Money Laundering Risks Through Trade-In Diamonds

Banks and other financial institutions have historically been the primary medium for money laundering and are often the destination for proceeds of crime. The probability of money laundering (ML) and terrorist financing (TF) through financial services has decreased because of international strategies to minimize the risks of ML/TF through this market. Offenders have been challenged in their ML/TF operations thanks to country-specific regulation and regional coordination facilitated by the FATF. Because of the enforcement of AML/CFT measures, offenders had to search for ways to launder the money of their crimes.

As a result, offenders have turned their notice to other markets, such as the precious metals and valuable stone industries, especially the trade in rough and polished diamonds. Diamonds are traded on world markets as a currency. The diamond trade is a thriving global trading market, with financial companies managing a large portion of the business. They're used for more than just trade; they're often used for investment also as a form of currency. 

Financial Action Task Force's Report

The Financial Action Task Force (FATF) and the Egmont Group of Financial Intelligence Units partnered on a different business environments research project to determine the "diamond pipeline's" money laundering and terrorist funding (ML/TF) weaknesses and threats, which include processing, rough diamond sales, cutting and polishing, jewelry manufacturing, and jewelry retailers.

The study states that the diamond trade is vulnerable and risky, based on research undertaken, a review of case studies compiled by the project team, and consulting with the private industry. The diamond markets' closed and transparent nature and the high demand for diamonds, along with the authorities' lack of experience in this industry, have made this industry vulnerable to criminal activity.

While noting that the diamond trade has developed for centuries and has formed its own culture and trade customs, each country and continent has its own characteristics and variations. However, the report noted several changes in the international diamond trade over the last few decades, including De Beers' loss of monopoly; the entry of minor diamond dealers; large distribution channels; new trade centers; the switch of cutting and polishing from Belgium, Israel, and the United States to primarily India and China; the emergence of smaller cutting centers; the decline of money transfers; and the advent of the Internet.

These significant developments in the structure and processes of the "diamonds pipeline" raised the issue of whether the threats and vulnerabilities stay the same and whether existing anti-money laundering/counter-terrorist financing requirements and national legislation are appropriate to minimize the various ML/TF risks and vulnerabilities described in the study.

The case studies in the survey demonstrate how traffickers have used unique tactics to profit from the diamond trade for money laundering and terrorist financing. This study aims to raise knowledge of the threats and vulnerabilities of the diamond trade and how to minimize them among legislative, compliance, and customs officials and monitoring agencies.

The essence of the diamond trade is global and complex, making it suitable for ML/TF transactions, which are often worldwide and multi-jurisdictional. Since diamonds are difficult to track down and can provide anonymity in trades, they are extensively used as currency; and Trade-Based Money Laundering (TBML) is frequently used because of the unique features of diamonds as a product, as well as the substantial percentage of exchanges related to global trade, makes the diamonds trade vulnerable to various laundering strategies. Furthermore, the high value of diamonds can range from tens of millions to billions of dollars. As a result, immense sums of money are laundered.

According to the research, law enforcement and AML/CFT regulators and financial intelligence units (FIUs) have a limited understanding of ML/TF strategies through the diamond market.

Suggested Ways To Decrease Rısks İn The Diamonds Trade

A host of problems continue to be worth considering to increase the capacity to reduce the ML/TF threats associated with the diamond trade.

Increasing awareness and understanding

Criminals use innovative methods to control the diamond industry. Lack of understanding of the ML and TF risks with diamonds and the diamond trade can lead to the ML/TF dangers associated with trade violations. This lack of knowledge among leading players about their position in combating illegal activities is a significant deficiency, mainly because improving understanding and awareness requires specialized skills.

Recommendation 32 of the FATF

Presently, governments are not expected to have systems in place to monitor the physical cross-border shipment of diamonds using a declaration/disclosure process. The FATF can include diamonds in the same way as cash/currency are.

Definition of a precious stone dealer

The FATF does not describe a special stone dealer (which includes a diamond dealer). As a result, international laws and interpretations of diamond dealers vary. Pawnshops and stores are not often regarded as diamond traders and thus are not subject to national anti-money laundering and counter-terrorist financing laws and enforcement. A definition of a precious stone dealer should be considered to reduce the chance of ML/TF.

Trade-Based Money Laundering (TBML)

Massive Trade-Based Money Laundering (TBML) through the diamond trade is a major concern, as shown by some events. Diamond import and export are not always controlled by experts or risk-based monitoring. More inspection by specialist gemmologists employed inside or on behalf of customs may help to reduce the risk of TBML and limit the scope for money laundering in global trade.

Global cooperation

Difficulties in global sharing intelligence and the use of tax shelters are significant barriers to detecting and prosecuting money laundering through the diamond trade. Since the transaction is multi-jurisdictional, affecting many countries from mine to market, investigating ML/TF cases requires multi-jurisdictional cooperation. Given the global nature of the industry, international cooperation and knowledge exchange are critical in the battle against ML. To detect and fight the use of diamonds for ML/TF uses, countries must work together.

National risk assessment

Related regulatory authorities should include the diamond market as part of their national risk evaluation and implement proportionate Anti-Money Laundering (AML) and Counter Financing Terrorism (CTF) interventions in jurisdictions where the diamond trade is a major part of the market or trade levels are large.

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