When flights are midair, the expected arrival time often remains “not final” until the plane gets close to its final destination. The 79 Diamond Trading Company (DTC) Sightholders are still in the air. The final contract will land on their desks just before April 2008, and it is now already clear that at least four Sightholder (all Indian) companies will not reach the finish line.

There may be more – much depends on the degree of turbulence encountered by Kroll forensic investigators, which is now doing a final check on a number of Best Practice Principles (BPP) issues.

In the past, when checking profiles, Kroll’s hands were pretty much tied behind its back – and its mandate extremely limited. This time, I have reasons to believe, it has a larger brief and a wider mandate.

The good news is that now, on the very highest levels of De Beers’ management, a major decision has been made: the company will, indeed, implement its own rules on BPP. For those who have already forgotten, reputation is a pass/fail criterion in the profiles; you violate BPP and you are out.

So far, this has largely been a “propaganda” item, only symbolically and sporadically enforced. Finally, it has dawned on the upper echelons of De Beers that its own non-compliance with its stated BPP may seriously damage the reputation of the company and will negatively impact the corporate image of De Beers in the market.

It may sound ridiculous, but I honestly believe that De Beers deserves to be congratulated on finally deciding to take BPP more seriously, and that it will now drop some Sightholders solely for BPP reasons or impose some kind of sanctions on others.

I disagree with “sanctions” – a Sightholder should be either “in” or “out,” and haphazard measures, such as a partial reduction of supplies, again point to an erosion of these very principles. But realpolitic may, in some instances, force the DTC to find a middle ground. It is still better than nothing.

At De Beers, nothing that has to do with “reputation” can be assumed – the company still has problems ridding itself of its own past. In the early 1990’s, I was always utterly amazed by the repeated statements by its top executives that “the company has made the strategic decision that it wants to become legally compliant in every jurisdiction in which it operates.” Wow – they needed a “strategic decision” just to do to what every normal company represents the natural way to behave?! To me, it always sounded like a man proudly announcing that he has finally decided to stop beating his wife.

So, in a De Beers context, the decision to start implementing BPP on reputational issues is major, important, welcome and long overdue. Now we have to see “how” it will be done – and whether the company will move the goal posts, and how much it will still “compromise.” When it involves BPP, nothing must be assumed – and, like the flight’s arrival time, nothing is definite until the plane has actually landed. The pilot has the final say in how he steers the plane.

Convicted Sightholders

A word about the pilot, DTC managing director Varda Shine. When dozens of diamantaires told her that so-and-so was the largest defrauder in the GIA Certifigate upgrade scandal, she would gently remind and caution those around her that information or rumors coming from a company’s competitor should never be accepted on face value. What is needed is hard proof, hard evidence, she’d say. Varda’s mantra: provide proof or shut up. As much as I tend to disagree with that approach – as reputation is, by definition, a market perception, a market judgment and not a legal issue – I have always admired Varda for consistently “bending over backwards” to be fair and for always, always, giving her clients the full benefit of the doubt. But when there is hard evidence, she’ll pursue this with equal fervor.

An Antwerp court recently convicted six DTC Sightholders (in a group of over a dozen diamantaires that stood trial) of grand-scale fraud, fictitious invoicing, smuggling and fiscal fraud in what is known as the Brenning case. It doesn’t leave the DTC with much room to maneuver. BHP Billiton acted immediately; the DTC will take its time and simply not renew the relevant Sightholders’ contracts. Two of the six convicted Sightholders lost their Sight already as their application for continued Sightholder status failed – at least they will be spared the embarrassment of losing Sightholder privileges on reputational grounds. But things are never as easy – and never as unequivocal as they may appear. Also, there is always “another side.”

The six months suspended jail sentence handed down by the Antwerp Correctional Court (which is the formal name of the court) involved acts committed more than a decade ago – in the period between 1994 and1999. In this period, there was no BPP, there was no Supplier of Choice, there was no applicable anti-money laundering law in Belgium – and, most problematically, these companies basically didn’t do anything De Beers wasn’t doing itself during that very same period. The main difference: these Sightholders were caught.

Since then, the industry has changed – and so has De Beers. Former managing director Gary Ralfe put legal compliance and good governance on the top of the company’s corporate agenda, and the current pilots (Gary’s successor Gareth Penny and Varda Shine) personally loathe some of these former practices. The management of De Beers has changed – and so has the management of some of the convicted Sightholding companies. Does it make difference? Should it make a difference? Does the reputation come and go with “the person” or with “the company”?

The DTC has, in a way, locked itself in. It has often refused to take action in the absence of hard evidence, in the absence of a court decision. Now the DTC has convictions. Should they be ignored because the wheels of Antwerp justice move so slowly?

