ernational Diploma in Anti Money L

Assignment

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International Diploma in Anti Money Laundering (Assignment)

QUESTION (A)
The diamond trade has been in existence for many centuries and as such have resulted in the
development of many unique and specific traits pertaining to the trade practices involved in this
industry, it is important to note in this context that such trade practices often have wide variations
in different regions. It is also pertinent to note that during the last few decades international
diamond trade has undergone many shifts and changes that make them particularly attractive to
those involved in money laundering in the context of proceeds received through criminal
activities.
The Financial Action Task Force report on "Money Laundering and Terrorist Financing Through
Trade in Diamonds" , published in the year 2013, has put the spotlight on some of the most
important changes pertaining to this industry.
De Beers no longer holds a monopoly and emergence of smaller dealers: This was an
important shift for the diamond trade given that De Beers held a monopoly over rough diamond
supply, which focused mainly on Africa, however with the opening of the market for a rough
diamond sales many more organizations such as Alrosa, BHP Billiton, Harry Winston, and Rio
Tinto have come into the picture that have shifted focus from Africa to Russia, Canada, and
Australia. These changes make it easier for money laundering at different parts of the world to
engage in using diamond trade for their activities and also it causes the need for greater than
cooperation in the regulation of this trade among many countries.
Changes and shifts in rough diamond trade many important changes have also taken place
such as the movement of De Beers rough diamond production will have been relocated to
Gaborone, Botswana. Such changes and shifts means that the role of countries such as Belgium
will now be taken up by these new countries which in turn will result in new banking and trading
actors entering into this industry thereby giving rise to increased opportunities for ML/TF
activities.
New trading centers : there has been a gradual emergence of new trade centers for diamonds
such as those of China, India and the United Arab Emirates. These indicate a major shift in the
supply chain off this particular industry, in addition to which countries such as India and China

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International Diploma in Anti Money Laundering (Assignment)

have also become large consumers, considering that these trade centers are primarily new day
may not have very strict regulations or awareness relating to possibility of ML/TF activities.
Beneficiation has also increased in terms of the efforts of countries to sustain employment in the
industry which are again resulting in the larger number of domestic cutting and polishing centres
that are seeking to expand their involvement in the diamond supply chain. As these moved to
other industries it is quite possible that it will increase the opportunities for ML/TF and the rough
diamond trading stage.
Emergence of the Internet as a trade platform: this particular change has brought buyers and
sellers in this particular industry more closer, and in many cases it has provided the dealers to
offer the routes directly to end consumers. As such this new trend has created increased
possibilities for fraud and also makes it difficult to administer any form of Know your customer/
Customer Due Diligence/Enhanced due diligence procedures which are an important part of
preventing money laundering. The wide variety of payment structures available for use in the
case of Internet transactions are further boosting these activities.
Emergence of Synthetic Diamonds these diamonds are very much alike they are counterparts
with the main differences being in the atomic structures and that they are made by a man-made
processes, the further increase and improvement in quality and methods of creating such
diamonds have increased death rate and subsequently their use in money laundering has also
been recorded. Given that most of the anti-money laundering and counterterrorist funding
regulations in most countries do not take into consideration the case of the synthetic diamonds it
is quite possible that this increases their vulnerability to be used for such trade practices.

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International Diploma in Anti Money Laundering (Assignment)

