The United States has now followed Europe, especially Belgium, in implementing diamond and jewelry industry specific Anti-Money Laundering (AML) compliance programs.  The Jewelers Vigilance Committee (JVC) has prepared a comprehensive, user-friendly, and in-depth AML Program Compliance Kit, which has one enormous advantage - its acceptance from coast-to-coast as the “final word” on compliance programs has created a level playing field. It de-facto harmonizes the programs in use throughout the United States – something we cannot say about Europe where cash diamond transactions that are prohibited in Brussels are allowed to the north in the Netherlands. There is something awesome, almost unreal, about the implications of the compliance exercise and it evokes a myriad of startling thoughts.

Though the law is clear, the “customary trade usage” will be set by the JVC’s compliance kit, which will basically set the industry standards. The JVC and its President Cecilia Gardner have done a superb job. What is particularly noteworthy is the kit's recommended policy that diamond and jewelry dealers also acquire identification information for any third party associated in any manner with any transaction for covered goods in which a dealer is engaged, including third party payers or payees, recipients, suppliers or senders of goods.

These policy recommendations take account of reality. They recognize that in a market in which there are billions worth of memo goods, and in which transactions (especially with foreign sellers and buyers) are often in both directions, and goods move from one potential buyer to another, there is often third party involvement. Verifying the identity and reason for the involvement of the third party makes a lot of sense. It makes the due diligence effective and meaningful. It closes any possible holes.

I am wondering whether anyone has paused for a moment and reflected on how much information will now be gathered in the U.S. on the worldwide diamond industry players. Let’s face it: 100 percent of all diamonds traded in the United States (rough and polished) comes from overseas.

However, and that is quite surprising when you think about it, virtually 100 percent (by value) of all polished diamonds consumed in the entire world passes through the United States. Look at the figures: the annual worldwide polished diamond production, at polished wholesale prices, is in the range of $16-17 billion. This amount is almost equal to U.S. annual imports of polished, which we estimate at $15.2 billion for 2005 (and $13.9 billion for 20004.)

In other words, if all U.S. covered dealers take their due diligence obligation seriously – and I think they will; it is the law of the land – the U.S. diamond and jewelry dealers will have details of close to 100 percent of the world’s suppliers of diamonds  in their books, in their computers, in their data banks at their finger-tips.

And now for the “catch”. More than 50 percent of these polished diamond imports are subsequently exported. In 2005 we estimate U.S. polished exports at $8.25 billion, some 25 percent above the 2004 level of $6.6 billion. A few billion within this sum will be return shipments to the cutting centers (to parties on which due diligence and identification exercises have already been done), but most of these exports will go to diamond and jewelry companies in the Far East, in the Middle East (Gulf Countries), Europe or elsewhere.

The identification requirements in the AML Compliance Programs cover both purchases and sales. So the U.S. dealer must conduct the same identification exercise on overseas clients, the purchasers of diamonds in Japan, Korea, Switzerland, etc. Thus, in accordance with the new rules, detailed information is collected on $15 billion worth of suppliers of polished, but also on some $8 billion of overseas clients (this figure includes the return shipments to suppliers).

Historically, most of the polished diamond imports would be acquired mostly by New York based polished diamond distributors, who would then supply the diamonds to (1) jewelry manufacturers; (2) large jewelry retail chains; and (3) the small- and medium-size independent “high street” jewelers and small retail chains. Today, as part of the greater efficiencies of the diamond pipeline (the value chain from the mine to the consumer), the overseas suppliers of polished diamonds are increasingly supplying jewelry manufacturers, jewelry chains and retailers directly.

This means that in terms of “data collection”, the identification requirements fall on the shoulders of a much wider group than just the New York importers. Even retailers, when they purchase diamonds from overseas suppliers, are required to have AML compliance programs.

So who is gathering the information on the suppliers of some $15 billion of polished and close to $1 billion worth of rough, as well as on the overseas buyers of $8 billion of polished and some $0.5 billion of rough?

