|
|
Too Many Dealers, Not Enough Polishers in Israel Diamond Industry
Q & A With Shmuel Mordechai - Israel's Diamond Controller
Jul 20, 2014 2:55 AM
By Rapaport News
|
|
|
RAPAPORT...The diamond controller is the public servant in charge of Diamond, Gemstone and Jewelry Administration of Israel’s Economy Ministry. The administration is a special division tasked with supervising the diamond and jewelry industry and enforcing government policies toward it. In a recent interview with Rapaport News, Shmuel Mordechai, Israel's diamond controller, expresses his view on the market, some of the regulatory changes he would like to see implemented and the challenges facing the industry.
The diamond controller is in charge of the Israeli Economy Ministry’s Diamond, Gemstone and Jewelry Administration. The administration is a special division tasked with supervising the diamond and jewelry industry and enforcing government policies toward it.
 Rapaport News: What does your role as diamond controller entail?
SM: My main task is to regulate licensing in Israel’s diamond industry. The Israeli government requires people who trade in diamonds to be licensed, after being reviewed by a regulator.
Our stakeholders around the world are happy that someone takes a good look at diamantaires here before they get a license. We don’t solve all the possible problems that may arise but a license signifies that you have passed certain checks.
We also operate a customs facility specifically for diamonds. We are the only gateway through which rough and polished diamonds enter and exit Israel. Although there is no duty on diamonds in Israel, it is still a customs station for all intents and purposes. We also receive and check all Kimberley Process certificates.
Rapaport News: What are the toughest challenges that you or the industry face?
SM: The amount of diamond manufacturing in Israel at the moment is negligible. I would like to see 500 to 1,000 new polishers enter the field in the coming years, but I'm not sure this will happen.
Some say that polishing elsewhere has become more expensive, but I think it is still cheaper to manufacture small stones in India and China. We are not ready to compete in the market for goods below 0.50-carats, and in my opinion it’s also difficult to compete with the 1-carat goods. That doesn’t mean we cannot bring 1,000 polishers to the Israeli industry to work on medium and large-sized stones.
I recently wrote a letter to the Israel Diamond Institute to request special funding for an industry training program. We requested about NIS 2 million for the 2014-2015 budget and we might also get NIS 1 million in matching government funds. In addition, the Israel Diamond Exchange (IDE) promised another NIS 1 million to 2 million for this project. That would be enough to start training 10 people every two months on a trial basis until we reach our goal of 60 people in the training program.
However, there is no reason to train workers if the industry doesn't want them. If we see that only 10 percent of these people are being hired, then we will pull the plug.
Rapaport News: What is the current state of the diamond industry in Israel?
SM: The industry is performing reasonably well and I expect this year will be stronger than 2013. However, I’m not so sure that all the diamantaires in Israel are doing well and have work.
I think there are too many people in the industry who do not provide significant added value. If it were possible to reduce the amount of dealers to one-third their current number, then maybe everyone remaining would have work.
I want to focus on giving licenses to those who are involved in international diamond trading. We have about 2,500 to 3,000 licenses but only around 400 of those license holders import and export diamonds in significant quantities.
I want the mix of diamantaires that lead the industry to change and we need a few new big companies to emerge. The Belgians who came here have helped develop the industry, but I still don't need 3,000 license-holders when 2,500 of them don't contribute anything substantial.
Rapaport News: What do these 3,000 license holders do?
SM: There are three groups. The first is our key constituency of traders who import and export both rough and polished diamonds. I love this group and am willing to pamper them. These are the people who create the hustle and bustle in our import-export room. There are between 1,000 to 1,200 trader license holders, but not all of them are traders. Those dealers who trade with each other and don't contribute to our foreign trade hold the same license.
Manufacturers are another group of license holders consisting of about 600 people. Not all of them are really involved in polishing diamonds, but they use their licenses to trade diamonds. They are called manufacturers because they have manufacturing licenses, which are easier to get than trading licenses.
The third group consists of people who touch up the stones for the local market, which numbers between 200 and 250 people.
Rapaport News: What is the process for receiving a license?
SM: You must prove that you’ve worked in the industry for four years by providing four years’ worth of pay slips and tax forms and we require recommendation letters from at least two diamantaires. We also require a letter from a bank attesting to your financial means to prove that you are a person who behaves appropriately in financial matters.
