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Diamond Industry Now Banking on Legitimacy

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Dec 8, 2016 10:00 AM   By Avi Krawitz
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RAPAPORT... The diamond industry has added several layers of legitimacy this year as more companies are complying with standards set out by banks, regulators and suppliers, even if they’re still burdened with a “high-risk” profile.

Bringing that improvement about has been an arduous journey that is by no means complete. It will take a lot more for the trade to fully reject traditions such as closing a deal with a simple handshake and a blessing of “mazal u’vracha.”

But industry leaders believe it is vital to enable a more bankable and profitable industry in the long term.

“Ultimately, it’s a survival strategy,” said Howard Davies, vice president, commercial development at De Beers. “The market may continue to be turbulent but businesses that are compliant will be better positioned to deal with the volatility.”

Global laws have influenced demand for transparency, better controls and reporting, and the diamond industry has to move with the times, added Ernie Blom, president of the World Federation of Diamond Bourses (WFDB).

Cash Clamp-Down


The banking sector tightened its lending requirements as compliance issues came to the fore after the 2008 financial crisis and as the Basel laws were introduced even before that, explained Erik Jens, head of Diamond & Jewellery Clients at ABN Amro.

Meanwhile, the diamond sector came under further scrutiny given the global crackdown on the use of cash.

India’s sudden elimination of high-denomination rupee notes in November drew attention to the trade, even if it wasn’t specifically directed at the diamond market. While the government’s demonetization policy aimed at curbing money laundering, among other “subversive activities” in India, it virtually froze up activity among small mom-and-pop jewelers and diamond dealers.

Other countries have made similar moves in the past, albeit less drastic. Italy banned cash payments of more than EUR 1,000 back in 2011, impacting luxury purchases even as the cap was raised to EUR 3,000 this year. Germany’s proposal in February to ban cash payments of EUR 5,000-plus was shelved after drawing strongly negative reactions, but many believe it will eventually pass.

In theory, a decline in the use of cash should have boosted demand for diamonds, which, unlike cash, has maintained its store of value. But as banks and regulators tighten their controls, the industry is less willing to deal in cash or accept payments with undeclared money.

Black market trading may have defined the diamond industry in the past, but Blom stressed its use of cash has dropped significantly because of anti-money laundering laws. “There’s just no way to use cash in those large-parcel transactions today,” he noted.

Roadmap to Compliance

Still, the suspicious attitude toward the industry remains and regulators have long targeted the trade for undeclared tax revenues – particularly in Belgium and Israel. That served to raise its risk profile as the perception of cash business and undisclosed transactions “terrifies” the banks, given the potential for anti-money laundering infringements, Davies explained.

A platform was therefore required to engender a higher level of reporting and transparency. Pressure was exerted by the banks, while the mining and retail sectors also demanded greater compliance from their midstream partners, Jens noted.

De Beers made financial compliance a top priority when it set out its requirements for new sightholder contracts back in 2014 and sightholders committed to a roadmap to be compliant by 2017. That would require them to produce consolidated financial reports that are in line with IFRS accounting standards and subject to an independent audit from an approved auditor. They also have to meet a De Beers required debt-to-equity ratio of 70:30 from 2017.

Changing Ways

Three years ago, only a handful of publicly listed sightholders had proper reporting, Davies noted. Today, nearly half of the 85 sightholders have completed the roadmap required of them, he reported. If they haven’t yet, they’ll need to reach that goal for the accounting year that begins January 1.

The shift toward greater legitimacy and transparency has slowly influenced the rest of the trade to follow.

The proof, Davies observed, is in the number of companies De Beers has awarded “accredited buyer” status – a second tier of clients that are entitled to ex-plan goods made available over-and-above sightholder supply. Accredited buyers, which are typically small-to-medium size diamond businesses, need a full set of compliance credentials to qualify. Eight new appointments have already been made during the current contract period and many more applications are in the pipeline, Davies reported.

