in their business.

            On paper, these requirements will make business dealings with Angola, DRC, Sierra Leone, South Africa, Russia, and a range of other countries exceedingly difficult requiring not only considerable ingenuity and common-sense on behalf of the Antwerp trader, but also of the Belgian authorities.

            All documents involved in a transaction, including the client identification requirements, must be kept for five years after the last transaction with such client (Article 16). It is not enough just to have the bookkeeping evidence: there is a requirement to have enough materials “to precisely and accurately reconstruct the transaction” years later. Though the diamantaire is at liberty to select the optimum way to carry out this requirement (electronically or otherwise), keeping records of every fax, every opened cachette, etc. may create a great demand for storage facilities on the Schelde river banks.

            This is neither the time nor place for a careful study of the draft law which, just from an initial reading, would suggest that the strict requirements imposed on banks in their dealing with clients have literally been copied.

            Some diamantaires may find the proposed law a bothersome impediment to business; others (and we assume most) will welcome it as a source of competitive advantage, as a demonstration of ultimate good governance, transparency, and legal compliance. Antwerp as a whole may, through this law, position itself as a most attractive, secure and AML/CFT compliant diamond trading center.

            There is another aspect that needs to be noted – and that is actually the main reason for bringing up this draft law: this type of law is basically a “kind of social contract” between government and industry. It is the result of, or part of, an ongoing dialogue that will assure the future of a flourishing industry, something which is also a vital government imperative. However, government must, by its actions and behavior, also display common sense.

            That is not what we saw this week. What we saw was loudly publicized tax-raids by the Special Investigations at the offices and homes of about ten diamantaires suspected of money laundering or smuggling using the services of the Monstrey Worldwide Services courier company. Newspapers speculate that in this case some €8 million has already been confiscated, which include some €3.5 million from coded bank accounts in Switzerland. The names of companies that were publicly identified point to relatively marginal players in the industry. But the reported figures are staggering. The Gazette van Antwerp presents it as a $100 million laundering scandal, which may implicate some 150 clients of Monstrey. Computers, files and safes were confiscated in this week’s police raids.

Government Must Stop Leaks

            We’ll leave the gory details to the general daily press reporting on the “sweeping cleaning action” by the police officials. In selective leaks of information it is also intimated that the Geneva airport plays a major role in the investigation since, allegedly, rough diamond dealers would send shipments there ostensibly for further sale, though, in reality, the goods were returned to the Antwerp sender – or may not have left Antwerp at all. (See: Tijd newspaper). Violations would point to “transfer pricing” issues which may, or may not, have very plausible reasons. Internationally operating companies need to ensure that profits are allocated throughout the different international units and transfer pricing is one of the methods to ensure the fair division of a company’s margins throughout its international operations.

            Indeed, the government has agreed with the industry to a sensible approach to transfer pricing issues and expects that companies will show a net profit margin equal to that provided in the fiscal audit (assessment method) standard for the diamond sector. The government recognizes that profits are also made in the overseas companies of international organizations (often also allocated through transfer pricing) and agrees that foreign dividends collected on overseas earnings can be repatriated to Belgium tax free, subject to tax treaties, provided these profits don’t exceed five times the taxable profit declared in Belgium.

            Often transfer pricing adjustments are needed to reflect true costs. When purchasing rough in Africa, for example, there may be additional costs on top of the stated price on invoice and Kimberley Process documentation related to insurance, commissions, freight, duties paid in Africa, etc. Transfer pricing may be used to reflect the accurate costs involved. The police may interpret these things differently – and it is not for us to double guess their actions. Prima facie the Monstrey affair involves rather ugly issues that need to be investigated, solved and closed. But it is our understanding that the majority of the courier’s clients were not involved in anything illegal or questionable.

What is upsetting – or worrisome – is some of the interpretation given by the local press with respect to the timing of the police raids. The government has announced a one-off inventory revaluation of the diamond industry, subject to a 4.5 percent one-time tax on the reported increase. The press refers to this as a white-washing of dirty money – an amnesty. In essence it is not an amnesty – the agreed upon tax system (assessments made on turnovers) made it unessential to revalue stocks frequently, so the so-called “amnesty” is simply a revaluation of the stocks, which, in carats, have been reported accurately year after year. But this is all beside the point.

            One gets an impression that the police and the tax people are racing against the clock. The stock-revaluation proposal must be approved in Brussels (in parliament) by the end of November to enable implementation in 2007. In any event, diamantaires wishing to participate in the scheme must prepare their revaluation by the end of November. Actually, the government’s budget contains an income item based on the expected extra tax revenues that will be raised through this process. So the clock is ticking.

            The understanding between industry and government states specifically that “any out-of-court settlement [with the Tax Inspectorate] can not be proposed, however, if offences are discovered like fraud, money laundering or the financing of terrorism. For files without particular problems a compromise is always proposed but it is evident that organized fraud must be dealt with.”

            The Antwerp press suggests that “fiscal amnesty will follow the current judicial activities.” In a specific reference to the provision that if fraud is discovered, no deals can be made, it is implied that the timing of the police action was planned to precede the implementation of the fiscal amnesty. We were told that not all government officials fully support the planned amnesty. The investigation of the laundering accusations is expected to last for another year. However, and that is implied, by taking action against suspects now, these suspects may not be able to be included in the amnesty scheme. Are the police suddenly in a hurry?

            Maybe all parties involved should be reminded of another provision in the agreement between industry and government: “in investigations [the diamond sector] will be treated correctly like any other sector. The government will not aim at the diamond sector more specifically than the other economic sectors in our country.”

            In any economic sector there are some “rotten apples” – and they must be dealt with. But, at the same time, the diamond industry has agreed with government to the sector’s strictest money laundering rules in the world. This should provide Antwerp with a marketing (“image”) advantage that can be easily cancelled by overblown publicity and statements by prosecutors and others. Someone saw fit to leak an estimate that some 40 percent of the Antwerp turnover may be unreported in the black economy. [Gazet van Antwerpen.] If, as has been suggested, the timing of the actions is related to the timetable of the approval of the one-time inventory revaluation, that would be quite disturbing. Let’s hope that this isn’t the case – and that the terms of the (May 2006) industry-government agreement will be adhered to in both letter and spirit.

            Have a nice weekend.