Before the Christmas holidays, in a column titled “DTC Flight 79 – Not Final,” we wrote that the Diamond Trading Company (DTC) would drop a number of Sightholders for reputational reasons, and this week the DTC confirmed having decided on several suspensions. Some of our readers were quite upset with our story, which is puzzling. A journalist provides news and analysis – it is the rough producer that removes names from its client lists, and one should differentiate between message and messenger. As De Beers has, so far, failed to meaningfully enforce its own mandatory Best Practice Principles (BPP), one should applaud its most recent decision.

However, and I have said this before, I have some reservations about these particular choices as there are others who are far more deserving of sanctions for BPP reasons. I wouldn’t necessarily have used these Antwerp conviction cases to set a first example. The DTC still seems reluctant to touch the more serious cases – a reluctance not displayed by some other producers, one should add.

The companies suspended so far are being penalized for something they did in the mid 1990’s, which refer mainly to fiscal infringements. Though they are all BPP violations, common sense would differentiate between defrauding consumers, drug trafficking, smuggling or delayed payments to suppliers or tax evasions.

The good news is that the current DTC management, under the leadership of Varda Shine, seems now quite committed to show that BPP must be enforced in the best interest of the entire industry, but actions so far fall short from representing the desired zero-tolerance policy. Apparently, the upper echelons of De Beers haven’t yet given their strongest support. Some London sources suggest that much depends on De Beers Chairman Nicky Oppenheimer and his resolve to protect the image and reputation of the company and the brands associated with De Beers. This might be the case.

Oppenheimer also has BPP worries about his partners in Africa. The present court cases in Botswana will probably bother him far more than anything that happened in Belgium. In Botswana, President Mogae and his longtime friend and former managing director of Debswana Louis Nchindo are on opposite sides in a massive case of alleged corruption at the Debswana mining company. The court case will start later this month. The defendants represent a slate of former Debswana officials, including Nchindo, Debswana Group Secretary Joseph (Joe) Matome, ex-Corporate Communications chief Jacob Sesinyi and even Nchindo's son Garvas. The 32-count charge sheet was labeled by one report to “read like a criminal offence manual.”

The alleged crimes range from giving false information, forgery, obtaining registration of title deeds by false pretenses, conspiracy to defraud and prevent lawful disposal of property for its fair value, obtaining by false pretense, stealing by servant, receiving unlawfully obtained property, false statements and fraudulent appropriation.

It may have been that the Botswana case, which came on top of some other irregularities of ex-De Beers executives that have recently come to light, has brought home the realization that BPP violations must be viewed far more gravely and need to be dealt with in earnest. Top management may have become “born-again BPP’ers.” Better late than never.

At next week’s annual New Year’s cocktail at the DTC in London, Oppenheimer will politely and cheerfully shake hands with the remaining and the newly dropped Sightholders (The newly appointed ones aren’t invited yet – and these companies are still being reviewed from a BPP perspective before finally being approved.) As the group of “old timers” is dwindling, the chairman will not only need to try to connect faces with companies, he will also need to wonder, we presume, whether the hands he is shaking belong to someone who will bring him the next Jacob the Jeweler-type narcotics and laundering affair.

De Beers probably likes to believe that the company itself is upholding the highest standards in the diamond business. But, clearly, it is not and a strategy based on trying to make the public believe something that is not (yet) the case will quickly prove itself to be unsustainable.

Cleaning up its act is something that we always believed would eventually be inevitable – and the sooner the better. De Beers currently doesn’t rank highest among the diamond producers from a reputational perspective. Among retailers, De Beers is surpassed in BPP by many other excellent players. By making ethical conduct, integrity and honesty the essence of the new De Beers credo and its Forevermark, Chairman Oppenheimer has become highly dependent on the good conduct of all his stakeholders, clients, employees, and his African mines included.

What commenced in the beginning of the 21st century “as an unqualified zero tolerance” policy (remember Gary Ralfe?), has throughout the years eroded into a meaningless “one can get away with murder, as long as no one is actually convicted.” BPP violations were interpreted as requiring a conviction before action is taken – and that is utter nonsense and an accident-prone policy. On some major issues (Certifigate included), some temporary minor steps were taken – which only demonstrated to the parties involved that the DTC wasn’t really serious.