QUESTION (B)
While there are many different methods that are used in the case of money laundering in the
context of diamond trade, each having their own unique characteristics and techniques, the
following are the major three categories as identified by the FATF (2013) :
Use of Diamonds as Currency : in this context, it has been pointed out that diamonds have
many inherent characteristics that make them similar to cash in addition to such characteristics as
the high value-to-weight ratio, the relative stability of their value and the limited impact of
changes in exchange rates and inflation on these products that make them attractive for the
purpose of used in ML/TF activities. In particular, diamonds are particularly susceptible to these
activities because they are readily able to be used for the purpose of acquiring goods such as
tobacco, guns and in most cases drugs. In this manner, diamonds are often used by money
launderers as an easy alternative to using of currency and this has been identified by a large
section of reports from countries such as Australia, Belgium ,Canada, and the USA. Another
important factor that improves and increases the incidence of diamonds being used as currency is
that these often fall out of the purview of cash/currency or a bearer negotiable instrument
regulations in most countries. This form of payment, just as cash payments, is untraceable and
allows criminals to avoid the use of financial institutions while conducting their criminal activity
thus avoiding rigorous KYC procedures put forth by banking institutions where diamond dealer's
accounts are managed. The success of this particular method has been identified through the
large number of criminals who have been apprehended with such items in their possession.
Acquisition of diamonds with proceeds of crime as a means to store wealth : this method is
primarily supported by the fact that prices of diamonds are relatively stable and offer great
degree of protection against depreciation of the value of the proceeds that were invested in these
components even considering a long term horizon. In other words, it facilitates easy concealment
for long time periods and also due to their small size it also permits the money launderers to store
up high amounts of money while ensuring that risks relating to seizure and confiscation are
limited as it may be very difficult to find that the diamonds may be a hidden. This method also
allows easy transfer of the money involved across borders where they can be kept safe and also
even after a longer duration of time they still retain their value and can be used for payments.

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International Diploma in Anti Money Laundering (Assignment)

Another characteristic feature of such methods involves insuring the value of the diamonds that
further offers added protection against theft.
Laundering through stages of the Diamond Trade: this particular methodology is facilitated
by the long and complex nature of the diamond supply chain which is also referred to as the
"diamond pipeline". Since there are different stages and levels in this particular chain it provides
opportunities at each of such levels. The main techniques that has been identified in this
particular typology by the FATF (2013) include the following activities:
1. Commingling of illegally gained diamonds through the mining sector
2. Laundering illegally gained diamonds through wholesale, retail jewelleries, pawnshops or
trade shows.
3. Laundering proceeds of crime through wholesale or retail jewelleries
4. Using accounts of diamond dealers as a conduit to transfer funds, particularly in favor of
third parties which are not part of the diamond trade
5. Funneling of large amounts of money are through the industry in favor of undeclared
entities
Furthermore, this technique also benefits from the important fact that the trade in diamonds and
not to nearly USD300 billion per annum which increases the potential for laundering large
amounts of money .

QUESTION (C)
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International Diploma in Anti Money Laundering (Assignment)

Fagan & Munck (2009) argue that the special and unique characteristics of diamonds have
made them particularly susceptible to use in money laundering. Whereas, Billon (2013) argues
that diamonds have rapidly become a "Currency of Choice" in the context of money laundering
and the financing of other secretive activities due to its properties and nature of the industry
itself. While, it follows from such assessments and statements that the use of diamonds for the
aforementioned activities primarily arises on many grounds, it can be pointed out that it's
characteristics as a product make it chiefly appealing to money launderers.
According to FATF (2013) the following are the important characteristics of diamonds as
products making them attractive to money launderers:
Very High Value: Diamonds have a very high value as they are considered to be rare and
precious stones and are much sought after making them particularly vulnerable to ML/TF
activities.
Low weight/mass and relatively small size high value to mass ratio : these unique
characteristics are quite responsible for the easy concealment and transportation
associated with diamonds which is further aided by the characteristic that they allow a
transfer of high value much easily in comparison to other such products.
High durability with stable pricing and an ability to retain value over long periods
of time: As such, these characteristics make diamonds and attractive investment which
has long-term value and particularly can be used to transfer any funds into these products
particularly obscuring any information regarding to the origin of the funds.
Ability to go undetected: inherent chemical properties of diamonds such as the
nonmetallic nature and therefore the properties provide a distinct advantage when it
comes to transferring the diamonds as they are difficult to be detected when passing
through any x-ray systems particularly found that airports as compared to other precious
products such as gold or silver.
Untraceable: it is for the easy to exchange diamonds at the same time obfuscating any
information regarding origin and ownership of these products, especially in those
circumstances wherein such products have been put through the beneficiation process of
cutting and polishing which makes them virtually untraceable and is one of the key
factors generally sought after by money launderers.
Easily bought and sold outside the formal banking system diamonds are capable of
being bought and sold outside the traditional banking channels which are usually having
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International Diploma in Anti Money Laundering (Assignment)

