Diamond Industry Fighting Imposition of Money Laundering Controls

Authorities stepping up efforts to increase industry supervision, including banning trade in 'blood diamonds’

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Israel’s diamond industry is fighting to prevent the government from imposing tougher money laundering rules, saying it no longer does business in cash.

The Economy Ministry is now engaged in talks with the Justice Ministry’s Anti-Money-Laundering Department to extend its oversight to the diamond industry. Leading executives in the industry have asked Amit Lang, the Economy Ministry’s director general, to block the move, which right now is slated to go into force early next year.

Shmuel Mordechai, the Economy Ministry’s diamond industry controller, said the industry isn’t in need of special supervision.

“In the past, there used to be many cash payments in the diamond industry which could have presented an opportunity for improper accounting,” he said. “Today, cash deals are a minuscule fraction of the industry. ... Even deals closed with a handshake and the saying of ‘Mazal u’vracha’ are accompanied by an orderly bank transfer.”

The industry is among Israel’s biggest but is traditionally secretive, relying on personal relationships and trust when expensive but easily portable stones are bought and sold. The government is seeking to reduce cash transactions throughout the economy as it cracks down on tax evasion and money laundering.

Extending anti-money-laundering provisions is one of a series of steps being taken to make the diamond industry more transparent. Among them are regulations being imposed on gemological labs to determine the provenance of diamonds and thus to clamp down on the trade of “blood diamonds” - stones mined in war zones illegally and used to finance conflicts.

Mordechai said that within a year, labs would have to be licensed and operate according to set standards for the issuing of certificates of authenticity.

Another area that Mordechai said should be subject to regulation was synthetic diamonds, which are becoming more prevalent in Israel and around the world.

“Recently, it was discovered that the Indians mixed synthetic diamonds and regular ones,” he said. “There should be regulation of this activity as well in the Diamond Law, perhaps treating it as completely separate from the trade in real diamonds.”

Still in its formative stage, the Diamond Law aims to regulate the industry by law in place of regulatory decrees. “We have been operating according to emergency decrees,” said Mordechai. “Now, they are preparing a law similar to the regulatory decree, which will include licensing, regulation, import duties, obligation to abide by the Kimberley Process [which certifies that gems are not blood diamonds] and the operations of the labs.”

The diamond industry has been in turmoil in recent years. After the recession of 2008-2009, the diamond market recovered and enjoyed record sales in 2011. Since then the industry has suffered another downturn, with sales declining in 2012. This year, Mordechai said, sales rose but profitability has declined.

Mordechai estimated that Israeli exports of polished diamonds would reach $6.25 billion this year, a 13% increase over 2012 but still under the $7.2 billion recorded in 2011.

Israel’s largest market for polished diamonds has long been the United States, with a 35% share in the first nine months of this year, although exports to East Asia are growing rapidly and are approaching U.S. sales. Polished diamonds are primarily shipped to Hong Kong, which had a 28% share in the first nine months, and from there re-exported.

Polished diamonds at the Israel Diamond Exchange in Ramat Gan. Credit: Bloomberg

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