MONEY LAUNDERING AND TERRORIST …

1 Fatf reportMONEY LAUNDERING AND TERRORIST financing THROUGH TRADE IN DIAMONDSO ctober 2013 FINANCIAL ACTION TASK FORCE The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against MONEY LAUNDERING , TERRORIST financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti- MONEY LAUNDERING (AML) and counter- TERRORIST financing (CFT) standard. For more information about the FATF, please visit the website: EGMONT GROUP OF FINANCIAL INTELLIGENCE UNITS The goal of the Egmont Group of Financial Intelligence Units (Egmont Group) is to provide a forum for financial intelligence unites (FIUs) around the world to improve cooperation in the fight against MONEY LAUNDERING and the financing of terrorism and to foster the implementation of domestic programs in this field.

2 For more information about the Egmont Group, please visit the website: 2013 FATF/OECD. Egmont Group of Financial Intelligence Units. All rights reserved. No reproduction or translation of this publication may be made without prior written permission. Applications for such permission, for all or part of this publication, should be made to the FATF Secretariat, 2 rue Andr Pascal 75775 Paris Cedex 16, France (fax: +33 1 44 30 61 37 or e-mail: Photocredits coverphoto: Thinkstock MONEY LAUNDERING AND TERRORIST financing THROUGH TRADE IN DIAMONDS 2013 FATF / Egmont Group 1 Table of Contents ACRONYMS .. 3 EXECUTIVE SUMMARY .. 5 CHAPTER 1. INTRODUCTION.)

3 9 I. Reasons for conducting the research .. 11 II. Aim and objectives .. 11 III. Methodology .. 12 IV. Scope .. 14 CHAPTER 2. THE INTERNATIONAL TRADE IN DIAMONDS - OVERVIEW .. 16 The diamonds pipeline .. 16 Business practices and changes in the diamond trade .. 20 Overview of diamonds and MONEY LAUNDERING and TERRORIST financing .. 26 The diamond trade in numbers .. 28 Rough Diamond trade .. 28 Diamond Production Countries .. 29 Diamond trade centres .. 32 Cutting & polishing centres .. 33 Polished diamond trade .. 34 Jewellery manufacturing .. 35 CHAPTER 3. REGULATION AND LEGISLATION RELATING TO DIAMOND DEALERS AND CROSS-BORDER TRANSPORTATION OF DIAMONDS AND CURRENCY RELATED TO THE TRADE IN 36 FATF 36 FATF standards related to designated non-financial businesses and professions.

4 36 FATF standards related to Cash couriers .. 37 National AML/CFT regulation/legislation in diamond trading countries .. 37 National AML/CFT regulation on diamond dealers, reporting duties and record keeping duties .. 37 Licence regime and supervision of the sector .. 39 National AML/CFT regulation on cross-border transportation of diamonds and currency related to the trade in diamonds .. 40 CHAPTER 4. FUNDING THE DIAMOND TRADE .. 43 CHAPTER 5. STATISTICS (REPORTING, INVESTIGATIONS, INDICTMENTS ETC.) .. 45 CHAPTER 6. THREATS AND RISKS RELATED TO VULNERABILITIES IN THE TRADE IN DIAMONDS .. 48 Product vulnerabilities.

5 48 MONEY LAUNDERING AND TERRORIST financing THROUGH TRADE IN DIAMONDS 2 FATF / Egmont Group 2013 Use of diamonds as currency .. 51 Trade based ML .. 52 Regulation of diamond 54 Supervision, control and Enforcement vulnerabilities .. 56 Supervision .. 56 Control .. 56 Enforcement .. 58 Vulnerabilities in the different stages of the 59 Mining .. 59 Rough trading .. 60 Trade centres (rough/polished) .. 61 Cutting and 62 Retail level .. 63 Vulnerabilities in the Use of the Internet .. 65 Vulnerabilities relating to all stages .. 69 Trade financing vulnerabilities .. 71 CHAPTER 7. RED FLAGS AND INDICATORS OF ML/TF .. 75 Red flags and indicators for regulated entities.

