The recent changes in worldwide anti-money laundering laws (which are already having a strong impact on Belgium and the EU countries) have their conceptual basis in the so-called “40 Recommendations and 8 Special Recommendations” issued by the Financial Action Task Force (FATF) of the OECD. As the diamond industry gradually starts to realize, it is the FATF that initially decided that diamond dealers should be designated as “financial institutions” imposing many of the “40+8 Recommendations” on the diamond industry. The U.S. PATRIOT Act also contains the special provisions affecting the diamond and jewelry industries.

Lately, FATF reached the conclusion that the rules hitherto in effect on “cash couriers” are not sufficient and it has now issued its “9th Special Recommendation”, urging countries “to stop cross-border movements of currency and monetary instruments related to terrorist financing and money laundering and confiscate such funds. It also calls for enhanced information-sharing between countries on the movement of illicit cash related to terrorist financing or money laundering.”

“We want to put an end to cash smuggling used to fund terrorism and criminal activities,” says Jean-Louis Fort, President of FATF, who also calls upon countries to share intelligence on cash couriers suspected of terrorist financing or money laundering. This may especially impact India (and Middle Eastern countries) in which the “informal cash transfer systems” (such as Hawalah) are very much rooted in these countries’ social-economic cultural environments.

FATF now calls on countries to implement systems to detect the transportation of currency and monetary instruments (such as checks, money orders and promissory notes) across borders. The measure also calls for these systems to enable authorities to stop and freeze cash or monetary instruments that are linked to terrorism or laundering.

Some Belgian diamond industry insiders know that at this very moment there is at least one diamond company in Antwerp that isn’t functioning, as the Belgian government has frozen the bank accounts of the diamantaire. As the anti-money laundering law prohibits cash transactions above €15,000, no diamond company in Antwerp is capable of functioning when its bank accounts are frozen. Governments (any government) assume an awesome responsibility when freezing an account. The owners of the frozen accounts have advised Diamond Intelligence Briefs, also in reaction to last week’s Memo reporting on the raids in offices of half a dozen diamantaires: “We have not even been given the warrants used to raid our offices. We have still no clarification on any concerns from the authorities. Our lawyers and I are astounded that the authorities can be so un-transparent. This would not be acceptable in the rest of Europe.”

I don’t know about the rest of Europe. But I somehow tend to believe the diamantaire who says that he has not received any explanation as to why his bank accounts were frozen by the government and what the government is looking for – and, as I wrote last week, it is my personal conjecture that the government action is related to money laundering.

But what it also shows is that FATF Recommendations are not just some esoteric rules that are readily ignored or forgotten. They tend to find their way into national legislation (especially in Europe and the United States), and, far more slowly, in diamond countries like Israel, South Africa or India. [Even in the United States, not all FATF Recommendations have been implemented yet.]

As if governments don’t enjoy enough authority already, the new FATF Special Recommendation is greatly strengthening the already existing Recommendations – enhancing government controls over the money transfers to and from their jurisdictions. This is what the Paris-based Task Force decided this week:

“Countries should have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation.

“Countries should ensure that their competent authorities have the legal authority to stop or restrain currency or bearer negotiable instruments that are suspected to be related to terrorist financing or money laundering, or that are falsely declared or disclosed.

“Countries should ensure that effective, proportionate and dissuasive sanctions are available to deal with persons who make false declaration(s) or disclosure(s). In cases where the currency or bearer negotiable instruments are related to terrorist financing or money laundering, countries should also adopt measures, including legislative ones which would enable the confiscation of such currency or instruments.”

As the FATF has often warned that diamonds can be used as a transfer of money instrument, some anti-money laundering specialists wondered whether “diamonds” could be viewed as a monetary instrument. If this were the case, the industry could probably not function if the new regime was strictly applied. Says the FATF: For the purposes of new Recommendation “gold, precious metals and precious stones are not included despite their high liquidity and use in certain situations as a means of exchange or transmitting value. These items may be otherwise covered under customs laws and regulations. If a country discovers an unusual cross-border movement of gold, precious metals or precious stones, it should consider notifying, as appropriate, the Customs Service or other competent authorities of the countries from which these items originated and/or to which they are destined, and should co-operate with a view toward establishing the source, destination and purpose of the movement of such items and toward the taking of appropriate action.”

