This week, I overheard a heated discussion amongst a few Antwerp diamantaires about the revaluation of inventories that took place in December last year. The question that was raised was, “Did we make a monumental blunder, or not?” By itself, that is a very intriguing question.

There were various reactions: “If I am not going to stay in Antwerp and instead move in two years time, this gift to the government was just wasted money,” remarked one. “The issue is,” said another “what did we get in return? There has been no visible let-down of tax raids, seizures, or harassment.” Then, a third noted “To protect ourselves, we are now moving our stocks to Geneva or Dubai, together with our company headquarters. We’ll turn our Antwerp office into a branch or subsidiary. We shouldn’t show too much equity.”

“If moving stocks out of the country is the scenario, then there was no reason for having participated in the voluntary revaluation of inventory values.” And so the debate went on. Though in my columns I always refer to the inventory revaluation as a tax amnesty, technically and legally it was not, and, as it turns out, that may be just the problem.

It may be recalled that in December 2006, within less than two weeks, $2.5 - $3 billion worth of diamond inventory was revalued and declared, bringing in a tax revenue windfall for government of some $150 million. All parties involved - government and industry - went to great lengths to make sure that everyone understood that this was not an amnesty. It was agreed that the “late” payment of taxes that had not been raised earlier was due to a tax system that disregards changes in inventory evaluation.

Incidentally, the Belgian government would not have been allowed (under EC rules) to declare an amnesty for a single industrial sector. It held a nationwide amnesty in 2004, which largely failed. The terms were too limited. The Belgian revaluation of inventory required a special law – and, interestingly, that law doesn’t provide anything “in return”. True, the law was “needed” because the banks (and De Beers for that matter) wanted to see greater equity in the balance books of their clients.

The Privilege of Trading Tranquility

“We should, at least, have been awarded with some period of tranquility,” sighed another participant in the discussion I overheard. Maybe this is the catch. If it would have been called an amnesty, or had been structured as an amnesty without calling it as such, the diamantaire who voluntarily decided to make an additional tax payment would have protected himself against possible prosecution or other charges related to fiscal issues. That is the nature of tax amnesties around the world. That is also the nature of previous tax amnesties in Belgium.

Amnesties encourage people to file and to pay their back taxes. In return, the relevant tax agency may reduce penalties or even waive them entirely. In December 2006, the Belgian government received a payment from the industry it may not have been entitled to – as the assessment formula in force for the diamond industry neutralizes inventory valuation issues. So if the government received an unexpected bonus – could there not have been some form of relief as a quid pro quo?

Let there be no mistake: no government will tolerate money laundering – and we would be the first to agree with any government on this. However, the current investigations involving transfer pricing are basically of a fiscal nature.

Few people are talking about what is exactly happening. Some 15-16 people had some of their goods seized. The DTC is also becoming curious, and is asking questions. Sales Director Des Cavanagh has emailed clients demanding that they inform the DTC if they are involved. This is reminiscent of the request to inform the DTC whether one had received “a letter” from the GIA at the height of the Certifigate scandal.

As some $100-150 million worth of goods may now be held by the courts, the industry has asked the presiding magistrate to release these diamonds in return for some kind of collateral equal to 4-5 percent of the value of the amounts the government believes have been “evaded”. The magistrate agrees to 40 percent - and to the best of my knowledge - only one party, who is very marginally involved in this whole courier affair, has agreed to put up such collateral and has received his diamonds back. No charges have been filed against that diamantaire.

None of this has anything to do with the “inventory revaluation” one may argue. We think differently. Companies which have revalued their inventory have more equity – and have easier access to credit. Tax people can demand more. Furthermore, though this is truly not related, having made use of the revaluation facility may be interpreted as a sign that there may be undeclared income. That’s nonsense – but I have stopped looking for sense on these issues.  

The bottom line is that the “inventory revaluation” program wasn’t structured to reward – or even to show some appreciation to those who participated.

Listening to the Prime Minister

Prime Minister Guy Verhofstadt - and we say this to his great credit and with all due respect - has always shown a keen interest in the plight of the diamond sector. He has personally been involved in the restructuring of the HRD. He knows the business and the community. He cares. Taking stock of the current scene in Antwerp, I recall a presentation which the Prime Minister made to the Indian Community of Antwerp on March 9, 2004.

The Prime Minister then said, “Little Belgium ranks just after the United States as the most important import partner of India. It is due to one important sector, one important product: diamonds. As the Prime Minister of Belgium, the last thing to do obviously is to underestimate the diamond sector. Diamonds are not only responsible for a huge turnover worldwide; they also involve thirty thousand jobs in Antwerp. At a time when work remains the number one priority, those jobs represent a high value for Belgium,” said Prime Minister Verhofstadt.

“That is why I found it advisable to meet the De Beers Group a few months ago,” he continued. “This productive meeting resulted in a commitment from both parties. The De Beers Group committed itself to staying in Antwerp and to making further investment, whereas we committed ourselves to keep giving the same opportunities to the sector as in the past, which enabled the diamond sector in Belgium to reach the top of the world. Remaining at the top is a conscious strategy; due to the world competition, it actually seems to be the only possible strategy,” he concluded.

All the recent activities by investigators highlights a lack of ‘tranquility’ in the work environment that has prompted diamond companies to minimize the risk of working in Antwerp. They are looking for a (temporary?) solution such as moving out of Antwerp to places like Dubai or Israel. One of the interim solutions is the establishment of company headquarters in Geneva or in any other non-European jurisdiction, while turning the Antwerp operations into either a branch office or a subsidiary. The inventory and the capital will be held by the head office so the next time the investigators knock on the door of the diamond industry of the Antwerp entity, they will have hardly any stocks and very little money. This is not just official company restructuring since it involves the actual removal of inventories from Belgium. Again, the net effect is fewer goods on the market.

Rough is only traded where there is stock. Moving stocks means less trading activity. That is not being at the Top of the World.

One can speculate that from all of this (i.e. the non-amnesty amnesty, the seizure of goods and the ongoing investigations, as well as the relocation of head offices to other jurisdictions, or the buying of offices in Tel Aviv or Dubai), the cumulative effect will make Antwerp a less attractive diamond trading center with fewer goods on the market. One might also argue that fewer goods means higher prices, more volatility, and less efficient distribution.

Some of this is wishful thinking because higher prices for non-market related reasons are unsustainable and will only trigger further hardship among more people.

Let us dwell on the Prime Minister’s words: “Remaining at the top is a conscious strategy.” While taking stock of the current scene in Belgium, it seems that this strategy has been lost. When people believe that a voluntary compliance with an amnesty (that is not called an amnesty) was a wrong decision, then something has gone astray.

Have a nice weekend.