Politically Incorrect Part II – The Case of Venezuela

Last week’s column on the erosion of the effectiveness of the Kimberley Process, on the organization’s need to stop wasting time on trivial, technical infringements (caused by human error), and our call for the KP to start addressing the real macro-issues, generated an avalanche of responses. 

A senior executive at a diamond jewelry retail chain, who holds an active leadership role in the industry, opined that: “consumers, in my experience, do not care if diamonds are smuggled. They care about what the industry does to prevent diamonds from funding wars. The Kimberley Process can still limit the second oldest profession in the world [smuggling] and there is nothing wrong in doing more to limit it, but like the oldest profession, it will never abolish it. The Kimberley Process is not a failure, but it could win more friends.”

I have no problem with the first oldest profession in the world, but I don’t like the implied view that if the consumer doesn’t care about smuggling, we shouldn’t either just because we can’t stop it anyway. Though smuggling is an infringement of industry’s Best Practice Principles, I am the first to admit that these principles are hardly enforced.

However, smuggling is also a predicate money laundering offense. Those dealers trading in smuggled goods are guilty of a criminal offense in most of the world’s jurisdictions. So even if consumers “don’t mind” smuggled goods (have they ever been asked?), as the jewelry chain spokesman suggests, we believe the trade shouldn’t give it the ethical stamp of approval, accept it, or lend a hand to it.

There is one instance in which the KP is actually “promoting” or “condoning” smuggling – and that brings me to Venezuela, a subject on which most reactions to last week’s column centered. According to a U.S. State Department report, Venezuela is “one of the principal drug-transit countries in the Western Hemisphere…It refuses to cooperate with the U.S. on counter narcotics activities…” The country also suffers from “rampant corruption throughout the law enforcement, judicial, banking, and banking regulatory sectors.” It’s a major money-laundering country and known for its huge trade-based laundering. Venezuela is currently not a “compliant” country on most of the regulatory issues of importance to the diamond trade.

In 2006, one of the conflict diamond NGOs, Partnership Africa Canada (PAC), issued an in-depth report about the illegal mining and smuggling in Venezuela and called for the country’s expulsion from the KP. Venezuela doesn’t want that because its oil industry needs industrial diamonds to keep its wheels operating so that the oil will continue to flow out and the money will continue to flow in. A politically weird game came into play. In order to avoid being kicked out of the KP, Venezuela “partly suspended” itself, making sure that it still gets all the benefits of a full “participant.” Only the U.S. has now prohibited all rough trade with Venezuela, something which is meaningless as trade will simply transfer through other countries.

Until recently, the U.S. apparently was quite “protective” of Venezuela. Earlier this month (on September 8), the U.S. Federal Register published a notice effectively removing Venezuela from the list of KP countries. The KP itself, however, has not yet removed that country, thus creating a strange situation. Since 2005, no rough diamonds have officially been exported from Venezuela, for reasons best known to the Venezuelan authorities, but most likely because they had lost control of their largely artisanal diamond mining industry. When pressed by the KP (or rather the NGOs involved in the KP), the country then decided to announce a halt to official exports, simply formalizing the de facto situation. As Venezuela does have a considerable diamond production, employing tens of thousands of diggers, it is clear that diggers and miners had no legal way to export. Officially condoned, supported and facilitated smuggling became the only available option.

No Functioning Kimberley Mechanism

Looking at the Kimberley data on the import side, the Venezuela KP authorities have never recorded any import of any rough diamonds – of either gem or industrial qualities. Never. However, in fact, there were considerable industrial rough diamond imports from the U.S. into Venezuela in all of the past few years. So from the beginning of the KP system, there has existed a ridiculous situation in which U.S. KP data shows exports to Venezuela, but the Venezuelan KP data doesn’t show imports. Over three years, the KP has never been able to get this issue resolved. So Venezuela has the best of both worlds: it can smuggle rough gem diamonds to anywhere it wants while remaining a proper member of the Kimberley system for import purposes. With exception of the U.S., this is still the law of the land.

If you have ever heard about having your cake and eating it too, Venezuela can become an example for any country in the world. And it’s a daily reminder to all diamond traders and producing countries that the KP has ceased to take itself seriously. This is a joke, and should almost be reason enough to close the KP system down. You are allowed to smuggle rough but still can officially import rough from anywhere you want.

In fact, the main exporter of rough diamonds to Venezuela was the U.S. Though acknowledging its recent “change of heart,” it remains quite incomprehensible that the U.S. continued to send diamonds to Venezuela for years while the country itself was smuggling its own production to the rest of the world, including Europe. Actually, in 2008, i.e. this year, in its first seven months, the U.S. government reports an increase of over 102.5 percent on the level of U.S. natural industrial diamond exports to the Venezuela. To be precise, these exports refer to Tariff Item 7101.21, which is a category requiring KP certificates. 

The KP Walking Away from Hot Issues

The KP chair, the secretariat and the members actually walked away from their idiotic situation – preferring to argue about trivialities. Maybe this is because Venezuela has oil, and that makes all the difference. I remember that in the early years of the conflict-diamonds issue, when an embargo was put on diamonds from Angola, U.S. Congressman Tony Hall, one of the early fighters against conflict diamonds, met with journalists at the U.S. embassy in London. I was there. The question was raised why he went after diamond people and not the oil companies, which were thoroughly corrupting everyone in Angola and amounted to over 90 percent of that nation’s exports. The answer (and I don’t remember the precise quote) was clear: the oil companies were all American and they were politically untouchable. Maybe nothing has changed. At a recent KP session in New Delhi, participants walked away with different interpretations on what had been discussed. Intentional and planned ambiguity. Quite convenient – the participants avoided a political situation with an oil producer.

Until this very month, the U.S. had been stepping up the exports of industrial diamonds to Venezuela to serve its mining industry as if there were no KP. No, the KP is not a package containing specific obligations. What the KP is basically saying is that you can just take the part you like – and ignore the rest. It is both a disgrace and an outrage.

The KP authority in India, which chairs the KP this year, further accentuates the ambiguity by sending a circular to Indian exporters advising them that Venezuela “has voluntarily detached themselves from the KP Certification Scheme for a period of two years and ceases certification for exports of its diamonds. In view of this, no shipments of rough can be imported from Venezuela into India.” Then it states, “Kimberley Process Certificates issued by Venezuela will not be accepted.”

Wow! India will not accept certificates that nobody has seen for more than three years anyway. It’s almost like saying that no $100 bills printed before 1900 will be used to buy diamonds…. So what’s the purpose of that circular? As it was carefully crafted not to say a word about not sending rough to Venezuela, I guess that was the real message. Exports to Venezuela are allowed. With compliments from the Chair.

A Declaration of “KP Irrelevancy”?

It’s time that the U.S. government explains how a trading partner that is clearly condoning the smuggling of its (and its neighbors’) diamond production could still be seen as a legitimate export trade partner of the U.S. – until September 8, 2008.

There is no evidence of diamond exports to Venezuela from other countries after 2005, thus, therefore, the U.S. is the main “villain” of this story. But the KP is not the private domain of any one country. Europe, Russia, Israel, India and others are still condoning this weird status of Venezuela – which is formally still a KP member until this very day.

There is one KP law for Venezuela. There is apparently another one for the U.S., and again, another one for the rest of the world. I am sure some western African nation would like to adopt the Venezuelan KP model. If the next KP Plenary Meeting fails to address this issue, it should adopt a motion declaring itself “Irrelevant.” I wonder whether the adoption would be unanimous.

Have a nice weekend.