All that glitters

This certainly was the case a few years ago when violence in the Marange diamond fields of eastern Zimbabwe led the Kimberley Process (KP), the international initiative that regulates the trade of rough diamonds, to impose an embargo on stones from the area.

Although not a classic case of conflict diamonds—”¨as the perpetrators of the violence were state actors not rebel groups—the Canadian government rightly took a tough line, as much for ethical reasons as to protect the economic bottom line of our own industry, ranked within the top five globally in terms of both value and production.

Since the KP’s formation more than a decade ago, the ethical landscape has shifted considerably. The most obvious example is the way in which new forms of violence by state actors are affecting the diamond sector, challenging the outdated and rebel-based definition the KP uses to determine what constitutes a conflict diamond.

A decade ago, issues like revenue transparency, environmental degradation, formalization of artisanal miners, terrorism financing, or transfer pricing in trading zones were hardly talked about in the diamond world. Yet, as these issues are widely debated in initiatives dedicated to improved and more responsible sourcing of other precious minerals, it was only a matter of time before the discussion caught up with the diamond world.

The last issue, transfer pricing, was a major focus of a Partnership Africa Canada (PAC) report, “All That Glitters is Not Gold: Dubai, Congo and the Illicit Trade of Conflict Minerals,” and one gathering growing attention from African governments that are failing to realize the full economic potential of their diamond resources. (Transfer pricing happens when two companies that are part of the same multinational group trade with each other.)

There’s a curious fact about Dubai that warrants serious discussion: on average, diamonds exiting Dubai are valued at 43 per cent higher than at what they entered the country. In 2011, the figure was as high as 71 per cent. By comparison, the average in other trading centres (i.e. Antwerp, Ramat Gan, and Swiss-free zones) is between six to eight per cent.

What are the reasons for this discrepancy and what are the consequences of this to Africa’s diamond-producing countries? In 2013 alone, price manipulations due to transfer pricing generated in excess of $1.6 billion in profits for diamond companies in the United Arab Emirates (UAE), and represent 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 per cent undervaluation of its diamond exports to UAE resulted in an estimated $770 million bypassing revenue authorities between 2008 and 2012.