Blom noted a similar move among bourse members and the WFDB has made compliance a central part of its agenda. In fact, the theme of the World Diamond Congress held in Dubai this year was compliance, and the trade body is planning a related ‘diamond financing seminar’ in Mumbai from February 5 to 8. Jens recognized that effort and noted small and medium-sized companies are moving in the right direction as they realize “doing business the old way is simply not going to work.”

After all, it was those traditional business practices that banks rejected in the first place, causing them to significantly retract from diamond lending. It influenced the likes of Antwerp Diamond Bank (ADB) and Israel’s Bank Leumi to close their doors, while others such as First International Bank of Israel (FIBI) and Standard Chartered Bank are winding down their operations. It also caused non-industry banks to adopt a cautious attitude toward diamantaires.

Liquidity still Challenging

In Belgium, you can’t even open a bank account for your private affairs if you’re associated with the diamond trade, reported Shashin Choksi, whose Antwerp-based company Swati Gems deals in rough and polished diamonds.

Belgium’s state-owned Belfius bank in late 2015 somewhat infamously stated in its ‘customer acceptance policy,’ “[It] will not accept customer relationships with persons or entities … as part of a commercial activity related to the trade in war weapons or diamonds.”

Choksi said his personal account which he had for 40 years with Belfius, and another held by his wife for 20 years, were subsequently closed for “ethical reasons” that had nothing to do with his company’s commercial activities. Hundreds of other people related to the diamond industry had similar experiences, he said, stressing it has become very hard to get an account in Belgium since ADB decided to exit the trade.

“The problem is banks are shutting out a whole industry rather than looking at individual customers,” said a Belgian industry official, who recognized the problem and noted there has been political lobbying to alleviate the situation.

Belfius did not reply to Rapaport's request for comment for this story.

Finding New Financing

Such caution and reduced credit lines have highlighted the need for greater compliance over the years. And, with the progress made in 2016, the trade is starting to see the benefits of having a “more bankable base,” Davies noted.

“Professionalization dilutes risk and gives existing banks greater confidence in transactions,” he said. “These credentials also open doors to other banks, as well as non-bank funding that has emerged in the last few months, because it’s now considered normal business funding.”

The Belgium industry is exploring new avenues of financing such as Fin-Tech or Block Chain technology. It also held a financing seminar in London last month to familiarize the financial industry with the diamond market.

“They don’t know us and are therefore afraid of the diamond industry,” the official said. “The reality of industry compliance has changed, but the perception of non-compliance is still there. So we’re trying to close the gap.”

Creating a Normal Market

Strides are being made as other risk factors are also fading.

The introduction of the ‘Carat Tax’ in Belgium has largely been positively received and will allow companies “to focus on running their businesses rather than running their books,” Jens said. “The tax is de-risking the industry and the perceptions about tax evasion, leaving Belgium in a favorable position.”

Similarly, the Israel Diamond Exchange (IDE) is said to be close to reaching an agreement with the Tax Authority that will end a four-year investigation into the bourse. IDE president Yoram Dvash said the deal, which will also clarify how diamond companies report and pay undisclosed retroactive taxes, will free the trade to focus on growing their businesses in a still challenging market environment.

Indeed, industry professionals who spoke with Rapaport News cautioned that as the diamond market remains volatile, and compliance requirements are expected to become stricter across all business segments, weaker companies who fail to conform will be subject to inevitable consolidation.

For those on board, however, Jens assures there is money available for good companies. And it seems the industry is in a far healthier place than a year ago as more businesses are ready to prove their legitimacy by meeting the compliance standards required of them.

“It took a while but a lot of companies are now changing, becoming a real business with business plans, proper bookkeeping and structures in place,” the banker said. “It’s a good thing because it creates a normal market. We see diamonds becoming a more normal commodity from a trade and finance perspective.”
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Tags: ABN Amro, Avi Krawitz, Belfius, Belgium, De Beers, diamonds, Erik Jens, Ernie Blom, Howard Davies, India, Israel, Rapaport, Swati Gems, WFDB, Yoram Dvash
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