Dealing with Russian diamonds

Image: Alrosa

To stem the tide of funds fueling Russia’s war on Ukraine, the US has placed sanctions on Alrosa, which is partially owned by the Russian Federation. These measures state that American firms must immediately cease all transactions with or benefiting the Russian miner. But what does that mean in practice for retailers struggling to make sense of the latest regulations?

The government’s moves

Alrosa is the world’s largest diamond mining company, according to the US Department of the Treasury, and is responsible for 90% of Russia’s diamond mining capacity. On April 7, the US Treasury’s Office of Foreign Assets Control (OFAC) placed the miner on the Specially Designated Nationals (SDN) list. This means US firms cannot directly or indirectly purchase rough or polished diamonds from Alrosa or any company in which it holds a 50% stake or higher.

An earlier executive order, which the White House released on March 11, contains a loophole of sorts: that Russian diamonds cut and polished in other countries are legal to import. However, while that loophole is still valid as of this writing, American jewelry merchants should scrutinize the fine print carefully before relying on it.

“[The March 11 order was] intended to give the industry time to figure out how to handle its inventory and sourcing,” says Brad Brooks-Rubin, senior advisor at The Sentry, an organization that investigates predatory networks and kleptocracies. “Now every retailer should be asking suppliers, ‘Am I sourcing Alrosa diamonds?’ [Because] you could face penalties or blocked goods if you don’t stop.”

Risky business

Any diamonds or diamond jewelry of Russian origin that US companies already own are still legal to sell, according to the Jewelers Vigilance Committee (JVC), which has issued member alerts outlining key facts US jewelers should know (see box). The problem lies with new inventory or business (such as marketing agreements) since April 7 that may directly or indirectly benefit Alrosa.

Companies that had transactions in progress with the Russian miner, such as memo agreements or related contracts, must complete these by May 7 — though the JVC recommends seeking counsel to ensure proper policy observance.

Russian diamonds that have been substantially transformed — i.e., cut — in other countries are still legal to import as per the executive order. So are parcels of mixed-origin melee. However, even these categories are fraught with risk. Alrosa contract clients — which include many of the companies doing the overseas cutting or putting together the parcels — could end up on OFAC’s “SDN list for secondary sanctions for contributing to a blocked entity,” according to an April 15 JVC alert. Should that occur, any US firm that does business with them would be subject to penalties.

“The least risky choice for businesses to make is to tell your suppliers that you no longer want to sell Russian diamonds,” explains Sara Yood, the JVC’s deputy general counsel.

Brooks-Rubin agrees. “If 20% of your Indian suppliers’ diamonds come from Russia, and that is 90% of what you sell, then you may be at risk. You can mitigate penalties through due diligence. Ask suppliers questions and seek advice from lawyers with experience on sanctions issues.”

Legal aids

Jewelers can find sanctions experts at many large law firms. The JVC even has a tool to help its members locate law firms with the relevant expertise. The staffers answering the phones at the OFAC hotline are also helpful.

“This is not a ‘gotcha’ situation — they want to help,” notes Yood.

Meanwhile, retailers should prepare talking points for their employees to address the topic of diamond origin. It’s also a good idea to ask suppliers for written documentation that shows they’re not selling Russian rocks. If suppliers are unable or unwilling to do so, it may be safer to discontinue doing business with them.

From the JVC

Member alert issued April 8, 2022

On April 7, 2022, the US Department of the Treasury’s Office of Foreign Assets Control designated Alrosa pursuant to Executive Order 14024. Alrosa has now been added to the OFAC Specially Designated Nationals list, and all US transactions with or benefiting Alrosa are fully blocked. Additionally, all entities owned 50% or more directly or indirectly by Alrosa are now blocked, even if they are not specifically named. Through this action, Treasury is cutting off additional sources of support and revenue for the government of the Russian Federation.

All transactions by US persons within (or transiting) the US that involve any property or interests in property of designated or otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC. These prohibitions include the making of any contribution or provision of funds, goods, or services from any such person.

In practical terms, if a US business had not already stopped doing direct business with Alrosa due to the previous sanction limitations, they absolutely must now cease doing so. Any US business that has an ownership interest in or relationship with a foreign company that is still doing business with Alrosa, or is owned by a foreign company with an Alrosa relationship, may now be at risk for having assets blocked. Those businesses should also seek counsel to determine how to proceed.

The safest course of action for all US businesses is to tell all suppliers that they will no longer purchase any goods that originated from Alrosa. It is not yet clear how OFAC or US Customs will interpret this new designation, but if a US business continues to deal in these goods, even indirectly, they are at risk for encountering issues upon importation or the freezing of assets. In addition, US banks are also required to comply with these sanctions and will likely be asking jewelry business customers for information ensuring that they are in compliance.

Evasion of sanctions is a crime and a serious threat to national security and foreign relations. Violations of sanctions are punishable with significant civil monetary fines (often in the millions of dollars) and criminal prison sentences. Businesses are strongly encouraged to report any potentially unlawful transactions and seek assistance by calling the OFAC hotline at 1-800-540-6322.

Article from the Rapaport Magazine - May 2022. To subscribe click here.