This is a totally useless article. I suggest stop reading right now and come back to this column next week. Have a nice weekend. If you are still with me, this article deals with the question whether it is possible that a diamond polishing plant operated by the Hezbollah in southern Lebanon and would-be-again diamond miner Alan Bond may be facing legal and reputation challenges in marketing their output? That sounds like a weird question and it is hard to give an explicit answer – unless one goes by the letter and the spirit of international anti-money laundering laws which, increasingly, have become an inherent part of diamond industry compliance environment.

Let’s first take a look at Alan Bond, the flamboyant entrepreneur who also has a well-established criminal record. Bond, the business tycoon (from owning media to almost everything else) who in the early 1980s was a 5 percent owner of the Argyle mine project in Australia, is again looking for a future in diamonds.           

Says the Financial Times this week on the front page of its companies section: “Alan Bond, the disgraced Australian businessman and American Cup winner, is looking at ways to raise money in London for an African diamond mining project, including a reverse take-over of AIM-listed River diamonds.” The project it is referring to is the Kao diamond project in Lesotho. Alan Bond’s Lesotho Diamond Company controls 93% of the project, which – he claims – may produce a total of 5 million carats over the next ten years.

The Kao project, reportedly discovered in 1972 by U.S. prospectors, has attracted the interest of many companies over the years, only for them to be put off by political uncertainty and technical difficulties. The last public company to be associated with the project before it caught Bond’s fancy was controversial Canadian miner Diamond Works, which farmed into the Kao pipe in early 1998.

The Financial Times tried to be “nice” to Mr. Bond by merely calling him “disgraced.” It would be far more accurate to describe him as a convicted criminal who has admitted to committing the largest corporate fraud in Australia’s history, years before the world got used to Enron-type swindles. Sentenced to serve a seven-year jail term in 1997, the ex-tycoon was released after only four, after his lawyers used a legal technicality to invalidate the sentence.

The fraud he committed “only” involved some A$1.2 billion (approximately $1 billion) – a colossal amount in the early 1990s and still a gigantic sum. You really must know what you are doing if you want to defraud the public of this kind of money.

Bond’s jail time also related to an art swindle centering on the purchase of Vincent van Gogh’s Irisesfor $54 million — at the time, a record amount for a single painting. Bond had borrowed the money from Sotheby’s – but then simply reneged on his commitments, and refused payment, forcing Sotheby to sell the painting to a third party.     

Some five years before going to jail, Bond went bankrupt. Poor guy. But don’t worry too much. In 1995, his offshore family trust (that apparently remained untouchable and outside the bankruptcy) was able to allocate $12 million to settle with creditors owed $1.8 billion. The creditors ended up getting a pittance, something like half-a-cent to the dollar, in a settlement which enabled Bond to get out of bankruptcy.

Bond very much wants to take the Lesotho Diamond Company public and he is trying to achieve this through a reverse take-over, via a listed company (River Diamonds, with properties in Sierra Leone and Brazil). Some people, including some journalists, seem to have a very short memory.

Financial Markets Refused to Deal with Bond

Three years ago, around April 2004, Alan Bond's Lesotho Diamond Corporation unsuccessfully approached at least 10 London brokers in a bid to complete a £30 million float in the London market. The London Times then conjectured that Bond's links to Lesotho Diamond Corp as a consultant, and the size of his shareholding, had dampened broker enthusiasm. A float on the Alternative Investment Market (AIM) was initially pushed back six months – but that delay has lasted until today.

At the time, Bond served “only” as a consultant to the company, though he also had intimated that the always present offshore Bond family trust controlled sufficient shares for it to remain a 30 per cent shareholder of the company after the then contemplated float. (His son Craig also sits on the board of the Gibraltar-registered Lesotho Diamond Corporation.) The Financial Times says that Bond today owns 40 percent of the company, with RAB capital (a hedge fund) holding an additional 10 percent.

It seems that the presently contemplated reverse take-over of River Diamonds is just another way to go public – after failing to find backing for his own straightforward bid. Mining consultants SRK value the Kao project at $ 250 million, making it a quite a substantial property. The projected production figures have recently jumped.

Before elaborating on the question put at the outset on the challenges facing both Bond and Hezbollah diamond manufacturers, a quick word about this week’s Swiss government annual Anti Money Laundering (AML) and Terrorist Financing (CFT) report – a progress report on that country’s adherence to relevant compliance laws. The Swiss government reports an increase in the “quality” of the suspicious activities reports filed by mostly large private banking institutions and by major foreign banks.

