Rapaport Magazine

Venezuela’s Defection

By Marc Goldstein
RAPAPORT... What will Venezuela have to do to rejoin the Kimberley Process and how long will it take?

The global diamond industry breathed a collective sigh of relief when Venezuela suspended itself from the Kimberley Process Certification Scheme (KPCS) for two years. The country’s diamantaires had been under attack for trafficking in uncertified diamonds to evade domestic export taxes. The self-suspension was announced at the intersessional meeting of the KPCS in New Delhi in June.

The move by Venezuela avoided the complicated administrative process of expelling the country from the KP, as well as a great deal of negative publicity that would have undermined the credibility that the KP has established for universal diamond certification. Just weeks before the announcement, several nongovernmental organizations (NGOs) called for the expulsion of Venezuela from the KP for its noncompliance with KP requirements and continued refusal to allow teams from KP member countries to inspect Venezuela’s diamond industry. The country produces an estimated 150,000 carats of diamonds annually, but has reported no official exports since January 2005.

Following the suspension, current KP Chairman Rahul Khullar announced that a KP team will visit Venezuela to assess the situation and prepare a report before the next KP plenary meeting in November.

Protecting the Public Trust

Dr. Gaetano Cavalieri, president of CIBJO, the World Jewellery Confederation, confirmed that Venezuela’s action helped the whole KP system to remain trustworthy. “In suspending themselves, the Venezuelan government did something that’s at the same time clever and commendable, because they took the industry out of every possible embarrassment.” Cecilia Gardner, KP general counsel, said, “We were surprised at first by Venezuela’s decision to retire from KP, but we certainly welcomed it, given they were indeed unable to comply with the minimum required standards. And then they invited us to help them prepare for their comeback to the KP. They expect that, with adequate support, things should be corrected within two years.”

Erez Akerman, president of the Panama Diamond Exchange, explained, “The problem was that they were not able to cope with the stringent implementation requirements of the KP, so the only logical choice left was to step out, resolve the issues and then come back.” Akerman suggested that “If the diamond manufacturers went around the KP requirements in order to avoid paying what they consider too-high taxes, the Venezuelan government has basically two options. It can either lower the taxes in question or establish a local enforcement mechanism in the state of Bolivar, where the diamonds are produced. Not to mention that a mix of both solutions is possible.” There is some doubt, however, about the effectiveness of any control procedures that would be implemented in Bolivar, because the areas to be monitored are largely jungle.

“For obvious reasons,” continued Akerman, “all discussions with Venezuelan officials as to the possibility of redirecting KP certified rough through Panama have stopped, but it’s our firm intention to resume the process as soon as Venezuela rejoins the KP.”

In the immediate aftermath of the self-suspension, Avi Paz, president of the World Federation of Diamond Bourses (WFDB), called on “members of the 29 bourses affiliated with the WFDB to take all measures necessary to ensure that they do not trade, directly or indirectly, in diamonds originating from Venezuela.” He added that “The WFDB and its member bourses have a cast-iron rule that rough diamonds can only be traded when they are accompanied by KP certificates. Any bourse member who trades in rough diamonds without KP certification is liable for expulsion from his bourse, which, in all practical terms, means the exclusion from the entire diamond business community.”

A Tough Negotiation

No one holds out much hope that the situation in Venezuela’s diamond industry will be resolved quickly or easily. Karel Kovanda, KP chairman in 2007, remarked, “The main achievement so far is that we have managed to get Venezuela back to the negotiating table. However, we’re playing in a very sensitive context, with a very proud people, not easy to handle. The fact that there’s a problem doesn’t mean that there’s a solution.”

Off the record, diamantaires and other industry observers and officials raise more uncomfortable issues, such as the possibility that some Venezuelan officials might not be in a hurry to rejoin the KP as it would mean the termination of bribery and other illegal, but profitable, practices.

Alex Yearsley, head of special projects for Global Witness, an NGO that has been calling for Venezuela’s expulsion from the KP as far back as the fall of 2007, also has questions. His first reaction was to wonder why it took Venezuela so long to resign from the KP. Had they waited a little longer, Yearsley suggested, the country would have been expelled by KP authorities themselves. “Serious side effects will have to be expected and firmly addressed by the KP authorities,” said Yearsley. “First of all, in spite of Venezuela’s repeated commitment to invite KP authorities to visit the country and help restore adequate KP conditions, as of June 2008, nothing had happened yet. So, how can we exert sufficient pressure on the country’s government to get them to return to the negotiating table with a clear intent? The second fundamental issue is the monitoring of the diamonds that are still mined in Venezuela as we speak.”

Obviously, it would be naive to expect that all the diggers whose bread and butter depends on diamond exports will remain quiet and just keep piling up diamond stockpiles without attempting to channel them through to the pipeline. Yearsley suggested that the Venezuela case is the evidence that was needed to illustrate the urgent need for the KPCS to establish a set of formal guidelines to be followed by all parties, should another country ever feel the need to retire temporarily or permanently from the KP.

In the end, it’s not surprising that the KP authorities have been so unanimous in applauding Venezuela’s decision to self-suspend. Had the country remained a member of the KP, the doubt surrounding the diamonds it exports would have spread like locusts through the entire global diamond network, undermining the credibility it has worked so hard to achieve. Other “difficult” countries, including many African countries, have gone through this transition to KP compliance in the past, but KP compliance doesn’t necessarily stop bribery. All one can hope, for the sake of the diamond community, is that an effective solution will be devised for Venezuela within the announced two-year period.

Article from the Rapaport Magazine - September 2008. To subscribe click here.

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