The agreement signed between UBS and the U.S. Government, in which the Swiss bank will release to the government the names of 4,450 account holders suspected of tax evasion, triggered a quiet but very persistent positive spillover effect for the diamond business. In the last few weeks, inquiries about acquiring diamonds from financial consultancies and advisories representing private and institutional investors have intensified.

Questions regarding diamonds as investments have changed in nature: the long-term worthiness of investing in diamonds and their long-term value appreciation are no longer being questioned; diamonds as an investment are accepted as an axiom. The inquiring institutions now appear to be mostly exploring the best mechanism through which they can protect the wealth of their clients, in a quiet and discreet manner.

Though players in the diamond industry are committed to conducting client due diligence, required by Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) laws, the fact that the funds come from large, well-established and respected international banks with superior compliance systems, virtually removes any obstacles to concluding successful deals. The expected investment yield seems to be a secondary factor – safe wealth preservation is the main driver.

But this is not brought on just as a result of the UBS tax deal. The G20 finance ministers’ meeting in London this weekend is set to discuss the progress made by the Global Forum on Transparency and Exchange of Information in dealing with tax matters. The ministers are expected to take further steps in confirming the end of an era of banking secrecy as a protective shield for tax evaders. Global wealth, under the threat of taxation, is looking for alternative safe havens.

They are discovering diamonds.

The world’s nations seem to be steamrolling new agreements on the exchange of tax information – quietly, but effectively. By my count, since the previous G20 meeting in April 2009, over 50 new tax information exchange agreements have been signed (doubling the total number of agreements signed since 2000) and over 40 double taxation conventions have been confirmed. As a consequence, another six jurisdictions have implemented the internationally agreed tax standards.

In a short period of four months more agreements were conducted than in the past decade!

The list of countries becoming more pro-active promoting agreements on tax information exchange is mind-boggling. This week, very quietly, Gibraltar signed tax information agreements with a dozen countries. Belgium is also getting its act together, with its most recent agreement signed with Monaco. Germany and France, which fought to weaken Swiss banking secrecy, will not allow the U.S. to be the only beneficiary of Swiss tax information. More banks will be targeted. The general vulnerability of the banking system and their recent dependence on government bailouts has its price. Relinquishing secrecy is one of them.

This is not to suggest that we launch an international promotion campaign to move parts of the world’s wealth into diamonds, but we believe this is going to happen one way or another.

Only a “tiny part” of the wealth will do the job. Take Switzerland. It has more than 330 banks holding over $3.5 trillion in offshore funds – and that is a lower post-financial-crisis figure. The Swiss government itself seems to have lost its resolve to protect its own system. In the past few days, the Swiss finance ministry indicated that it is about to pursue new or amend existing tax agreements with a large number of countries, mostly European and Middle Eastern. Some Swiss bankers expect the money flow to go to Asia. What is certain is that money will be on the move.

The Nature of Information-Sharing

The Organisation for Economic Co-operation and Development (OECD) spokesman, Nicholas Bay confirms that all of the organization’s 30 member states are looking at tax evaders in an effort to recoup some of the $7 trillion lost in the global crisis. What exactly does it mean when a country “strengthens” an existing tax agreement? What is behind the vocabulary?

Brian Monroe, the editor of an anti-money laundering website, explains that bilateral “information sharing agreements typically involve more than a dozen tenets spelling out the depth and breadth of the information to be exchanged, the legal powers allowing the exchange to occur in both countries and the requirements to get the information. Investigators must usually provide client names, account numbers or evidence of suspicious transactions.”

The model developed around the UBS case may be repeated. The U.S.-Switzerland deal tries to sidestep the breach in Swiss banking secrecy laws by requiring the U.S. to submit a new treaty request, based on prior tax agreements with the Swiss government (concluded in October 1996 and January 2003). The new agreement, which will apply to past offenses, will expand the number of offenses justifying data sharing. That’s what all these treaties are about – criminalizing tax evasion, something that many countries have refrained from doing so far. Experts conjecture that with U.S. agencies hammering out an information sharing framework, it “should be easier” for other countries to take similar steps as there is a precedent standard to follow.

Diamonds to Become the New Gold?

Institutional investors are generally aware of only one very crucial diamond investment parameter: they realize that the absence of new major mine discoveries will lead to a dwindling of new diamond supplies. In a few decades, the main diamond producers of today may not be around anymore. They also realize that through the development of mostly underground mining activities, the cost of mining will go up in almost any scenario. There is no way investors can lose out under these circumstances.

In the diamond investment schemes of the 1980s, there was a high emphasis on the commodity’s volatility and the belief that in a futures market one could reap fruits by playing the market. Short-term gains were just for the grabbing.

With the institutional investors of today, that element seems to have disappeared. Investors are looking for long term. They are focusing on ways to acquire diamonds and are less, or almost unconcerned with how to sell them in due time. Secrecy, confidentiality and discretion – all of these are part of the attraction and essential prerequisites.

In the world of gold, one is used to regular statistics showing the percentage of gold demand for jewelry fabrication, for industrial applications and for investment demand. Except for a short period in the 1980s, the investment demands for diamonds have never been clearly monitored or really measured in quantitative terms. At its peak the entire diamond investment portfolio may have been worth $500 million per year. Today, we have anecdotal data that investment demand is growing, but we think that we are still some distance from its real takeoff.

Unlike gold, the act of physically storing diamonds is a very unobtrusive and discreet issue. The intensifying war that the world’s governments are now relentlessly waging to discover and tax private wealth anywhere and everywhere will, we expect, considerably change the nature of future demand for diamonds – both for polished and rough.

We may not really get excited about the causes that are triggering this demand. Love and commitments are nicer purchase drivers. We just have to be grateful that this demand is imminent. It couldn’t come at a better time.

Have a nice weekend.