a higher level of regulation and restriction aimed at defeating ML/TF, diamonds can be
easily transferred without any form of KYC and are readily capable of being bought and
sold with relative ease.
Unmarked: money launderers are attracted to products that cannot be easily marked as it
provides for a greater level of secrecy, this is applicable to diamonds as they are quite
difficult to mark and therefore distinguish between those diamonds that are legally
obtained from those that are not. Further to this it is also possible to disguised diamonds
as other stones which further improves its usability for ML/TF activities. Although
modern technology allows for marking of the diamonds a large majority of the diamonds
in trade are still unmarked.
Changeability: another unique characteristic of diamonds is that these can be easily
modified by changing important dimensions of the product using polishing techniques
which reduces the level of product differentiation therefore making it difficult to identify
which yet again allows criminals to avoid any charges by making the diamonds difficult
to be identified.
Price Evaluation: there is a high level of subjectivity associated with the valuation of
diamonds, the prices are known to be depending upon several important characteristics of
the diamonds such as its crystalline shape, the carat weight, the colour and the clarity,
further to which this also enables money launderers to use such products for the purpose
of price manipulation and also it is possible to use these to throw off judicial
investigations on the basis of the prices.
Apart from the upper reasons that are noted by FATF (2013) , commentators such as Billon
(2013) argue that some of these reasons even extend to avoiding of risk. Due to the nature of the
prices of the diamonds and their value it is also quite possible to use the diamonds to circumvent
excessive risks in the form of volatile local currencies and other such financial sanctions that
may be placed on trade between countries.
QUESTION (D)
The FATF (2013) report was prepared on " money laundering and terrorist financing through
trade in diamonds" and includes a detailed analysis and thorough investigation on some of the
means, methods and techniques that are being used to undertake money laundering activities
through the use of diamonds. On the basis of the above-mentioned report and consideration of its
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International Diploma in Anti Money Laundering (Assignment)

contents, recommendations and findings the most important measures that might be taken to
reduce the attractiveness of the diamond trade industry to money laundering are as follows:
Building a better awareness: one of the primary issues in such a money laundering activities is
that the schemes that are being used to carry out these activities are increasing the coming more
and more creative in nature. In addition to these as noted in the previous context that many new
diamond trade centers as well as cutting and polishing centers are being established in new
locations such as India and China which may not be having the requisite level of expertise and
knowledge or awareness relating to money laundering activities being carried out using the
diamond trade. Hence building up on awareness and the risks associated with this particularly by
government bodies and financing institutions could play a large role in closing the loopholes and
practices that are used by the criminals to launder money using such channels. In order to
implement this particular strategy and measure effectively there would be a need for greater level
of training and cooperative action including information exchange between different parties of
the diamond trade industry.
FATF Recommendation 22 and 23 : many of these recommendations as well as the definitions
primarily adopted by the FATF, mainly consider cash-based transactions although there is
increasing evidence that these methods are being used for such purposes. This particular measure
requires that ATF to broadening AML/CFT duties to non-cash payment means. This will ensure
that most of the trade in terms of volume (carat) and value (tens or even hundreds of billions of
USD that were formerly not covered under AML/CFT requirements, will now be considered.
FATF Recommendation 32: the research has indicated that there are a large number of countries
that are not having any form of measures that require declaration or disclosure in the context of
transportation of diamonds and there is need to act on this particular measure urgently due to the
research findings that diamonds that are part of ML/TF are often transferred across borders and
lack of declaration allows the perpetrators to easily circumvent the measures of declaring
currency as they convert the currency into diamonds which required no disclosure.
Enhancing transparency through cooperation with the private sector: increasing the level of
cooperation and partnership between private sector organizations can provide the authorities who
are engaged in anti-money laundering to better understand the practices that are being carried out
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International Diploma in Anti Money Laundering (Assignment)

