The Travels of a Lady-Wearing-Rough into a Legal Kimberley Process Hole
August 09, 07Checking in for a recent Heathrow-Mumbai flight, I couldn’t help noticing a female traveler wearing what looked like a rough diamond pendant. It was a huge, milky, smooth-looking stone, which must have been in the 40-50 carat range. Intuitively, I surmised that this jewelry piece is an elegant way to smuggle large rough stones, avoiding both export taxes and the need to have a Kimberley Process Certificate (KPC). Ostensibly appearing as part of a woman’s personal jewelry, generally no questions are asked at customs.
Exceptionally large stones, especially those mined in artisanal alluvial environments, fetch premiums in the cutting centers; their owners, in the past, often tried to use unconventional ways to get such stones into overseas markets. Many diggers labor a life-time just to get to that one “big one” – their ticket to riches – and are often less inclined to share the spoils with governments or others. With the advent of the rough diamond Kimberley Process Certification Scheme (KPCS), considerable parts of informal exports have been diverted to formal markets.
The lady in the airplane made me think. Rough diamonds are not usually associated with consumer purchases. But, as a recent front-page article in the Wall Street Journal phrased it, “from Tiffany to De Beers, a new look in diamond jewelry is on the rise: uncut diamonds that to the untrained eye can look more like gravel than gems. For jewelers,” says the daily, “these stones have another appealing quality: The wholesale cost of uncut diamonds is far below that of cut and polished gems. Yet some customers are proving willing to pay tens of thousands of dollars for them.”
A leader of the trend in selling rough diamonds set in jewelry is De Beers. According to the article, “at De Beers's three U.S. stores, which started offering rough-diamond jewelry two years ago, one of every five pieces sold now features rough diamonds. A $45,000 rough-diamond necklace is displayed prominently in the window of the company's Fifth Avenue store in New York.” The article says that the De Beers “Talisman collection, a line of jewelry featuring uncut diamonds, sometimes mixed with polished stones, which range in price from $400 to $700,000, are among [the stores] top sellers.”
An intriguing question is from where De Beers would source its rough. The De Beers retail stores must – as agreed with the European Commission – source the diamonds needed from the market. The volume of goods needed and the selection of consistent rough would almost require a Diamond Trading Company (DTC) Sight that would be dedicated to De Beers Diamond Jewellers. It sounds kind of stupid for De Beers to sell rough to a Sightholder, just to buy it back for its jewelry retail stores. But that may actually be the case.
A Hole in the Kimberley System
The lady in the airplane may or may not have been smuggling the rough stone she was wearing. The fact is that any rough diamonds set in jewelry, or set as a decoration on Frigidaire doors for that matter, can travel freely without a KPC. Rough diamonds (including conflict diamonds) that have ended up in non-Kimberley member countries can freely move around the globe – if set in jewelry or in any other product.
Stephan Chardon, spokesman for Kimberley Process Chairman Karel Kovanda, told us this week that “rough diamond jewelry is a relatively recent phenomenon which indeed does not as such fall under the jurisdiction of the Kimberley Process.” The reason given for excluding these goods is that “it is covered by a different customs code, and not treated as 'rough diamond' and therefore not subject to KPCS rules.”
Wow! Paste your rough diamond to a pen and it ceases to be a rough diamond for Kimberley Process purposes. It escapes controls. The KP chairman sees it differently. Says Chardon, “This does not mean that no controls are applied at all - rather such [jewelry or other custom category] goods are subject to customs control in place for jewels under the responsibility of customs.”
The spokesman concludes, however, that “the issue has been referred to the Kimberley Process' Working Group of Diamond Experts for further consideration, as they have been dealing with difficulties relating to HS [tariff] codes classification in the past.”
The United States government is also looking into the rough diamond jewelry trend. Says Sue Saarnio, the U.S. Special Advisor for Conflict Diamonds at the Department of State, “We've only encountered the question of rough diamonds set in jewelry once and I believe it was determined that the shipment could be sent as jewelry and hence didn't need a KPC. I agree that this could be a considerable loophole in the KP.”
It is my understanding that the U.S. case that drew attention involved a prestigious jewelry dealer. What is relevant, however, is that a jewelry export containing rough diamonds in the settings was flagged and became an issue of intense inter-departmental debate. This underscores that there is a problem. Whether it is Africa or the United States – when rules are not clear and they require customs officials to make judgment calls and apply discretionary powers, dealers unnecessarily live in an environment of uncertainty.
Saarnio has told us that the State Department has raised this issue with KP and U.S. Customs officials.
The Other Side of Rough Diamond Jewelry
One may doubt whether any diamond manufacturer would forgo the revenue optimization of a quality rough diamond and forfeit the premium in the stone’s polished state because of its beautiful color or high clarity and, instead, use such a quality stone for rough diamond jewelry.
Many of us may dismiss rough diamond jewelry as a fad that will pass. At best, such jewelry might become a conversation piece and raise questions about the diggers in Angola or Sierra Leone, who may have unearthed the stone in a riverbed. But, apparently, some jewelers find that the price a consumer is willing to pay for a rough stone is higher than the value of the resultant polished. It is fair to assume that rough diamond jewelry consumers will learn over time that it is the “junk” material that is diverted to jewelry.
Says the Wall Street Journal, “Many rough-cut diamonds used in jewelry are unsuitable for cutting because of their shape or flaws in the stone. In some cases, a potentially cuttable rough stone is selected for a piece of jewelry because it has an unusual shape in its uncut form. Generally, however, experts wouldn't advise consumers to consider cutting into a rough diamond they've bought in a piece of jewelry: The odds of finding a valuable cut diamond inside are fairly low.”
We are less concerned about the fashion fad than we are with the legal loophole presented by it. There is – in terms of customs classification and thus the Kimberley Process – no difference between the mixed rough/polished jewelry sold at De Beers’s stores or the rough pendant worn by the traveling lady.
There will be a broad consensus of support in the diamond industry if governments will attempt to close the loophole created by rough diamond jewelry. There are already voices in the Kimberley Process community that want to bring polished diamonds into the system. The industry will resist that – and rightfully so. But mixed rough/polished jewelry might just provide the bridge between rough and polished controls. Those diverting rough to the consumer markets must realize that every move involving rough diamonds will have consequences.
Regulations will evolve, if anything, to protect the consumer. What scares me is the position of the KP chairman, who alludes to the responsibility of the individual customs officers who must determine if the jewelry is “genuine” jewelry.
What if the aforementioned lady wearing a 40-50 carat rough diamond would arrive into the United States from a country that is not a member of the Kimberley Process or does not have the appropriate certificate, and the customs official determines that the setting is just “temporary” and a way to evade certification? The lady will discover that her diamond will be confiscated and she will also face criminal charges. The customs official doesn’t have any discretionary power to ignore the import if he disregards the setting. It is the law.
No warranty issued by a jewelry store will serve as an acceptable excuse or substitute for a Kimberley Process Certificate. The law on cross-border movements of rough diamonds never expected their use in jewelry and made no provisions for such eventuality.
As a gentleman, I wouldn’t buy my lady a rough diamond ring – unless I treasure the thought of getting her into deep trouble when traveling overseas. It’s almost like buying your beloved lady a one-way ticket to nowhere. Certainly no formula for sealing lasting, loving relationships…
Have a nice weekend.