By Khadija Sharife
In 2013, World Policy Journal published an investigation exposing how $3.5 billion in illicit diamond revenue flowing from Angola and the Democratic Republic of Congo was laundered using the legitimacy of the Kimberley Process Certification Scheme (KPCS). The KPCS was founded in 2003 to “keep rough diamonds tainted with violence out of the international trade.” That definition entirely omits all violence or conflict outside of ‘rebel activities,’ including that which originates or is implemented by diamond-producing or trading states and multinational corporations.
In the Journal’s original investigation, it was found that the Belgian-based company Omega, connected to Angola’s lifetime President, Eduardo Dos Santos, exported diamonds from Africa that were undervalued by as much as 50 percent to the KP-certified jurisdiction of Dubai—also a tax haven. From Dubai, Omega subsidiary Tulip FZE would re-export the same diamonds at a higher value with ‘mixed origin’ KP certificates that, in turn, conflated the origin of the diamonds—the exact sort of corruption that the KPCS is designed to prevent.
In the process, arms money from Arkadi Gaydamak, an infamous arms dealer connected to Dos Santos, would be laundered. When the Journal posed questions about this incident to the KP office, we were simply passed on to the Dubai Multi-Commodities Center (DMCC) without being allowed access.
This blurring of licit and illicit actions of questionable legality depending on the juristiction where they take place is the very strength behind Dubai as a powerful commodities trader. In less than a decade since receiving their KP-approved status, Dubai’s diamond industry increased from $5 million per year to over $35 billion, despite the presence of no real production, cutting, or polishing industry in Dubai.
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The key to understanding the mystery of Dubai’s value lies in the country’s own diamond statistics, which shows that diamond imports nearly doubled nearly a decade ago—from 26 million carats in 2005 to 42 million carats in 2006. The sharp increase in exported diamonds to Dubai corresponded with the opening of Zimbabwe’s Marange diamond fields for production. Described as the largest diamond find of the decade, Marange would quickly become a conflict zone between alluvial miners and the Zimbabwe regime’s military. By 2011, Zimbabwe would become one of the world’s top ten diamond producers and Dubai its natural ally.
Though diamond volume exported to Dubai in 2006 was 16 million carats more than 2005, ironically the import value actually decreased from $1.8 billion (2005) to $1.5 billion (2006) indicating gross undervaluation. Confidential Marange price lists reveal that diamonds were generally exported at an average of $67 – $72 per carat. Generously assuming that half the total sudden influx of diamonds into Dubai were of Zimbabwean origin in 2006, or an estimated 8 million carats, then more than $800 million would have been profit-shifted.
However, even those averages proved false as price lists divided by ‘lots’ revealed a different picture. In 2010, 16.8 percent of gem quality diamond production was considered of exceptional grade at $350-$388 per carat. The low overall value was obtained by including total industrial production (quality and low quality) to drive down the average to $67. When Zimbabwe initially received their conditional KP-certification that same year, 50 million carats were exported to Dubai at $3.2 billion, along with a similar volume re-exported from Dubai at $3.8 billion.
By 2013, when Zimbabwe was fully incorporated as a KP-certified member, export volumes to Dubai reached 67 million carats, with export value to Dubai at $5 billion. In the same year, however, re-exports from Dubai at around the same volume were valued at $7.2 billion, or $2.2 billon higher. The flow in bulk is, in part, stockpiled Marange diamonds from now over-mined concessions.
In other words, secretive jurisdictions like Dubai render initiatives like KP null and ineffective. Such secrecy also means that the wrong actors are financially empowered to continue rigging systems, including elections. The formula used by looting elites from Zimbabwe, as mentioned in our piece for the Journal, depended entirely on a KP-approval of those tax havens. But it is not just criminal dictators and other ‘illegal’ actors that manipulate governance initiatives like the KP.
