Some diamonds sparkle only in the eyes of those who seem to be skimming millions of dollars off their sale.
I’m going to get into this a lot more in coming months, but the issue of so-called “transfer pricing” of rough diamonds is going to get a lot of international attention in the coming weeks.
Here’s how this scam works.
Let’s say a diamond is mined in Angola and exported from that country in its raw state at a value of $500 a carat. The stone makes its way to a tax-free haven like the Cayman Islands, where its value is arbitrarily boosted to $1,000 a carat.
That paper profit can be used for bribes, kickbacks and other naughty stuff. It wouldn’t surprise anyone if some of that additional value even went to terrorist groups.
However, the rough diamond is still on the move.
It leaves the Caymans for the US with its value boosted to $1,500. The importer in this country can then ship the diamond back overseas, attaching a value of $1,000 a carat to it.
The importer can book a tax loss of $500 on the transaction. Meanwhile, he is still able to sell the stone at $1,000, which is $500 more than its price when it left Angola.
Who is benefiting from this? Nobody really knows.
But it might surprise you to find out that the US government controls a large stockpile of these rough diamonds, which are used for military and industrial purposes.
My friends at the Census Bureau keep track of the rough diamond stockpile in the US, although they aren’t very helpful when I ask about transfer pricing. But the folks who try to monitor these transactions are worried about abuses.
“The US is perceived as one of the weakest links in the regulatory system, as many of the government functions are outsourced to private parties and physical checking of [diamond] parcels seldom occurs,” says Chaim Even-Zohar, editor and publisher of Diamond Intelligence Briefs.
“The less effective regulation makes America one of the more attractive routes for rogue traders laundering rough diamonds.”
But the problem is bigger than just the US, says Ahmed Bin Sulayem, chairman of the Kimberley Process, a joint government, industry and civil initiative to stem the flow of so-called conflict diamonds.
“To single out one country or another for failing to stop [transfer pricing] is to misunderstand that problem,” Bin Sulayem said
The issue of price abuse will be brought up at a meeting in Dubai next week and will be discussed at the UN in December.