Two Different Courier Fraud Stories

Since October 2006, according to my own records, over 35 offices and residences were raided in Antwerp in the Monstrey-courier fraud affair. The raids aren’t over yet – and the evidence that the police has is so strong that the courts have approved the seizing of diamonds from the suspected offices.

The recent convictions in Antwerp, as described above, have nothing, absolutely nothing, to do with the Monstrey affair. The court verdicts were in the so-called Brenning case, which came to light in 1999 and which initially involved 16 companies and some 243 fictitious shipments. This was a case involving false invoices issued in the period between 1995 and 1998. Shipments were given to Brinks with invoices to non-existent companies; some of those shipments never actually left Belgium, and others may have left Belgium.

The rationale was for diamantaires to balance the inventory levels on their books. The court handed down a two-year jail sentence (one year suspended) for the organizer of the scheme. An expert of Diamond Office was also involved.

Some of the diamantaires implicated in the Brenning case with whom I talked consider their conviction as totally irrelevant for BPP purposes. Apparently, a financial settlement was made with the fiscal authorities (Ministry of Finance) and with the customs offices.

It is my information that in the settlement, the customs received one percent of the invoice value; the Ministry of Finance got 1.5 percent. That money had been put in escrow and was to be released when the court approves the settlement.

There was no penalty – only tax payments. What happened is that the court rejected the settlement terms and added the suspended jail sentences. The convicted diamantaires can still appeal that jail sentence and that part of the conviction can still be dropped. “Does this warrant losing our Sightholder status?” lamented one party. These are no easy questions.

Setting the Standards for Tomorrow

In major Enron-type fraud cases, the issue often becomes “whom to go after.” Will one fire or put on trial a low-level bookkeeper or does one go after the firm’s top executives? The pilots in the cockpit of the DTC flight must establish clear standards. In Belgium, there is still the other case – the Monstrey affair – which seems more serious as the alleged offenses took place AFTER the first Supplier of Choice contract had entered into force, and well after Belgium had enacted very strict anti-money laundering laws.

Monstrey cannot be dismissed as a mere fiscal affair, as one might conceivably argue in the Brenning case. The Monstrey courier case involved anywhere between 80-200 companies; it came to light in 2005 and the alleged violations took place between 2003-2005.

If Antwerp sticks to its judicial traditions, any court cases resulting from the Monstrey affair will commence some five years down the road and God knows when they’ll be end. By that time there is a good chance that there won’t be a London DTC, no international Sights and the rough distribution system will have evolved to source-country operations. This gets us back to the more general question: if the DTC wants to apply BPP, does it really need court cases as the “minimum” level to take action? And what about those people that make a quiet out-of-court settlement? Are they OK?

The very fact that Kroll has been asked to investigate BPP compliance is the clearest hint yet that the DTC pilots will broaden their views and accept a non-court level of evidence. Companies that conduct fictitious invoicing, engage in illegal transfer pricing practices, or report inflated sales turnover for balance sheet (and profile scoring) purposes should not be allowed to get away with it. Not because of moral reasons – but simply because “good” companies cannot compete with “bad” companies. The latter always hold a competitive advantage. If, when the new contract period starts, only those implicated in the old Brenning case are paying the price, this will seem like the Enron-type case where only the small bookkeepers were held accountable. That is not the right standard to which the DTC should adhere

Footnote to the Lost Jayam Appeal

I am sorry that Jayam lost its final appeal in London’s court. Not just because of sympathy for Madhu Mehta and his family, but because the judgment tremendously weakened the DTC Ombudsman function at a time when having a credible Ombudsman is more important than ever. Let’s not forget what happened. Jayam had three separate and unrelated judgments by the DTC Ombudsman against the DTC. The DTC chose to ignore these findings when challenged in court. The DTC fought these findings – arguing that its very own Ombudsman didn’t understand what he was doing.

So while the DTC Ombudsman was created to provide a dispute resolution mechanism with clients – even a kind of arbitration – the fact that De Beers challenged the Ombudsman’s findings and won, and thus basically discredited its own Ombudsman in court, seems a great disservice to that very institution. The Ombudsman had the potential to do so much good for both clients and the DTC – and the court findings have made it largely irrelevant.

Though the new Sightholder list seems by and large an impressive and successful outcome of the exercise, the application process itself has been quite flawed, and the DTC is vulnerable. Though the DTC has graciously extended the deadline for complaints to January 21, 2008, Jayam’s experience will be remembered by many of the dissatisfied ex-Sightholders.

They’ll be reluctant to file a complaint under the circumstances – which may be a desired outcome for the DTC, but, at the end of the day, it will be likely to lead to more court cases. Nobody needs that. The DTC should have shown greater respect for its Ombudsman’s decisions – this would have strengthened the good governance of its very own rough allocation mechanism. Let’s hope that in 2008 these situations will not repeat themselves.

Have a nice weekend.