De Beers – losses are forever?
PROF. ROMAN GRYNBERG
In 2014, in perhaps one of his most provocative articles, Chaim Even-Zohar, one of the great gurus of the diamond industry published in his newsletter Diamond Intelligence Briefs, an article in which he revealed that since De Beers had started the retail marketing of diamonds as part of its post-cartel ‘Supplier of Choice Strategy’ it had lost $500 million dollars over the period 2002-2013. These figures were breath-taking first and foremost because no-one had ever published such detailed annual profit or more correctly loss figures for the secretive De Beers Group of Companies. De Beers never confirmed or denied the accuracy of Mr Even-Zohar’s figures but there were certainly many people inside De Beers who hated the Supplier of Choice Strategy who could have been responsible for the leak.
Even more breath-taking is what the figures appear to reveal i.e. that De Beers seemed incapable of retailing diamonds profitably. Worse still it suggested that those in charge of De Beers were unwilling to abandon a marketing strategy that was losing a fortune. In its 128-year history, De Beers had never before 2002 been a retailer of diamonds, so one could expect that when entering a new part of the diamond trade it might face teething problems and in fact make initial losses. But twelve years is a considerable length of time even for a company, even one with deep pockets like De Beers, and half a billion dollars is not small change even in the diamond industry.
There were a number of reasonable explanations for these high and mounting losses of the De Beers retail arm. De Beers had acquired some of the most expensive locations on earth for its stores. Its flagship London shop for example was set up on the corner Piccadilly and Bond St. with its stratospheric rents. This is a location hardly likely to sustain what was reported to be a gross margin of 46%, but what it had done in London De Beers repeated in some 45 major and very expensive locations around the world, from Tokyo to New York.
But it was not until the sale of the 40% share in De Beers by the Oppenheimers to Anglo American in 2012 that a small measure of transparency began to emerge as Anglo had reporting obligations to London Stock Exchange. It was no longer possible for De Beers to hide behind the status of a private company based in the tax haven of Luxembourg.
The real transparency bombshell came with the introduction of the EU Transparency Directive of 2015 when companies in the extractive sector and listed on European exchanges had to list all their activities by company and country. This included Anglo American. It was then that it became clear the losses of De Beers might have another possible explanation. For the first time, ever Anglo revealed the corporate structure of the De Beers Group of Companies and it was so complex and involved some 31 companies domiciled in tax haven or low tax jurisdictions. This number includes tax havens such as Luxembourg, Hong Kong etc. which the OECD refuses to define as tax havens because some are members of the OECD.
With such a complex web of some 94 companies (in 2014) many domiciled in tax havens, some with virtually impenetrable secrecy provisions, the possibility that the De Beers losses from diamond marketing might have another explanation, that they were accounting losses, also needs to be considered. Anglo American, which has for many years been at least 40% owner of De Beers, for many decades explained the companies in tax havens in the following manner in its taxation report.
“The use of tax haven companies plays no part in our tax strategies. We accept that we have a small number of so-called tax-haven entities in the group’s structures today that are largely the result of legacy structures inherited from acquisitions and that are now mainly dormant, are planned to be liquidated or re-domiciled. Such entities are disclosed in full to appropriate governments and agencies, and any remaining entities are fully subject to UK tax. As such, we secure no tax benefit from these remaining entities.”
If these 31 companies registered in tax havens or very low tax jurisdictions are ‘legacy structures’ as Anglo American calls them, then this begs the obvious question of what precisely are they a legacy of? De Beers was one of the founder supporters of the so called Extractive Industries Transparency Initiative and now through its parent Anglo American continues to do so and yet runs amongst the most secretive companies in the world.
Diamond prices are secret, the accounts of the main contributing company Debswana (65-70% of De Beers output) remain secret and of course contracts with governments are secret. On this basis one can choose between incompetence and/or financial folly as an explanation of how De Beers lost half a billion dollars in the retail trade and the possibility that these so called ‘legacy structures’ were once part of a system of transfer pricing arrangements.
These are the views of Professor Roman Grynberg and not necessarily those of UNAM where he is employed.