June 10, 2014
Today at the Kimberley Process Intersessional in Shanghai, China, PAC’s research director, Alan Martin, delivered the following speech on behalf of civil society groups in the KP:
Chairman Wei Chaunzhong,
Distinguished guests,
Colleagues and friends
The Coalition would like to begin our remarks with a few special words of welcome.
Firstly, to Edward Asscher, the newly elected president of the WDC: Congratulations to you on your election.
If the warm hospitality we have received here is any indication your initiation into the KP family should be a smooth one. For our part, the Coalition looks forward to working closely with you in the years ahead.
And secondly, to Côte d’Ivoire, which has had the UN embargo lifted and is back in good company with us here today. To Minister Brou and Madame Thes, your hard work and dedication has been inspirational and a sight to behold.
The KP can also take some credit for this through its many years of support to the Friends of Cote d’Ivoire.
We would also like to thank Cote d’Ivoire for hosting a workshop in March for Mano River Union countries who are working toward creating a Regional Approach to KP compliance in West Africa.
As you are all aware, the Regional Approach won the blessing of the KP in Kimberley, and responds to a long-held call by African governments and civil society groups for greater technical assistance to strengthen internal controls and development outcomes from the diamond sector.
Over the last year the approach taken by all participants – from governments, industry members and civil society groups – is testament to what collaborative and innovative thinking can achieve. It’s a model that deserves replicating in other areas of the KP.
Later today Minister Dorbor of Liberia and Maurice Miema, the leader of the technical team, will make a presentation to the plenary to brief you all on our activities to date.
The Coalition also welcomes further discussion on the current situation in the Central African Republic. The continuing political instability and reports of conflict diamonds exiting the country reinforce the need for continued vigilance by neighbouring countries as well as trading centres – a point underscored by Belgium’s recent seizure.
In 2013 neighbouring countries committed to providing the WGS and WGDE with regular statistics and photographs of all exports as a safeguard against smuggled goods. Despite initial efforts by DRC, our understanding is that this has not been undertaken as regularly or comprehensively as it should.
Considering the prematurity of sending a review mission to CAR under the current circumstances, the Coalition suggests the KP might be better served by undertaking a special review visit to DRC, Congo Brazzaville and Cameroon with the express purpose of evaluating ways to support them in their efforts to quarantine CAR diamonds that may be compromising their internal controls.
A similar review should be made to trading centres to measure the efficacy of their vigilance efforts.
In the same spirit of cooperation as the West African Regional Approach the emphasis would be on providing technical assistance and strengthening KP compliance, rather than apportioning blame.
The Coalition would also like to open a discussion here about another issue of growing concern: transfer pricing.
The week before last at the OECD in Paris, PAC launched a report on the illicit trade of Congolese minerals between East Africa and Dubai. There we dealt with the issue of the illicit gold trade. Today we want to speak about our concerns about the diamond trade.
There’s a curious fact about Dubai that warrants serious discussion here-on average diamonds exiting Dubai are valued at 43% higher than what they entered the country at. In 2011 the figure was as high as 71%. By comparison, the average in other trading centres is between 6-8%.
What are the reasons for this discrepancy and what are the consequences of this to African countries? In 2013 alone, price manipulations due to transfer pricing generated in excess of $1.6 billion in profits for diamond companies in the UAE, and represents a major deprivation for African treasuries, which lost much needed tax revenues that could have funded public services.
In the Congolese diamond context transfer pricing cost the treasury an estimated $66.2 million in 2013. Perhaps one of the worst affected countries is Zimbabwe, where an average 50% undervaluation of its diamond exports to UAE resulted in an estimated $770 million bypassing revenue authorities between 2008 and 2012.
PAC is not alone in its concern.
Last year a joint report by the African Development Bank and Global Financial Integrity, a US research and advocacy group, concluded that the illicit haemorrhage of resources from Africa is about four times Africa’s current external debt-or as much as $1.4 trillion between 1980 and 2009. As South Africa’s ambassador to the United States pointed out on a panel we shared last month, this theft of Africa’s potential is largely the work of commercial interests headquartered outside of Africa and action has to be taken in those jurisdictions to end this practice.
For the international law enforcement community, this activity spells a concern of a different kind.
The Financial Action Task Force (FATF) and the Egmont Group are two of the world’s leading agencies studying the issue of money-laundering and terrorism financing. Late last year they published a seminal study looking at the intersection between those threats and the diamond industry. Many KP members took part in the study, from North America to Southern Africa, from Europe to the Middle East.
It makes for some stark reading, not least its conclusions on the issue of transfer pricing in Dubai.
If you will permit me I want to read a paragraph from the report: “Diamond trade centres like Dubai, which operate as Free Trade Zones (FTZ) are susceptible to money laundering vulnerabilities…This, in combination with the specific vulnerabilities of the diamond trade and the mechanism of transfer pricing, creates a significant vulnerability for money-laundering and terrorism financing activities.
By way of over or under invoicing with affiliate diamond companies located in Free Trade Zones, it is possible to illegitimately shift profits from diamond companies in high tax rate countries to FTZs and thus avoid taxes. It is also possible to use the same scheme for money-laundering and terrorism financing purposes.
The combination of a lack of transparency in the diamond trade with a lack of transparency in a Free Trade Zone provides an excellent atmosphere to conduct large volume transactions without being detected.”
The report also makes several recommendations specifically targeting identified and proven vulnerabilities of the Kimberley Process. They cover everything from how to improve certification and enforcement, to the lack of transparency and documentation by industry members.
With the exception of internet trading, which we are to discuss in the coming days, the KP has yet to respond, never mind seriously discuss, the findings of this report. The response by most industry groups has been equally disappointing and dismissive.
The Coalition believes that the KP can do better than that. The report warrants serious consideration and debate, and we hope that conversation can begin here in Shanghai.
During DRC’s chairmanship, the issue of undervaluation and transfer pricing was a priority shared by many African producers and it’s high time that we revisited the issue.
With that in mind, and based on the findings of all the reports I just cited, the Coalition calls on the KP to create a special taskforce to investigate the issue of transfer pricing in the diamond industry, with a view to recommend ways African diamond producing countries can secure fairer and more accurate diamond valuations, and predictable tax revenues.
We welcome your support for this initiative and look forward to discussing it more with you in the coming days.
Thank you.