During the first hearing in which authorities requested the extension of the remand of the suspects in the case of Lev Leviev’s LLD diamond firm, earlier this month, police Supt. Gal Chesner told the court that according to the evidence, LLD has systematically engaged in smuggling diamonds to Israel since 2002. One can presume, cautiously, that this statement is based on the testimony of the individual who has turned state’s evidence in the affair, whose name is protected by a gag order.
As it happens, a suit filed in 1999 against Leviev and this same witness alleged that in 1998 the latter took over a diamond polishing factory that served to cover the smuggling of unpolished stones from Russia to Israel. The lawsuit claimed, but never proved, that the takeover of the factory was funded by Leviev.
Under the taxation system that applied to the diamond industry until last year, the tax levied on diamond merchants was fixed at a percentage of the turnover of their business. Since there was no tax on importation of raw diamonds into Israel, there was no tax advantage to smuggling diamonds into the country.
In the case from 1999, the plaintiff argued that the business he had established for smuggling diamonds – which he subsequently accused the state witness and Leviev of stealing from him – had been intended to cheat not the Israeli authorities but rather the Russian government. This is because in Russia, diamond mining licenses prohibit the export of raw diamonds; they are required to be polished on Russian soil before they leave the country.
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‘Just a cover for smuggling’
The names of the person who filed the 1999 suit and the individual against whom it was filed cannot be published here because the latter has turned state’s evidence in the latest case. What can be revealed is that the person who filed the suit is an uncle of the state witness, who via an Israel company and a chain of foreign companies held shares in a Russian diamond-polishing company.
According to the uncle’s testimony, that business served as a cover for smuggling activities, in case the Russian authorities chose to audit its compliance with the conditions of its mining license – among them the requirement to polish the diamonds on Russian soil.
“The Russians have large diamond mines, and the raw Russian diamonds were quite inexpensive,” wrote the uncle, in the statement he filed with the court. “However, Russian law does not allow export of raw diamonds – but rather requires that they be polished in Russia and exported only afterwards.”
“To export raw diamonds from Russia, the Israeli diamond merchants had to open a business for processing them inside Russia because the Russian syndicate, which is responsible for marketing the raw stones, would sell them only to a Russian polishing factory and only in accordance with the factory’s ability to process them,” the uncle said in his suit. “Instead of processing the raw diamonds in the factory inside Russia, which had been set up as a cover, it would use messengers to send the stones out of Russia without the knowledge of Russian authorities.”
Supreme Court Justice Hila Gerstel, who at the time was a Tel Aviv District Court judge, dismissed the uncle’s suit in 2002, and expressed discomfort with the crimes the plaintiff had described to the court with surprising frankness. “From the little that was revealed to me, it emerges that the parties created extensive networks of activity to circumvent Russian law and maximize their profits, while committing illegal acts under various guises,” Gerstel wrote in her ruling.
‘Leviev stole the trustee’
At the time his uncle filed the suit, the state witness was a young diamond merchant. According to the older man, the nephew began working for him the day he was discharged from the Israel Defense Forces, and in 1997 was appointed director of the polishing and smuggling operation (as the uncle described it). As a result, the witness moved to St. Petersburg to live for a while.
In 1998 the uncle’s company in Israel was liquidated, and as part of that process the liquidator sold the Russian factory to the nephew.
The uncle’s main beef against his nephew was that there had been an agreement between them, whereby the nephew was only purchasing the factory from the liquidator as a trustee on behalf of the uncle – and would later on return control of the factory to him. However, claimed the uncle, his nephew tricked him and concocted a plot with Lev Leviev, who wanted the factory for himself. According to the suit, Leviev paid for the nephew’s acquisition of the factory, knowing that he was facilitating a breach of the contract between the uncle and his nephew.
According to the lawsuit, “Leviev, who is one of the wealthiest men on the Diamond Exchange in Ramat Gan, was deeply involved in the Russian market and coveted the license from the Russian syndicate to acquire diamonds at a reduced price. Therefore, he decided to collaborate with the nephew to get control of this source and thereby caused the nephew to knowingly violate the trusteeship agreement with the plaintiff.”