The KP’s mission excludes the most critical sources of revenue leakage, economic and human rights violence, and state capture. This is because only rebels are included in the definition of conflict diamonds, allowing rent-seeking regimes and corporate tax avoiders, among others, to have free reign. Major players like De Beers routinely use undervaluation to profit shift by using self-regulated transfer pricing that permits companies to transact goods and services between subsidiaries of the same parent company. This essentially creates a space for allowing companies to secretly and liberally adjust their own tax rates by determining value at their own discretion.
As my colleagues and I have shown here, its not just the players we think we know that are benefitting: the Cosa Nostra, Italy’s most notorious mafia, also has skin in the game. So what is the purpose of governance initiatives like the KP, backed by major industry players like De Beers, Angola, and others? Perhaps more critically, who benefits from their oversight, or lack thereof?
In Africa, both state governments and corporations are usually involved in extractive partnerships, accounting for the bulk of diamonds produced. The creation of the KPCS is considered to have generated 99 percent of ‘conflict free’ rough diamonds and, for some reason, is held as the model for replication across the natural resources industry. While providing a clean bill of legitimacy to the diamond industry, the KPCS relies on the integrity of the diamond entities exporting ‘value’ to not only ensure this level of secrecy but also to allow tax havens like Switzerland and Dubai to re-export diamonds with KP certificates.
In a recent paper on taxation, economic development, and philanthropy, I explored the role of big money funding public-facing initiatives, like the KP, designed to promote ‘justice.’ In it, I demonstrate how the African continent loses over 60 percent of illicit flows to corporate tax avoidance, mainly from extractive industry revenues. Ironically, when corruption and illicit flight is framed by most corruption and governance institutions such as Transparency International (TI), the issue of secrecy providers—from London to the Netherlands, and yes, Dubai—is largely ignored. In the process, so is the issue of economic development and competitive markets. Instead, the concept of corruption is limited to demand-side or political corruption, responsible for just 5 percent of the same ‘illicit’ economy.
The kind of capitalism supported by corporate philanthropy, directly or indirectly, enables a version of economic development constructed at the expense of fair competition, taxes, and more broadly, economic justice. This occurs through depoliticized ‘policy spaces’ producing a boomerang effect of both legitimacy as well as ‘cleanliness.’ In the case of Extractive Industries Transparency Initiative (EITI), mining companies even directly fund such deception.
This ‘easy virtue’ was the subject of a recent analysis for Southern Africa Trust (SAT) probing the role of philanthropy in resource governance-related initiatives. Here, massive wealth is automatically cleaned of its history and politics—as well as its intentions. Instead, it is framed as a transformative agent acting for the public good. ‘Neutral’ delivery mechanisms such as KP, EITI, or TI, are presented as solutions to problems diagnosed on behalf of the public.
In the process, politics is privatized. Democracy as political engagement and policy created or impacted through citizens via elected governments is tangibly lost through the medium of money. As with Dorian Gray, big philanthropy is taken as good on face value merely because it looks good.
Yet here, Big Money is dealing in another currency: virtue. The imagined market of the ‘poor’ or ‘impoverished’ do not have a ‘voice’ and are often unable to be authors of their own reality. The real market then emerges: using poverty and the ‘poor’ as underlying assets to market need in this virtue economy.
As a 2011 report on the subject published by the World Bank notes, diamond value as a mineral in producing countries cannot be measured due to the sheer opacity of the industry, which, unlike gold or platinum, has no benchmarked price. Such secrecy surrounding diamonds, coupled with their hyper-mobility and subjective valuation, characterizes them as the perfect ‘commodity on the move’ for criminals and corporate looters alike. Worse, it creates a grossly anti-competitive market—which is part of the reason why the U.S. government banned De Beers from trading in America for 60 years.
Where it relates to initiatives that are integral to Africa, the continent in which over 70 percent of the world’s diamonds are produced, the Dorian Gray excuse is simply just not good enough.
Khadija Sharife is a senior researcher for the African Network of Centers for Investigative Reporting (ANCIR) and a fellow of World Policy Institute.