Banks understand much better that, under Swiss laws, tax evasion is not money laundering offenses that need to be reported. They also understand that a questionable transaction is ONLY questionable if there is reason to believe that the monies involved are from crime.

And reporting they are! According to Swiss authorities – and this really applies universally to all money laundering and terrorist financing laws – the key in determining what money is crooked depends on the SOURCE of funds.

Banks will tell you that it is very difficult to assume that an ex-convict, who has embezzled hundreds of millions of dollars in the past – is not using some of these funds to get a new start on business.

The AML/CFT laws applicable to the diamond industry oblige diamantaires to either refuse or report transactions involving diamonds which may have been acquired by using questionable (read: criminal) funds.

Would an Alan Bond-owned and operated diamond mine fall into such category?

Diamond Cutting in southern Lebanon

Let’s see what Hezbollah has to do with this argument. An American investigative journalist, living in Beirut, has been investigating diamond manufacturing in diamond factories owned and operated by Hezbollah in southern Lebanon. The journalist comes warmly recommended by the U.S. Department of State. The guy is serious and thorough. Much of his investigation focuses on how rough diamonds reach the factories.

I don’t want to report details on what this reporter has found because it is his story – and when ready, the report will appear in a major U.S. publication. As Lebanon is (again) a member of the Kimberley Process, one must assume that the rough supplied to Hezbollah factories are not conflict diamonds.

Hezbollah is however listed by the U.S. government as a terrorist organization. One must assume that the funds used to purchase the rough diamonds for polishing come from an illegal (or criminal) source, something one also might assume when someone with questionable funds finances a diamond mine.

These diamonds are not conflict diamonds in the traditional sense. No, in my book, they are simply “dirty diamonds”. Actually, they hardly could be any dirtier.

Many diamond traders may shrug this off and argue that this isn’t a perfect world and there is a limit to how much a trader can exercise due diligence – or is willing to exercise it regarding the sources of money used to secure diamonds offered for sale. And that applies both to rough and polished.

Some time ago, we reported on the Sierra Leone Diamond Company where the controlling shareholder disclosed in a stock market filing, that he had been convicted in the past of narcotics dealing, and other violent offenses. In the legal community, all monies used in business by someone with a narcotics dealing background is, almost by definition, “dirty money”. It didn’t prevent the company from going public, nor did it prevent it from selling its diamonds. I told you in the first line of this column, this is a totally useless article and I don’t understand why you are still reading.

The point I am making is that somehow there are laws which are not being upheld. Most industry participants couldn’t care less – and any diamond that is not a “conflict diamond” is considered an ‘okay’ diamond for all intents and purposes. The Hezbollah factories will do well, so will any Alan Bond-owned diamond mine - if he finds the diamonds as suggested.

But traders dealing with these kinds of situations may not be aware of the “risks” they are taking.

The “risks” come from the banks – which have become far more conscious of these issues, and are reporting any transaction with a party they consider questionable, to the authorities. Our product is a “sensitive” product – its value lies in the confidence and trust of the public in diamonds. This isn’t oil or uranium.

The risks became very clear from this week’s Swiss government reports, as is it apparent from the behavior of other banks, including diamond financing institutions. A trader may not mind purchasing these goods – by just exercising lousy due diligence – but banks may think otherwise.

There are diamonds which, legally, should be viewed as “dirty diamonds”. One may argue about the definition, the circumstances, the “seriousness” of the violation of laws, or the interpretations. Some may argue that Alan Bond may not be the best of examples and say that he is okay now – and we hope that they can substantiate that position. Chances are that the issue will not come up and that one can buy his diamonds, or southern Lebanese polished, without worry.

The point we try to make here is that even if a diamond has a Kimberley Certificate, it doesn’t mean that the stone is okay. It still can be a “dirty diamond” and governments are increasingly going to greater lengths to investigate and prosecute. But who cares? Diamond Best Practice Principles have become largely irrelevant – they are hardly being enforced. Those fraudsters who bribed the GIA to secure fraudulent certificates to defraud the consumers are still among the industry’s most powerful and respected companies.

So who would care about ex-convicts, ex-narcotic traffickers, or Hezbollah diamonds? As long as the diamonds are “conflict free”, even the NGO’s don’t really care. What’s the down-side? I told you at the outset, this is a totally useless article. If you nevertheless have come to these lines, I apologize for having wasted your time. I promise I won’t do it again.

Have a nice weekend.