Government data shows that there are currently some 8,400 wholesale diamond, jewelry and watches trading companies serving the U.S. domestic jewelry industry, supplying some 28,500 jewelry retail stores. (These figures exclude the mass merchandisers, such as K-Mart, Sears & Roebuck, etc. that also sell diamond jewelry.) In terms of employment, the jewelry retail stores employ some 154,000 workers.

These figures show that close to 30 percent of the total employment in jewelry manufacturing and retailing consists of dealers. In theory – though some jewelry stores may be exempt – there are over 150,000 employees or staff members who should become aware of AML compliance program requirements. The AML compliance program exemption enjoyed by those retailers who only source their supplies domestically is probably of limited applicability.

A survey published by Jewelers of America, which represents more than 11,000 jewelry stores nationwide, notes that “diamond jewelry and loose diamonds continue to represent the largest categories of sales for its retail members.” The distribution of sales within jewelry retail stores shows that, on average, 14 percent of sales consist of loose diamonds and 36 percent of diamond jewelry (jewelry set with diamonds). Some 50 percent of all jewelry sales consist of either loose diamonds or diamond jewelry – and it stands to reason that more and more of these supplies will come directly from overseas.

So it would not be unreasonable to expect that some 20,000 U.S. companies, which includes only about one third of all the retailers, will find themselves engaged in extensive data gathering on overseas diamond and diamond jewelry companies.

This is, however, only part of the story. Gradually, all the overseas trading partners of the U.S. diamond and jewelry industries will have their own AML requirements. Actually, the JVC compliance kit reminds all players that they should enquire whether their overseas suppliers or buyers have AML compliance rules in their respective jurisdictions.

This means that the due diligence exercise is repeated also overseas – where information will need to be gathered on some 10,000 or more U.S. trading partners. 

This immediately invites questions on the need for the harmonization of compliance systems – a subject close to my heart, about which I wrote a book in 2004. There is a need for reciprocity, for mutual recognition of partner country diamond and jewelry compliance systems. Things must be made easier – and a level playing field must be maintained. It should not be possible for companies that cannot engage, in business in one country (due to compliance reasons) should be able to conduct business in another country. The last thing we want is for the trade to start “jurisdiction shopping.”

Then there is the question of costs. The AML/CFT program requirements impose considerable administrative burdens and costs that many businesses, particularly small businesses, prefer to avoid. U.S. jewelry retailers, who want to enjoy the exemption must balance the savings made in avoiding the AML/CFT program requirements by only sourcing domestically from AML/CFT compliant dealers, against the increase expenses of his diamond purchases. Wholesalers and other dealers will pass their extra costs on to their clients.

It is hard to predict how the AML/CFT burdens will impact the worldwide diamond pipeline in general and the United States in particular. As total diamond and diamond jewelry sales to the U.S. consumers come to some $32-$35 billion. Will the compliance cost affect consumer prices?

And what about “risk” perception? It must be recognized that in recent years, the compliance burdens on businesses have grown greatly, particularly those related to governance such as those at issue here.  The potential criminal and civil liability from failing to meet compliance obligations can be immense and most businesses have every reason to carefully consider taking on new compliance obligations. Unfortunately, except for some jewelry retailers, most industry players will have no choice.

What intrigues me most is as follows. What are the ramifications of having these mountains of transparent data? How much money is wasted on “duplication” since in one office building or diamond bourse, there are probably hundreds of companies gathering information on the very same customers on suppliers? Becoming compliant is a process – and staying compliant is an on-going obligation. But laws are also continually changing and what we have now is just a beginning – we don’t know where it will end.

From now one, no one will ever be able to claim that our business isn’t sufficient transparent, that its supply chain is opaque, or that there are unknown players. From a business perspective – and forgive me for these words – it seems that we are now engaged in a massive and collective “striptease” – soon we will know almost everything about everybody. And we must keep the information on file for anywhere between five to seven years, depending on the jurisdiction.  But we can take solace from knowing that it is all for a good purpose – the avoidance of money laundering and terrorist financing. This will do the job. No kidding.

Have a nice weekend.