6 76 Red flags and indicators for diamond 81 Red flags and indicators for Customs .. 83 CHAPTER 8. MONEY LAUNDERING SANITISED CASES THROUGH TRADE IN DIAMONDS .. 84 Method 1: Use of Diamonds as currency .. 86 Method 2: Acquisition of diamonds with proceeds of crime as a mean to store wealth .. 88 Method 3: LAUNDERING through stages of the diamond trade .. 90 Method 4: Trade-based MONEY LAUNDERING and customs infractions ..107 Method 5: Use of financial hubs and FTZs ..113 Method 6: Smuggling of diamonds and cash ..118 Method 7: Link with or use of gold and/or other precious stones trade ..122 CHAPTER 9. TERRORIST financing THROUGH TRADE IN DIAMONDS ..124 CHAPTER 10.

7 MONEY FLOWS RELATING TO SUSPECTED ML/TF RELATED TO THE DIAMONDS INDUSTRY ..128 CHAPTER 11. MAIN FINDINGS ..131 CHAPTER 12. ISSUES FOR CONSIDERATION SUGGESTED WAYS TO MITIGATE RISKS TO THE DIAMONDS ANNEX 1 GLOSSARY OF TERMS ..138 ANNEX 2 PREDICATE OFFENCES RELATED TO THE DIAMOND TRADE ..141 ANNEX 3 BIBLIOGRAPHY ..142 MONEY LAUNDERING AND TERRORIST financing THROUGH TRADE IN DIAMONDS 2013 FATF / Egmont Group 3 ACRONYMS AML Anti MONEY LAUNDERING ATA Admission Temporaire/Temporary Admission AWDC Antwerp World Diamond Centre CFT Counter financing of Terrorism CTR Currency Transaction Report CDD Customer Due diligence DD Diamond dealer DDA Designated Diamond Account DNFBP Designated Non-Financial Business and Professions DPMS Dealers in Precious Metals and Stones EDD Enhanced Due diligence FC Foreign Currency FIU Financial Intelligence Unit FTZ Free Trade Zone HS Harmonized Commodity Description and Coding System JA Jewellers of America KP Kimberley Process KPCS Kimberley

8 Process Certification Scheme KYC Know Your Customer ML MONEY LAUNDERING MSB MONEY Service Business RTGS Real Time Gross Settlements STR Suspicious Transaction Report TBML Trade Based MONEY LAUNDERING TF TERRORIST financing UAR Unusual Activity Report UTR Unusual Transaction Report WFDB World Federation of Diamond Bourses MONEY LAUNDERING AND TERRORIST financing THROUGH TRADE IN DIAMONDS 4 FATF / Egmont Group 2013 MONEY LAUNDERING AND TERRORIST financing THROUGH TRADE IN DIAMONDS 2013 FATF / Egmont Group 5 EXECUTIVE SUMMARY This report, examining MONEY LAUNDERING (ML) and TERRORIST financing (TF) vulnerabilities related to the trade in diamonds, began as an Egmont Operational Working Group project in February 2012.

9 In June 2012, the project was also adopted by the Financial Action Task Force (FATF) and it became a joint FATF and Egmont typologies initiative. There were two main reasons for the Egmont Group of Financial Intelligence Units (FIUs) and FATF to commission typologies research into the diamond trade: a) Neither FATF, Egmont Group nor any of the FSRBs had ever conducted an in-depth research of the diamond trade and its exposure to ML/TF risk. b) During the last ten to fifteen years, Egmont and FATF delegations noted a number of indications that the diamonds trade was being exploited for ML/TF purposes. Given the limited research into ML/TF through the trade in diamonds, the report provides a basic overview of the subject matter and then focuses on ML and TF issues.

10 Chapter 2 provides a general overview of the international trade in diamonds. The distinction between the use of diamonds themselves and the exploitation of the trade in diamonds which is conducted through financial institutions or alternative/internet payment mechanisms is important to note. Diamonds and the diamond trade can be used in all stages of ML (placement, layering and integration) and for the stages of TF (collection, transmission, and use). The research conducted has brought to light evidence that the diamonds trade is subject to considerable vulnerabilities and risks, creating a challenge for both stakeholders within the industry and relevant national authorities for AML/CFT.