PAC Calls for Expulsion of Venezuela from KPCS

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RAPAPORT… According to figures collected by the United States on rough diamond imports from Venezuela, the most recent time rough goods arrived in this nation was during year 2003. Rough diamond imports that year totaled $2.56 million.

However Partnership Africa Canada contends that in years 2005 and 2006, after a lengthy investigation into Venezuela’s diamond exports, that “a good number” of rough diamonds are being carried directly into the United States from Venezuela without Kimberley Process Certificates.

Partnership Africa Canada (PAC) estimates that Venezuela produces between 110,000 and 200,000 carats annually, but that the country has not “officially” exported rough since January 2005 to any other country.

“Although it is a member of the Kimberley Process Certification Scheme (KPCS) for controlling rough diamonds, Venezuela has essentially dropped off the KPCS radar,” PAC found in its report titled The Lost World – Diamond Mining and Smuggling in Venezuela.

Diamond Smuggling in Venezuela

Download PAC Report PDF 569KB

Through our partnership with news organizations in South America, Rapaport News has reported of six recent diamond mining murders and illegal trade in Venezuela during the past several months. The reason the illegal trade is so pronounced, according to PAC, is that high taxes, ineffective currency controls, and bureaucratic ineptitude have driven Venezuela’s diamond pipeline underground.

PAC concludes that Venezuela’s “entire annual diamond production” is smuggled out through neighboring Brazil and Guyana to Hong Kong, the United States, and Belgium.

The non-governmental organization concludes that Venezuela should be expelled from the KPCS “if the Kimberley Process wishes to maintain any semblance of order and integrity.”

Venezuela too must bring its diamond mining, trading, and exports under tight controls PAC stated. PAC discovered that diamonds from Venezuela are routed through the city of Boa Vista, Brazil,  and the Kimberley Process team should dismantle the route by creating a tripartite commission of inquiry and adjudication to coordinate a process of dialogue on diamond production and control procedures in Venezuela, Brazil and Guyana.

Where did the diamonds go?

During the past decade Venezuela’s declared diamond exports have fallen from roughly 300,000 carats to about 30,000 carats, but in neighboring Guyana the exports have risen from roughly 50,000 carats to 400,000 during the same time frame.

Diamond traders PAC interviewed openly admitted to smuggling upwards of hundreds of thousands of carats per year through Boa Vista and Georgetown, Guyana.

“As an example of its incompetence and indifference, Venezuela has not issued a single Kimberley Certificate in more than a year and one half, not because the diamond trade has stopped, but because a name change at the Ministry of Mines left the designated civil servant without the legal authority to sign certificates. In the 18 months since, no one in Venezuela’s government has seemingly had the will or interest to change two words on the appropriate government document and put it in front of a minister to be signed,” PAC reported.

Even though the number of carats may seem small in the scheme of world trade, smuggling from Venezuela has placed unfair pressure on Guyana –a country PAC contends desires compliant controls– and the diamonds  find their way into Antwerp, Hong Kong, and New York.

“What this implies is that a significant subset of the world’s rough diamond buyers still does not respect the Kimberley system.”

However PAC concludes that the drop of official Venezuela exports some 18 months ago should have been a red flag with Kimberley Process officials to investigate the cause. “If the consensus among Kimberley participants is that the abysmal situation in Venezuela doesn’t matter, then the question must be asked: Does Kimberley matter?

Diamonds emerge from small-scale mining operations

Rough diamonds in Venezuela are mainly mined in the state of Bolivar, which borders Guyana’s western fringe and Brazil’s northwest.

In both La Paragua and nearby Santa Elena mining residue flows into Venezuela’s Guri hydroelectric reservoir which is why the government banned gold and diamond mining in August. Several weeks after the ban, on September 22, 2006,  the military crack-down on small-scale miners resulted in six deaths of diamond miners at La Paragua where tertiary deposits are located. 