within the diamond trade industry which in turn would be beneficial for better understanding of
those practices that have legitimate from those that are to be recognized as suspicious in nature.
The greater level of cooperation between regulators and the private sector may also provide
greater scope for reporting from the private sector of suspicious transactions that can be tracked
and analyzed in the light of money laundering.
Regulation of Trade-based Money Laundering : the increasing number of cases indicating
trade-based money laundering in the case of diamonds also calls for certain measures to be
implemented mainly in the context of applying various risk-based controls on the import and
export of diamond. It is further recommended that various experts such as gemologists could be
appointed at strategic points such as customs that could prevent negative practices associated
with price manipulation.
Increasing the availability of Information: it may be recommended that the collection and
sharing of information from various stakeholders involved in the training of diamonds can be
beneficial in order to support greater level of accuracy of the identification of money laundering
activities and at the same time it would also be beneficial in terms of increasing the risks
associated with such practices related to diamond trading. Lack of information can be a major
impediment in the process of anti-money laundering.
International co-operation: on a further note, it may be identified that diamond trading
activities often occur in the context of multi-jurisdictions and the value chain also spreads across
several different countries. Therefore in order to appropriately track the activities and identify
appropriate instances of suspicious transactions or parties there would be need for international
cooperative effort that combines the use of different mechanisms across international borders for
sharing of information.

Regulatory level playing field: Currently, there are a large number of differences in different
jurisdictions relating to anti-money laundering regulations and legislation's, bearing this in mind
it is quite possible for those involved in money laundering to choose those locations and regions
where the rules and regulations pertaining to diamond trade is quite weak and low as this allows
them substantial room for carrying on their activities undetected. Focusing on creating such a
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International Diploma in Anti Money Laundering (Assignment)

level playing field can definitely reduce the attractiveness of this particular industry to the money
launders.
National risk assessment: adoption and implementation of national risk assessment will prove
to be particularly beneficial in the circumstances of those industries where there is a higher level
of transactions or the economic depends upon diamond trade it would be necessary to ensure that
national risk assessment is carried out and appropriate measures of anti-money laundering are
implemented in these jurisdictions.
Apart from the above noted measures suggested by the FATF (2013) aimed at preventing money
laundering in the case of diamond trade, it may also be recommended that adequate focus on the
possibility of several red flags that may be raised such as when those business organizations or
dealers that are actively engaged in diamond trade carry out certain unusual activities not directly
related to their core business there should be greater level of investigation, also the transactions
that take place across international borders involving many of the countries identified as the
diamond trade routes and hubs need greater level of scrutiny in order to identify the possibility of
money laundering activities being carried out (Parkman, 2012).
Furthermore, greater level of scrutiny in relation to cross-border transactions that involve the
transfer and transaction of diamond trade should require the scrutiny of appropriate experts who
can determine the appropriate value of the diamonds being traded as the valuation of the
diamonds could possibly be an important way of money laundering on an international scale.
Using the support of technology, appropriate measures for diamond marking may also be
beneficial as a measure of identifying and tracking the movement of diamonds, additionally
measures such as requiring adequate certification from the country engaging in export and
import may also provide valid means of tracking the movement of the diamonds, such greater
level of scrutiny involved in this industry may help to reduce its attractiveness to the money
launders. It should also be pointed out in this context that the lack of transparency associated
with this particular industry is one of the primary mechanisms that make it attractive to money
launders and therefore tackling this measure will be beneficial.
It may also be recommended that appropriate levels of supervision need to be adopted by
countries where the diamond trade takes place, this can be done by applying appropriate
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International Diploma in Anti Money Laundering (Assignment)

registration and licenses to the business organizations as currently it has been noted that only a
few countries are buying these provisions, greater level of penalties and fines also could be
applied to the dealers and institutions found to be involved in such activities

REFERENCES
Books
Billon. P.,. (2013). Fuelling war: Natural resources and armed conflict. Abingdon, Oxon:
Routledge for the International Institute for Strategic Studies, London.

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International Diploma in Anti Money Laundering (Assignment)

Fagan, G. H., & Munck, R. (2009). Globalization and security: An encyclopedia. Santa Barbara,
Calif: Praeger Security International.
Parkman, T. (2012). Mastering anti-money laundering and counter-terrorist financing: A
compliance guide for practitioners. Harlow, England: Pearson.
Others
FATF (2013) "Money Laundering and Terrorist Financing Through Trade in Diamonds",
www.fatf-gafi.org/documents/news/ml-tf-through-trade-in-diamonds.html

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