Gerstel rejected the uncle’s claims in the matter of the contract with his nephew – now the state witness – noting the uncle had not presented sufficient evidence to prove his claims. Other claims, among them his assertion that he was the owner of a stock of diamonds that was kept in a safe at the factory, were also rejected.
Gerstel discredited the uncle for his having admitted to serious crimes in the context of the proceedings. She explained her rejection of his claims concerning the diamond stockpile by stating that given the extensive document forgeries he had described, he was responsible for his own inability to prove his claims. “The court will not display enthusiasm for a party stymied by evidentiary problems that he himself caused by his illegal deeds,” she wrote.
Gerstel added, “I learned from the plaintiff, in a clear and complete confession on his part, that his activity in Russia was aimed at deceiving the Russian authorities and at smuggling rough diamonds out of Russia, all in order to make good money. To this end, a complex, proficient and well-oiled system was developed.”
She continued: “The significance is that the plaintiff came to court without clean hands. He publicly declares that he violated the laws of a foreign country and engaged in smuggling diamonds. For this purpose he even forged Russian corporate documents. Now he’s complaining that his work is really difficult, because these documents describe an inventory that doesn’t exist and deny an existing inventory.”
Gerstel included in her ruling quotes from the plaintiff’s questioning by the liquidator, in which the plaintiff tells of how easily he could “cook the books” to hide the illegal smuggling operation. “If my books show missing caratage [a reference to diamonds] at the end of the year, I can in two minutes produce a document that resolves my caratage so that I have a surplus and not a deficit. That’s it; this whole business is very disorganized, we are not the only ones,” he told the liquidator.
“So in theory you can play with the same bag [small diamonds are often sold wrapped in bags] eight times?” the liquidator asked.
“Eight times; 22 times is also possible,” the uncle explained, and added, “Do you want documents for 10 million, right now? I’ll arrange you documents for 10 million.”
The part of the lawsuit relating to Leviev was also dismissed, on grounds that the plaintiff provided no proof of Leviev’s involvement in the plot he described to seize control of his smuggling business.
“With the exception of a few mere claims about a conspiracy by Leviev to take control of his business, I found no substantive argument against Leviev that was worthy of discussing. It seems that the defendants’ counsel is correct in his claim that Leviev was inserted into this lawsuit for one sole purpose – to use his prominence with relative ease as a ‘bargaining chip,’ and as a means of exerting pressure to reach a compromise agreement,” Gerstel wrote.
After 20 years
In March 2018, nearly 20 years after this lawsuit was filed, two employees of the company belonging to the man who is now the state witness company were arrested at Ben-Gurion Airport, with one of them carrying diamonds worth close to a million shekels on his person. The two carriers were questioned and quickly led the investigators to the state witness, who said he was providing services to Lev Leviev and his LLD company. After six months of covert investigations, detectives raided the offices of LLD and arrested several people, including Leviev’s son Zevulun. The method of operation that the police described during their request to extend detentions in the case was almost totally identical to what the uncle of the state’s witness had described in 1999.
The primary suspect, Lev Leviev, is currently in Russia and it isn’t clear when and if it will be possible to question him in the case.
So how were diamonds smuggled into Israel for so many years uninterrupted? One possible answer can be found in the testimony of the uncle to the company liquidator, which was included in the lawsuit he had filed, and in which the uncle hints that he had the cooperation of government officials. In the minutes of the liquidation file there appears the following exchange:
The uncle: “I have news for you, I can bring you as much as you want without sending the clerk.”
The liquidator: “With the stamp of the State of Israel?” (The reference is to the stamp by the diamond inspection department in the Economic Affairs Ministry.)
The uncle: “As much as you want, whatever sum you want.”
Liquidator: “Any caratage that you want?”
Uncle: “Whatever caratage you want, and whatever you want.”
The LLD company, which is owned by Leviev issued this statement earlier this month: “The company is not at all familiar with the event being reported in the press. Mr. Leviev and the companies he controls operate in keeping with proper norms, taking care to obey the law. We hope that this issue will be clarified quickly and the suspicions will emerge as baseless.”