Money Laundering and Terrorist Financing through Trade in Diamonds
The FATF and the Egmont Group of Financial Intelligence Units collaborated on a typologies research project to identify the money laundering and terrorist financing (ML/TF) vulnerabilities and risks of the “diamond pipeline”, which covers all sectors in the diamond trade: production, rough diamond sale, cutting and polishing, jewellery manufacturing and jewellery retailers.
Based on research conducted, analysis of case studies collected by the project team and after consultation with the private sector, the report concludes that the diamonds trade is subject to considerable vulnerabilities and risks. The closed and opaque nature of the diamonds markets and the high value of diamonds combined with a lack of expertise in this area on the part of the authorities have left this industry susceptible to abuse by criminals.
The diamonds trade has existed for centuries. It has developed a unique culture and trade practices, which have their own characteristics and variations across countries and continents. However, the international diamond trade has changed in the last few decades:
- De Beers no longer holds the same all inclusive diamonds monopoly.
- A number of smaller diamond dealers have entered the market.
- Distribution channels have become more diverse.
- New trade centres have emerged with billions of dollars' worth of diamonds, and financial transactions go in and out of newly founded bourses and their ancillary financial institutions.
- Cutting and polishing has shifted (except for the most valuable stones) from Belgium, Israel and the US mainly to India and China, with smaller cutting centres emerging.
- Cash transactions are still prevalent but the usage of cash is diminishing.
- The internet, as in all other facets of life, is rapidly taking its place as a diamonds trading platform.
These significant changes in the "diamonds pipeline" structure and processes raised the question of whether the risks and vulnerabilities remain the same and whether current anti-money laundering / countering the financing of terrorism (AML/CFT) standards and national regulations are sufficient to mitigate the different ML/TF risks and vulnerabilities identified in the research.
The case studies included in the report demonstrate the creative methods that criminals have used to exploit diamonds trade for the purpose of money laundering and terrorist financing. This report aims to help build awareness with the regulatory, enforcement and customs authorities as well as reporting entities about risks and vulnerabilities of the diamonds trade, and how to mitigate them.
Some of the risks and vulnerabilities of the diamonds trade, identified in this report are
- Global nature of trade - The trade in diamonds is transnational and complex, thus convenient for ML/TF transactions that are, in most cases, of international and multi-jurisdictional nature.
- Use of diamonds as currency - Diamonds are difficult to trace and can provide anonymity in transactions.
- Trade Based Money Laundering (TBML) - The specific characteristics of diamonds as a commodity and the significant proportion of transactions related to international trade make the diamonds trade vulnerable to the different laundering techniques of TBML in general and over/under valuation in particular.
- High amounts - The trade in diamonds can reach tens of millions to billions of US dollars. This has bearing on the potential to launder large amounts of money through the diamond trade and also on the level of risks of the diamonds trade.
- Level of awareness - Law enforcement and AML / CFT authorities, including financial intelligence units (FIUs), have limited awareness of potential ML/TF schemes through the trade in diamonds.