We honestly hope Oppenheimer will realize that his organization gets its cues from the top. That is why we are appealing to his conscience. The forthcoming cocktail party will provide him with a platform to address this issue. It is never too late for anyone to become a born-again BPP’er. Between now and the commencement of the new Sightholder contract, the DTC enjoys a window of BPP compliance opportunity that may never occur again. Not entering into a contract is easier than dropping someone midway through a contract period.

The Next Jacob the Jeweler is Already Here – and Lives in Mumbai

We wish we could make life easier for the De Beers chairman and his colleagues. On the one hand, the new list of Sightholders truly represents some of the finest companies in the business. Let there be no mistake – the system, with all its flaws, works. On the other hand, and I regret to say this, the next Jacob the Jeweler is already in the room.

This time he has come from the other side of the globe. Third-party BPP verification agency Kroll will have no problem identifying a Sightholder who isn’t only tied to some companies in financial trouble, or selling all of his DTC boxes from-day-one - which are seen as semi-allowable practices -  but he is apparently also engaged in illegal Jacob-the-Jeweler type activities and beyond - allegedly in the sphere of sexual exploitation.

These activities don’t really go together with everlasting love and treasured emotional values. The DTC must be able to identify these reputational dangers. When identified, such players ought to be dropped from the client list – if for no other reason than for the protection of the industry at large.

Diamond jewelry sales to consumers have lost their momentum in recent years, and we are losing out to other luxury goods. Preventive measures are always better than damage-mitigating actions. Waiting for law enforcement to discover these crimes and waiting for final convictions will generate highly undesirable prolonged publicity and inflict avoidable damage on the industry.

The relevant player is only one fish in a small pond of clearly identifiable clients who don’t belong either at the DTC cocktail reception or on the client list. They are out of their league – but, ironically, it is the DTC that gives them an opportunity to be seen “in the league.” From a more practical perspective, these clients represent an operational failure in the application process, a system error, that is waiting (if not begging) to be corrected.

Most BPP infringements are related to reputational rather than legal issues. Let’s take another example from this group. It involves a company that has been lingering in near-bankruptcy for quite a while. It was often unable to pay bills to its suppliers, but eventually did so with great delays. In recent months, in order to stay out of bankruptcy and keep the creditors away, the company settled its bills in polished diamonds. Suppliers who had almost given up seeing anything were glad to accept these goods instead. The company, we should tell the chairman, has been rewarded for this behavior with DTC Sightholder privileges. Is this consistent with BPP or with the Sightholder criteria for that matter? Does the DTC wish to continue the recent tradition of Sightholder companies being directly or indirectly involved in insolvencies and more?

Sightholders have learned: One structures one’s business in such a way that when one part of the business goes bust, it doesn’t impact the reputation or BPP compliance of associated businesses. The legalistic approach serves clients well. Let’s give one more concrete example: This client represents a small Indian company that, for many years, made huge fortunes through fictitious invoicing and utilizing cheap export credits for financial manipulations – hardly the quality of a DTC Sightholder. This applicant had a brilliant idea: transform the business into a Sightholder group. One only needs to find a local manufacturer in Mumbai and a supplier to retail stores in the United States, make some kind of agreement that ostensibly provides it with majority voting control, and, maybe, get a share or two in the equity. By doing so, you’ve got yourself an instant winner – a fully vertically integrated potential Sightholder group for profile purposes. But would such a group meet the minimum BPP and reputational criteria? Not in a lifetime. Did it safely sail through the DTC application process? You bet it did.

Absolute Controls – but No Responsibility

The conduct of De Beers has shown that there is something very attractive about a Sightholder having control over a (preferably overseas) subsidiary that features prominently in one’s profile or contract proposal. If the subsidiary is caught in narcotic trafficking, money laundering, links with organized mafia, etc., the Sightholder can always claim “I wasn’t aware of it” or “I wasn’t really managing the subsidiary,” or “I have already sold my shareholding.” Under the DTC’s BBP enforcement procedures, one may have his cake and eat it too. If you only control 51 percent, you aren’t really supposed to know what is happening, are you?