There are no large scale diamond mining companies operating in Venezuela nor is there a government registry of small scale miners so there are only estimates of those involved — about 20,000 to 25,000 the ministry of mines assumes.

Most of the small-scale miners operate under an umbrella of a local cooperative, which provides monthly reports to the government, but PAC concluded that these cooperatives “cooperate” at hiding actual rough supplies in order to avoid paying taxes.

Diamond buyers mostly operate out of the city (ciudad) of Bolivar, Venezuela, and  they are required to pay an annual operational fee plus a 14 percent value added tax (VAT) on goods.  PAC blames the VAT on driving these traders underground. In one case PAC found a Bolivar dealer who regularly sells rough goods to a buyer from New York City off the books. (As already noted there were no rough imports of diamonds into the United States since 2003.)

Smaller buyers, PAC contends, go directly to La Paragua and buy from the small-scale miners.

Diamond sellers in Santa Elena and Icabarú appeared to be operating “more” legitimately PAC concluded. “There are some ten establishments in Santa Elena, each of which displays a sign and a diamond trader’s license. The seven-odd traders in Icabarú are similarly equipped with the trappings of legitimacy.

“However, this southern part of Venezuela falls firmly under the influence of Brazil. Much of the production bought by traders in Santa Elena and Icabarú finds its way into the hands of Boa Vista’s two largest diamond traders, known locally as Dema and Manchão.  From there, it gets exported out to the rest of the world via Guyana,” PAC wrote.

Hiding diamonds from taxation

The Kimberley Process came into affect May 23, 2003, in Venezuela. Since that time a grand total of 33,300 carats have shipped with certificates.  PAC reported that in 1994 Venezuela mined about 600,000 carats officially and the figure dropped to 10,000 carats for year 2004. Some of the drop was attributed to a well-past-peak period of diamond mining from the mid-1990s.

“The sharp drop in production seen in 2003 does, however, coincide with the implementation of the Kimberley system in Venezuela. Figures from Venezuela’s Ministry of Mines show that in the 10 years before 2003, at least 50 percent and often an even higher percentage of the country’s diamonds were produced outside of legal mining concessions. As in many other countries, Venezuela’s Kimberley system requires that diamonds be mined on a legal mining concession. It could be argued, therefore, that with the implementation of the Kimberley system in Venezuela, the irregular miners on non-concession lands were forced to halt, resulting in the production drop.”

The explanation however did not fit with robust mining in La Paragua and other areas PAC concluded.

“A more plausible explanation for the radical drop seen in 2003 is the government’s implementation in February of that year of currency exchange controls, followed later in the year by the beginning of SENIAT’s Zero Evasion Plan, an aggressive program of tax audits designed to ensure full collection of the 14 percent value added tax (first implemented in 1999).”

All together however the diamond export taxes amounted to about 40 percent of value on exports.

Estimating real production figures

PAC worked out a few different ways to approximate total Venezuela production. Those traders who spoke with PAC admitted that only between 10 percent and 20 percent of actual rough produced was being reported.

PAC also found that with dredge owners they must clear at least 40 carats per month (at $100 per carat) and when taking into consideration the number of such operators the figure comes out around 201,000 carats per year at present time.

For a third methodology, PAC spoke with individual diamond buyers, in an effort to determine how many diamonds are passing through their hands each month. At $22,000 a month –the minimum turn-over to break even,  according to an established buyer in Icabarú–  the average  yield was 220 carats per month. Multiply this figure by approximately seven buyers in Icabarú and 10 in Santa Elena and the yield is nearly 45,000 carats per year.

“In La Paragua there are about five active buyers, in Chiguao eight, in Guaniamo an unknown number, but allow 10, for argument’s sake. The result here would be about 106,000 carats.”

The New Yorker

One of PAC’s investigators met a trader in Bolivar who said a Middle Eastern diamond buyer from New York City was a frequent customer for goods.

