By Khadija Sharife
Recently The Wall Street Journal reported on European jewelry giant De Beers “squeezing” diamonds from mining waste ore in Kimberley, South Africa’s most renowned diamond mine. The diamonds were labeled as “scarce” minerals.
Whether or not this is actually true, the volume of gem quality diamonds available in countries like South Africa does not necessarily correspond to the value that will be received by governments. That is, mining is not always in the interests of a country where governments are politically weak or corrupt—or both.
In May 2014, the Leverhulme Center for Study of Value at the University of Manchester published a report exposing $3.5 billion in under-valuation of exported South African diamonds. Co-authored by the African Network of Centers for Investigative Reporting (ANCIR) and Professor Sarah Bracking, a leading corruption specialist, the study revealed that De Beers, who held the monopoly on South African diamonds until a few years ago, was responsible for an estimated $2.8 billion in transfer pricing manipulation. The practice involves increasing or decreasing the value of goods and services to avoid taxation in a particular jurisdiction. In this instance, De Beers subsidiaries based in South Africa reduced the value of South African diamonds when exporting them to its own foreign subsidiaries.
In June 2007, the Standing Committee on Public Accounts (SCOPA) in South African Parliament investigated the export of roughly $1.5 billion in rough gem quality diamonds by De Beers just prior to the first democratic elections in 1994. During that period—against the given exchange rate cited by Parliament—diamond exports by De Beers normally ranged in the value of $500 million to $900 million annually. The size of the shipment was described as a “stockpile transfer,” and the export taxes on the stockpile was estimated at $135 million.
However, according to minutes from the committee hearings, African National Congress (ANC) MP Pierre Gerber disclosed that the shipment “was not accompanied by payment of export duties,” and that “there was no documentary evidence from the Diamond Board stating that it had authorized such a large shipment.”
The South African Revenue Service (SARS) confirmed that “SARS has no legal standing on the issue, as it has never been mandated to collect export duties on uncut diamonds.” The law, said a SARS representative, was “imprecisely drawn.” Such confusion enabled De Beers to avoid paying between $60 million to $90 million in export taxes annually. Include the missing stockpile tax of 1993, and over $500 million was siphoned from South Africa between the transition period until 1999, when the letter was raised in Parliament.
Gerber described the tactic as a “scorched earth policy” that had been similarly replayed in Namibia just prior to the country’s independence from colonialism. Just as in the case of Namibia, the stockpiles were moved to London.
By then, the damage was done. Until 2007, no export taxes were levied on a mineral resource that generates billions in revenue annually. And it gets worse—there were no royalties levied on diamonds either. Effectively, De Beers, controlling virtually all of South Africa’s multi-billion dollar diamond industry, appeared to be physically removing diamonds for free. The company, however, claimed that it was perfectly legitimate as they were in possession of a letter ratified by the apartheid-backed South African Diamond Board (SADB) that gave them permission to do so. The letter, though, was difficult to track down.
“Where is the agreement that allowed De Beers to loot the diamonds out of the country?" stated Themba Godi, Chairman of the SCOPA, referring to the mysterious document that De Beers claimed exempted the company from export taxes. The South African Diamond Board, post democratic transition, claimed innocence, saying it had not been able to find a copy of the agreement. When Abbey Chikane, then Chair of the Diamond Board, wrote to De Beers requesting a copy, the company merely provided a copy of De Beers internal resolution of the matter.
It took more than eight years for De Beers to come to the table with the letter that allegedly provided the company with tax exemptions just prior to the first democratic elections. Though the document was finally procured, the question remained—was it legitimate?
Bruce Cleaver, Group Director for Commercial Affairs and Legal Services, claimed that the letter contained two verifying signatures. One was from Gary Ralfe, a De Beers non-Executive Director. The second signature on the letter, supposedly from a member of the SADB dated January 13, 1993, was illegible, and Cleaver later state he was not in a position “to say” who had signed on behalf of the diamond board. Despite the discrepancies in signature, font, smudge marks, and other incredulous details, De Beers regarded the document as a “solid letter.”
The controversy, colloquially known as “Lettergate,” eventually faded from the headlines as De Beers proved simply too big to be held accountable.
According to Godi, in an interview with World Policy Journal, “there was simply no political will at the time” to bring De Beers to justice. But it was enough of an embarrassment—or at least a blatant failure on the part of government to hold De Beers accountable—that the ANC established a royalties and tax regime, including a 5 percent export tax on diamonds.
The essence of the new export tax was less a tax than an incentive to create a local cutting and polishing industry. If companies like De Beers gave preference to local players, tax perks could be obtained. Yet, once again De Beers managed to avoid any and all constraint, using old strategies as well as new ones. One such new strategy involved ‘donating’ a fully paid-for staff to the State Diamond Trader (SDT), the government agency in charge of providing export tax exemptions to companies like De Beers.
Their plan succeeded. Just $21.9 million were generated in exports taxes from 2009-2013. The low volume of taxes collected should logically indicate that exemptions were being obtained by De Beers—given after De Beers provided local industry with preference in pricing and volume.
However, the SDT’s own report confirmed that gem quality diamonds were too expensive or too scarce in the local industry. Such preferences could not have been provided.
When asked about the arrangement during an investigation for 100 Reporters, the De Beers spokesperson said, “the arrangement between De Beers and the SDT is subject to confidentiality and information relating to this arrangement cannot be provided without the SDT’s consent.” The CEO of the SDT, Futhi Zikalala, maintained that the process was legislated. She neither confirmed nor denied the perceived conflict of interest inherent to the structure, but was quoted as saying, “I do not understand why you are asking that question.”
A former high-level source in the Department of Mineral Resources (DMR) said that the decision was for practical and political purposes: lack of political will, limited resources, and fear of chasing away foreign investment. By 2013, the Minister of Mineral Resources publicly referred to the SDT as a failed system in need of an urgent overhaul.
In short, De Beers was once again able to undermine the system because it quite literally devised the rules of the game on behalf of the public institution intended to regulate them.
The key final player in this game, the government, has not yet budged from the sidelines. As this decades-old drama magnifies, it is the right of governments to demand accountability and transparency from companies who must be held responsible for adhering to such demands. Where government fails, it is the responsibility of citizens to demand government does what it is elected to do.
And so we start by putting it on the record—loudly.
Khadija Sharife is a senior researcher for the African Network of Centers for Investigative Reporting (ANCIR) and a fellow of World Policy Institute.
[Photo courtesy of David Brossard]