Rapaport News: Banking practices were an issue recently as diamantaires were using a shadow bank illegally operating in the bourse. Why didn’t they just take loans from a regular bank?
SM: I won’t venture an opinion as to whether it was legal or not. The Tax Authority says it was illegal and I accept their judgment. However, the bank in question did not really give out money. What it did was exchange promissory notes.
Let's say I just sold $100,000 of diamonds, I receive a note that guarantees payment within two months, but I can’t wait because I need the money for my business. I approach somebody and ask him to give me 4 percent less than face value. In return, I receive the cash today. This is basically how the bank in question was operating.
Leverage is at the heart of our industry. You buy rough diamonds for cash and it can take three to six months before the goods are polished and sold.
The people who used this bank weren’t thinking, but they didn’t have much of a choice. Sometimes your money might be tied up in inventory but you see a parcel that you need to buy now. However, we need to understand that there is a difference between providing capital based on promissory notes and laundering money.
The real issue is that to kickstart something like this bank, you would need at least NIS 100 million of undeclared money to be able to reach a turnover of NIS 1 billion. I believe it will conclude with court verdicts and some people will have to sit in prison for a year.
Rapaport News: Were these transparency issues among the reason that Bank Leumi left the industry?
SM: Bank Leumi had additional reasons beyond the transparency issue and one can understand their decision.
The bank had two big clients, Leviev and Steinmetz, who could negotiate very low interest rates while everyone else had to accept what the bank offered. It seems the money they were making from everyone else wasn’t enough to cover the lost revenue from interest payments from these two, so they decided to leave the business.
Rapaport News: Can you give us an update on what is going on with Israel’s proposed Diamond Law?
SM: We’re currently in discussions with the Justice Ministry regarding the Diamond Law. I hope that there will be a bill ready to present to the Knesset in a couple of months but it won’t be voted on before the end of the year.
Until now industry regulation was based upon Israel’s Emergency Law. The Knesset recognized that it is impossible to continue operating basic governance structures under a law first enacted 66 years ago during a state of national emergency.
We were afraid that the new law would eliminate licensing or other elements of the current regulatory regime, but there is an understanding that it will enshrine the current status quo with only a few changes.
Our office only wants one or two changes made to the law. Primarily, we want to have the ability to set penalties for those who violate regulations.
Rapaport News: Will Israel continue to ban the trading of synthetics at the bourse?
SM: There is no ban. This is a misperception. However, two things do differentiate the way synthetic and natural diamonds are handled in Israel.
Imported synthetic diamonds are not processed by the Diamond Controller’s customs facility. They are handled by the regular customs facility at the airport because dealers are required to pay a value-added tax on synthetic diamonds and we don’t have the ability to levy taxes at the bourse’s customs facility.
Secondly, synthetic diamonds can only be traded at the bourse in a separate room from regular diamonds. There should never be a situation where a person is examining synthetics and regular diamonds in the same area.
The bourse doesn't have the authority to ban or permit trading of synthetic diamonds, but it can say that there should be a complete separation.
As of today, there has been no case of synthetic diamonds discovered in a parcel of natural diamonds in the bourse. We don’t screen all of the diamonds, however, if this issue becomes widespread it is likely that I will decide to buy a machine or two to check for synthetic stones.
Rapaport News: How does one ensure that sellers are presenting their diamonds accurately?
SM: It is all of our responsibility to provide disclosure, but what we are really talking about now are the laboratories.
The Diamond Controller’s Office is going to regulate the labs in Israel. This is a change we will implement within a year. It’s no secret that today anyone could set up a lab if they wanted to, and some of them will give you the grade you request. We also know what each lab’s certificate is worth.
There are some certificates that I don't want accepted in the trade. We will regulate things by recognizing general standards and conditions regarding how labs are set up.
I want to completely separate sellers and labs so that if you want a certificate from a lab, it wouldn’t come from the same person who assisted you in purchasing the diamond.
There are a lot of labs here and I won't order all of them closed. But we will gradually address the labs that are problematic in order to protect consumers.
|
|
|
|
|
|
|
|
|
|
Tags:
diamond controller, Israel, Rapaport News, Shmuel Mordechai
|
|
|
|
|
|
|
|
|
|
|
|
|