“In Guyana, this individual has been documented as one of the larger buyers of Guyanese diamonds. There are also records of his imports from Brazil. In Venezuela, the New Yorker is seen by diamond traders to be the single largest active foreign buyer. Presumably, the diamonds he buys in Venezuela are transported somehow to his offices in Manhattan,” PAC deduced.

The investigator also met up with a diamond smuggler named Warner who had recently returned from Hong Kong where Warner sold diamonds from Venezuela. As the investigator (who posed as a potential buyer) became friendlier with Warner the PAC rep discovered that the dealer was selling goods in Antwerp, and Windhoek (Namibia.) A fairly standard week of buying resulted in about $100,000 worth of diamond goods.  Warner told the PAC investigator the names of his buyers.

“Skeptics might suggest that Warner was simply spinning a story. But in all cases where Warner gave details of cities, buyers or contacts about whom PAC already had information, the smuggler’s story checked out.”

“As for Warner’s allegations about Hong Kong, Namibia, Antwerp and New York, they ring true, but they are certainly not iron-clad evidence. Rather, they should be taken as a warning that all is not well with the Kimberley Process.

“Importers in the consuming nations, or at least some subset of importers, do not seem to see any need to demand a Kimberley Certificate when buying diamonds, or to differentiate between diamonds of dubious origin, and those certified by a Kimberley Certificate as being conflict free,” PAC concluded.

Steps to fix the diamond smuggling problem

PAC concluded that Venezuela’s  Kimberley Process does not work and that there is no need for KPCS teams to confirm the broken cycle.

“That a country with a well-developed small-scale mining industry and historic annual production levels nearing a half-million carats can go for 18 months or more without –on paper– exporting a single diamond should be proof enough that something is very wrong indeed.”

First, PAC recommended that the KPCS should expel Venezuela from the process. Secondly, KPCS  should  create and coordinate a three-country process of dialogue that would aim to create synergies among the diamond production and control procedures in Venezuela, Brazil, and Guyana.

Third, KPCS should find out  where Venezuela’s diamonds are going and put illicit buyers and sellers out of business in New York, Antwerp, Hong Kong and other trading centers.

“The Kimberley Process has no research capacity; it must develop one if it is to deal with problems of this nature. The Kimberley Process must find more effective ways of halting the traffic in illicit rough diamonds everywhere, if it expects to prevent a resurgence of conflict diamonds,” PAC wrote.

Fourth, PAC urges KPCS to “get tough” on  Brazil and Guyana. “There has still been no reaction to PAC’s June 2006 exposé of diamond smuggling through Guyana. The KPCS must, as a matter of urgency, review Brazil’s new regulations carefully, and determine whether they are genuinely effective. It must work with the government of Guyana to ensure that its regulatory systems are adequate to the task of halting smuggled goods.”

Fifth, the KPCS must become more proactive with statistics. “It is unconscionable that the Kimberley Process did not notice that Venezuela had exported no diamonds for 18 months. This should have started alarm bells ringing long ago.”

Use technology to track the diamond pipeline

PAC also had urgent recommendations for Venezuela.

PAC noted that Venezuela’s diamond mining community by in large is operating with goodwill, however the high taxes and no intra-agency communication within the government allowed diamond smuggling to flourish. PAC called for  senior authorities to meet and fix the tax and currency problems so as to legitimize the diamond trade.

Additionally, Venezuela should create central electronic registry of diamond traders, mining teams and dredges. The mines inspection office urgently needs to create a central registry system for miners, or mining dredges (resumidors) or both. With this system Venezuela could track and analyze diamond production. PAC called on the government to hire additional mine inspectors.

The military has no role in policing diamond mines PAC concluded. Venezuela should negotiate the cessation of mining in the Caroní watershed with mining leaders, and do so in good faith.

Venezuela must also re-authorize the Ministry of Basic Industry and Mines to issue Kimberley Certificates.

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