What we are saying is that from a BPP perspective, there are other questionable cases that are far more compelling than of most of those who have been suspended. The recent suspensions refer to a case involving 12 diamantaires in Belgium who have been convicted for a tax fraud of some 70 million euros. On the eve of the trial, they made an out-of-court settlement with the customs and finance ministry authorities, but the court found the circumstances too serious to approve it without imposing a criminal penalty. Therefore, six-month jail sentences were handed out. Because none of the diamantaires had any prior conviction, the jail term was deferred for three years. If there is no additional conviction, it will never be carried out. However, these 12 have now a criminal record – and, worse for their reputation - their names have been publicized.

What must be realized is that, in fact, initially there were some 32 suspects, but some two dozen diamantaires reached an out-of-court settlement a long time ago. Their settlements were subsequently approved by the court as well – but the court agreed to seal their names, to protect their reputation and minimize commercial consequences. So the Sightholders among them remain on the Sightholder list or on the list of other producers.

What actually happened? The circumstances, as described in the court papers, involved unrecorded sales of diamonds in Belgium on the local market. The diamantaires refused to provide the court with the identity of buyers and/or the exact time of these unrecorded sales, and, apparently, the court didn’t appreciate that. To “balance the books,” a system of fictitious exports, invoices and shipping documents was created. The rest is history and not relevant today, except for two parts of the judgment, which may have relevancy in the future.

First, the diamantaires argued in court that their activities didn’t cause any damage to anyone. By balancing the book, they recorded the correct total turnovers and no tax evasion had thus taken place. The court disagreed, finding that the diamantaires had first defrauded the tax authorities. Then, in order to balance the books and cover up their fraud, they conducted an additional fraud. So even if, after balancing the books, the proper tax was paid – these taxes were delayed, causing “damage” to the government.

Estimating the Laundered Amounts

The arguments by the diamantaires that no damage was inflicted by these activities are quite interesting. If unrecorded domestic sales had taken place, then, income had been received (by unknown parties) on which no immediate taxes were paid. Through “balancing the books,” the actual income was also “officially” received and thus the fiscal authorities didn’t lose any income. At most, there might have been delayed income. So where does “laundering” come in?

The way the court reasoned, the tax that wasn’t paid on the income from local market sales represented the amount that was laundered, as this money came eventually from abroad and its sources were unclear. The anti-money laundering law in Belgium only considered major international fiscal fraud a money laundering predicate offense, and this was definitely not the case here. The court specifically stated that it had found no evidence that the origins of the moneys came from criminal activities. So the court viewed the offense as a fiscal one – and the laundered portion was only the tax part, not the principal. That is an interesting precedent. Thus, the court made a calculation. It reasoned that the high values on the invoices represented the true sales value to unknown parties. On these sales, there was a profit margin of 3.43 percent. On these amounts, a 40.13 percent corporate income tax was due. And that represented the laundered amount… The court papers document 243 shipments, and it tediously made the calculations accordingly. In any way, shape or form that one reads the judgment – it came purely down on a minor fiscal issue and the harsh wording ('fraud', etc.) had really little to do with the court’s very own findings.

Inconsistent Behavior by Courts....

By reading and re-reading the documents, one cannot help but raise some questions. The balancing-the-book activities took place between 1995 and 1999. Most of those caught in this scheme made a deal with government many years ago – and we the public, don’t even know who they are.

In Belgium, a judge can render a guilty verdict and then decide on “opschorting,” which roughly translates into suspension of the sentence itself. So one is found guilty, but in the interest of the offender’s social readjustment in his community or employment sphere, the court will keep the details secret. Moreover, though guilty, in the case of “opschorting” there will be no criminal record.

When a judge decides on “opschorting,” there is no way for a stakeholder (producer) to secure a copy of a guilty verdict. Thus the names of some were published, and others not. This doesn’t seem fair.

There is something else that bothers me. In those years, the DTC (then still called CSO) did similar book balancing, similar invoicing, exporting and re-importing of the same goods with different values. At some point, tax authorities in England found out about it and levied a fine. No court cases.

It’s all history and the practice has ceased. The DTC should concentrate on the far more serious and the far more recent cases. It should also ensure that its own house is in order. The DTC has come a long way on reputational issues in almost every respect, and that needs to be said. The company needs to enforce BPP, but it also requires sound judgment, common sense and fairness in its implementation decisions.

Have a nice weekend.