More Than Just A Canal, Panama Aiming To Be Diamond Hub

On the face of it, Panama certainly seems like a logical place for a new diamond exchange. From the southern tip of Argentina, relatively close to the South Pole, all the way to Mexico and including the Caribbean, there is not a single diamond bourse. According to estimates, this is a market with diamond jewelry sales valued at around $8 billion, so it is certainly a huge region where diamond firms and jewelers can make money.

And the Panama Gem & Jewelry Center, with the Panama Diamond Exchange, the only WFDB-affiliated diamond bourse in the entire region, at its heart, has been specifically designed to provide the missing infrastructure.

The region still has many strong economies and a substantial middle class population and number of wealthy residents despite the slowed in the commodities boom since the 2008 financial crisis.

To say that region has enormous untapped potential would be an understatement. The Latin American economy is forecast to expand at a rate of 4.6 percent annually from this year through to 2030 which is second only to the developing countries of Asia.

Even the mighty United States is only forecast to grow by 3 percent annually over the same period, while the European Union countries are seen posting 2.4 percent growth, and Japan a sclerotic 0.6 percent.

Furthermore, it is estimated that Latin America will have a combined annual GDP of $10.7 trillion by 2020, equivalent to 9 percent of global GDP, and double that of 2010. To put that figure in perspective, China's GDP last year was $9.6 billion, while that of the United States was $16.7 billion.

The international diamond and jewelry industry has not in the past shown a great interest in Latin American market. That is partly because the region has lacked the trading infrastructure that is taken for granted in the other major markets, which in turn has led the gemstone and jewelry sector in Latin America to underperform.

The region also suffered from a poor international reputation due to the horrific human rights crimes committed in several South American countries up to a couple of decades ago.

Of course, there are other reasons, too, that Western firms have not believed it was worth their while to become involved in the Latin American market, said participants at the launch event of the Panama Gem & Jewelry Center in March. "Let's be honest, we only tend to operate in established markets, in countries that are relatively close to where we are based, those countries that grab the headlines for positive reasons, and in places where we know we can easily communicate with the locals in English," said a representative of a Belgian firm. "For us, that basically means Europe, the United States, India, China and some other parts of the Far East.

"We are all used, in this business, to traveling a lot but we also want to be able to fly to an export market with a single flight of 10 hours or so, if possible. Many places in South America can be reached from Europe without having to take a connecting flight, but there are many others that are not so convenient.

"There is also the issue, let's be honest, of South America's 'political environment'. Although the situation is much improved, many of us remember the 1970s and 1980s with the terrible regimes that were in power and the crimes that were committed. And today, fairly or not, if you mention South America and Mexico, people will automatically think of human rights violations, drugs and money-laundering. That is an association that takes time to be broken down."

International Monetary Fund Report
On the money-laundering issue, the latest report by the International Monetary Fund (IMF) in January this year was hardly complimentary to Panama. Among its comments are:

Panama is vulnerable to money laundering (ML) from a number of sources including drug trafficking and other predicate crimes committed abroad such as fraud, financial and tax crimes, the report said. Panama is also a transit point for drug trafficking from South American countries with some of the highest levels of production and trafficking of illegal drugs in the world. These factors put the country at high risk of being used for ML.

Panama has criminalized ML and TF, but its AML/CFT framework is not fully in line with the FATF Recommendations. There are inadequate statistics on ML investigations, prosecutions, and convictions to properly assess the effectiveness of implementation of the ML/TF legislation.

There is no governing law relating to dealers in precious stones and metals, the IMF says in the report, and no AML regulator supervisor and information about the size of the market is not available.

There are no AML/CFT measures or supervision for dealers in precious metals and dealers in precious stones.

Trading in precious metals and stones is also a significant activity, particularly in the Colon Free Trade Zone. Nonetheless, they are not subject to AML Law regime.

The IMF report recommends including in the Panamanian AML/CFT regime, among others, dealers in precious metals and stones in accordance with the FATF Recommendations.

On the other hand, Cecilia L. Gardner, President and CEO of the Jewelers Vigilance Committee, who was invited to the launch of the Panama Jewelry Center and held discussions with the developers of the project, said she is "convinced that the developers and the government of Panama are both aware of the risks they face in this trade for money laundering given their location.  They were very aware of the IMF report, but their activities in this regard were not really in reaction to the report, since they set their policies long before the report was published.

"For example, the developers of the Gem Tower informed me that they plan to require all tenants to use regular banking channels (no cash transactions permitted) and to require extensive reporting regarding all transactions.  This is far beyond what is required under their law, and is far beyond what is required under US law.  This will be addressed in their procedures for all tenants who sign to occupy their property. 

"They have support from the government in this regard, and the government itself is considering their own AML requirements to ensure that there are strong internal steps all dealers take to prevent the use of their businesses for money laundering. 

"Of course this information is based on assertions made to me by representatives of the government and the developers in meetings - I have not seen any 'proof' that these policies have been put in place yet (I am not aware that there are any tenants actually signed up for occupancy) but it is certainly on their radar screen, and is a subject that they are fully focused on.  That is certainly a good sign."

Can the diamond and jewelry industry make money in the South American market and is Panama a ‘reputable’ place? On a recent visit, the city immediately put me in mind of Hong Kong and Dubai – a dynamic city continuously on the go and certainly not a turgid provincial backwater.

As for the business side, clearly the region has massive potential. For companies with deep enough pockets to spend the time getting to know the mentality of the area and its jewelry firms, South and Central America could indeed provide a new market opportunity. And given the saturation of the US, European and Asian markets, that is to be welcomed.