It remains frightening to see, again and again, how the diamond business (or high value businesses in general) is targeted by the FATF.

Basically, the new Recommendation tells governments that they should impose the following measures:

·        Detect the physical cross-border transportation of currency and bearer negotiable instruments

·        Stop or restrain currency and bearer negotiable instruments that are suspected of being related to terrorist financing or money laundering

·        Stop or restrain currency or bearer negotiable instruments that are falsely declared or disclosed

·        Apply appropriate sanctions for making a false declaration or disclosure, and

·        Enable confiscation of currency or bearer negotiable instruments that are related to terrorist financing or money laundering

As a kind of afterthought, recognizing that normal legitimate business transactions could be affected, FATF said, in an interpretive note, that the recommendation should be implemented “subject to strict safeguards to ensure proper use of information and without restricting either: (i) trade payments between countries for goods and services; or (ii) the freedom of capital movements in any way.” Thank you, FATF.

For many years, it was customary for diamond dealers not only to ship diamonds via courier companies, but also to get payments in cash also through the couriers. This was done especially in certain problematic jurisdictions, or where the client was not very well known. The FATF Recommendations, as existed up to now, already required considerable disclosure by couriers. This is now further enhanced. When a courier reports the cash movements, the new FATF recommendation allows authorities to stop or restrain cash or monetary instruments for a given amount of time to ascertain whether there is evidence of money laundering or terrorist financing. There is no obligation to give an explanation. It also allows it to request and obtain further information from the carrier of the money regarding its origin and the intended use of funds, if he or she fails to declare or disclose it, or makes a false declaration or disclosure.

It is important to understand how various terms are defined. A diamond is neither a currency, nor a bearer negotiable instrument. The term physical cross-border transportation refers to any in-bound or out-bound physical transportation of currency or bearer negotiable instruments from one country to another country. The term includes the following modes of transportation:

·        Physical transportation by a natural person, or in that person’s accompanying luggage or vehicle;

·        Shipment of currency through containerized cargo, or

·        The mailing of currency or bearer negotiable instruments by a natural or legal person.

All information obtained through the newly-recommended processes should be made available to the country’s Financial Intelligence Unit (FIU) either by notifying it of suspicious cross-border money movements or by making these declarations or disclosures easily accessible by the FIU.

As with all these FATF Recommendations, nothing will happen immediately or in the next few weeks or even months. It takes time. But, eventually, they will be implemented in each and every country through separate legislation. Basically, the FATF Recommendations are designed to provide a comprehensive blueprint for action against money laundering covering the criminal justice system and law enforcement; the financial system and its regulation; and international cooperation.

The Recommendations are not a binding international convention, but each of the some 32 FATF members (and India is not a FATF member yet) has made a firm political commitment to combat money laundering.

We have grown used to the fact that virtually all transfer transactions through the banking system are reported to the Financial Intelligence Unit in each country. In some countries, import or export of cash must also be reported at customs. The new recommendation takes it a step further. It calls for countries to set up a declaration or disclosure system to track the movement of currency or monetary instruments across borders. Worldwide, all persons who transport a pre-determined amount of money will be required to submit a truthful declaration to authorities about the amount they’re carrying.

Big brother (our governments) are gradually becoming a very BIG (heavy overweight) brother, watching over every penny that goes in and goes out. I can’t stop wondering how many terrorists have been arrested due to all these systems – or is it all solely aimed at preventing or detecting money laundering. It is hard to get clear answers. But as all these systems have a profound impact on our industry, it is imperative that we keep our collective finger on the FATF pulse. Night and day.