Future Headline: ‘DTC Sightholder Jailed for Attending Sight’

This headline is not imaginary, just premature. No foreign DTC Sightholder has yet been jailed in South Africa for attending his own company’s Sight at the Harry Oppenheimer House in Kimberley. Technically, at the last Sight, both De Beers and some of its Sightholders were definitely in legal jeopardy as they all violated the law. This scary headline might actually still become reality unless sanity and common sense prevail. The current impasse in South Africa has become intolerable.

In the case of the DTC Sightholders, the country’s diamond Regulator kind of closed an eye at the last Sight. Next month may be a different story. However, the people who are truly most in peril are the foreign diamond traders, who are flocking at this time of the month to South Africa to participate in tenders in any of the nine tender houses in Kimberley, Wolmaranstad, Schweizer Renecke and other places. Under the new law, foreigners coming to buy rough in South Africa can only purchase at The State Diamond Exchange and Export Centre. Under the current law, there is no other option.

The Regulator will also supervise tenders at the Centre. This week (July 14), the Regulator issued a notice stating that from now on “no tender results will be published,” and “only the successful tenderer will be notified.” To make absolutely sure that no trader will actually become privy to tender results, the statement added that “the winning tenderer will not be entitled to know of the other tender bids.” The impact of this new policy is yet unclear.

Back to the licensing mess. Until this month, foreign rough diamond buyers in South Africa would “pose” as experts “assisting” licensed traders who would then make the purchase on their behalf. That is now specifically prohibited – and the Regulator is determined to enforce that prohibition. A foreign Sightholder attending his South African Sightholding company’s Sight without a local work permit and without meeting other preconditions is basically “advising” his company – which has a license. That is now against the law.

Incidentally, one tender house, the National Diamond Marketing Company, secured a court order to continue business as usual until July 21, 2008. The Regulator interprets the court order most narrowly. Says Mpho Rapudubudu of the SA Diamond and Precious Stones Metals Regulator’s legal division: “the court order only applies to the specific individual who was awarded relief as prayed for. The court order does not extend any rights to other licensees or foreigners who are doing business with the holder of the court order.” Despite the court order – this is hardly anything but business as usual.

Simon Sikhosana, who is the General Manager of the Diamond and Precious Metals Department and the Regulator, says unequivocally that, “unlicensed exporters and Tender Houses will not be allowed to do business with unpolished diamonds in our country. Our inspectors will be out there to monitor the situation and will not hesitate to call the police when necessary to deal with the illegal activities.”

Regulator Monitors will Call Police

To underscore that he means business, Sikhosana adds that they “strongly advise the law abiding business people to stay away from such illegal activity to avoid the strong might of the law.” It is the Regulator that is suggesting that the police may be called in – “police” is not a word that we would have used in context of the current legal mess. We appreciate, however, Sikhosana’s candidness and, for the record, we note that the Regulator’s CEO, Louis Selekane, specifically authorized Sikhosana to provide us these important position clarifications.

Let’s be very specific about the legal risk of the relevant players, i.e. the tender houses, foreign rough buyers, DTC Sightholders, and De Beers itself. Their problems are all related to a very simple section of the law that says: “no licensee may be assisted by a non-licensee or holder of a permit during the viewing, purchasing or selling of unpolished diamonds at any place – where unpolished diamonds are offered for sale in terms of this act, except at a diamond exchange and export centre.” Foreign Sightholders “viewing or purchasing” at the Harry Oppenheimer House in Kimberley are infringing this provision.

How can it be done legally? A Sightholding company is entitled to designate an “authorized representative” who will be licensed to view and look at the goods. In order to be an “authorized representative,” you must be a resident of South Africa, or you need a work permit to work in South Africa. So an Indian, Belgian or Israeli non-resident principal of a South African Sightholding company who wants to view the Sight goods before purchase or who wants to consider negotiating for some specials cannot qualify. If this sounds absurd then, yes, feel assured, it is.

A DTC broker active in South Africa believes that the DTC might turn the Harry Oppenheimer House into a so-called “diamond trading house.” This will allow trading with locally licensed traders. However, it will not solve the problem because “no holder of a diamond trading house, which is authorized to sell unpolished diamonds, may allow the assistance of a non-licensee or permit holder.” Theoretically, from a legal perspective, it would mean that any licensed dealer could bid and maybe buy Sight goods over the heads of the Sightholders themselves. It is an intriguing thought whether a diamond trading house can refuse to sell or show goods to licensed dealers.

The other option would be for the Regulator to establish an “export center” at the Harry Oppenheimer House. That would mean anyone could view the goods and bid for them as they do at the current State Diamond Exchange and Export Centre. It would also imply, however, that these foreign Sightholders viewing the goods will have to pay the $3,500 monthly license fee at every Sight they attend. That’s the law. The DTC would probably “negotiate” a waiver of the $3,500 fee for its overseas clients, which will bring an outcry and charges of unfair discrimination against non-DTC Sightholder buyers.

The DTC will undoubtedly find a solution well before the next Sight. Its clients are responsible for 80 percent of employment and 90 percent of the capital of the South African diamond beneficiation scene. Therefore, the Regulator is not likely to focus on these heavyweights and march them into jail. Other foreign diamond traders may not be that lucky. Nevertheless, DTC Sightholders shouldn’t be complacent. The Regulator is unpredictable and seems to zealously be guided by the law. So, yes, overseas Sightholders illegally “viewing Sights” will take a risk (as does the DTC itself) until a solution has been found. They should even be careful as to how to act in their own offices!

Mpho Rapudubudu of the Regulator’s legal division cautions that “in the case of a [Sight-holding] company, the license is in the name of the company and not the Sight holder. For the owner of the company to be able to do business on behalf of the company, firstly that person must be in the possession of a South African work permit and secondly, must be an authorized representative. In the event that the owner of the company which is licensed visits the premises of the company, without the intention of doing business on behalf of the company, such person need not have a work permit nor authorized representative certificate.”

In non-legal language, this means that a foreign Sightholder, who owns a company in South Africa, and who during a visit to that company makes a business phone call, could be arrested. It seems like prohibiting Mickey Mouse from entering Disneyland…

Nevertheless, the Regulator wants to assure that everybody is welcome. Says Sikhosana: “The law does not in any manner prevent the non-South Africans from doing business in the country but ensures that they comply with the laws of the country.” The aforementioned foreign buyer’s fee of $3,500 permits purchasing solely at the State Diamond Exchange and Export Centre. Not at the tender houses!

Stay Away from Tender Houses

Operators of the tender houses have been sending text messages to the mobile phones and BlackBerries of overseas clients urging them to come. They wish to protect business as usual – even though it is anything but… The operators realize that well over 40 percent of their rough sales go to foreigners, who also tend to pay higher prices and thus optimize the production revenues. We would caution foreign traders and almost suggest that they “stay away” from South Africa’s tender houses until there is greater legal clarity. In fact, at mid-week, it became clear that dozens of foreign buyers had cancelled their trips. It is easy to unwittingly get into legal problems – it is far more difficult to get out of them.

Dubai is holding a tender of southern African run-of-mine production this month. And if no solution is found for the South African situation, Dubai might become the second home for South African rough. This underscores the need for a quick rather than postponed solution.

Foreign experts - don’t assist “locals” at tenders, just keep a distance. I believe I’m echoing the view of Sikhosana, who strongly advises “law abiding business people to stay away from such illegal activity to avoid the strong might of the law.”

Incidentally, this month marks 141 years since the first large alluvial stones were discovered in South Africa. Surely, the time has arrived to get a workable and sustainable rough distribution system in place. Better late than never!