The big Bots diamond rip-off

Botswana, Africa’s GDP poster-child, is the world’s second-biggest diamond producer, from which it earns four-fifths of its national income.

Heavily reliant on diamond exports, the country went into business with mining giant De Beers 50 years ago. In a New African exclusive, Khadija Sharife reveals that Botswana has been getting a raw deal from the arrangement.
Thabiso, a taxi driver in Botswana’s capital of Gaborone, has big plans for the day he gets some extra money. “When I’ve got it, I’m going to propose to my fiancée at a nice place like KFC,” he says. “Put the big diamond ring on a fried chip.”
But the likelihood of Thabiso being able to buy a large diamond is slim despite Botswana being one of the world’s biggest producer of gem-quality diamonds. Times are hard in Botswana. Despite his undergraduate degree, taxi work is all Thabiso can find.
Diamond-rich Botswana, according to the World Bank’s income inequality statistics,
is one of the world’s most unequal countries. It is a land of contradictions: rich and poor, politically peaceful yet economically unequal. Driving through the dusty streets of Gaborone, it is hard to see where the $40bn in diamond value mined since 2003 has gone.
The diamond business makes up a huge proportion of the country’s economy, accounting for 80% of Botswana’s export revenue. Yet puzzling discrepancies in the country’s diamond data exist.
“Rough” diamonds, or diamonds straight from the ground, are mined in various locations around the world and come in three types: gemstones, industrial grade and “boart” diamonds. The stones are sorted into thousands of categories based on weight, colour and clarity.
Gemstones are the classic brilliant diamonds seen in rings, necklaces and tiaras; industrial grade diamonds are darker and contain flaws, while boart diamonds are the poorest grade of all. As all diamonds are exceptionally hard, the lesser grades are used for products such as drill bits, while boart can be ground into dust to make industrial sandpaper.
Most of Botswana’s rough gemstone diamonds are exported to other countries to be cut, polished and made into jewellery, which raises the value exponentially.
Yet an analysis of confidential data on rough Botswana gemstones shows an average 77.6% increase in value for the stones once they leave Botswana and arrive in a foreign country – before any cutting or polishing takes place.
That is, the diamonds’ value miraculously increases when they are traded between different countries after escaping Botswana’s national borders – and tax brackets. The data appears to indicate use of an old trick known as profit- shifting, whereby a commodity is undervalued to reduce tax liability. But when the diamonds arrive in a tax-free jurisdiction such as the “freeports” of Switzerland, their value increases by up to 200%. (A freeport is a free-trade zone where products can be stored duty-free while awaiting re-export.)
How much is that diamond in the window?
Since gaining independence from Britain in 1966, Botswana, which is about the size of France with
a population of 2 million, has become a middle-income country. Just 50 years earlier, it was one of the world’s 10 poorest nations. The country has also managed to avoid the type of violent conflict that has engulfed others on the continent.
The government of Botswana is losing significant tax revenues if the diamonds are being undervalued on export only to assume a higher value abroad. The country has also managed to avoid the type of violent conflict that has engulfed others on the continent.
Since then, most of Botswana’s diamonds have been produced through the joint-venture Debswana, a partnership between diamond giant De Beers and the Botswana government. Known as the De Beers Botswana Mining Company when it was founded in 1968, the relationship between De Beers and the Botswana government is considered the oldest public-private partnership of the post-colonial period. Over the years, the Botswana government increased its shares in Debswana from 15% to 50%, and also managed to obtain a 15% share of De Beers itself.
For decades, De Beers closely guarded its financial information. But in 2013 the company released some numbers showing that Botswana provides more than 70% of De Beers’ diamonds.
In 2013, De Beers obtained more than 31m carats from its holdings in African countries such as Namibia, South Africa and Botswana as well as Canada. Of that, Botswana accounted for about 22.7m carats. Of the $5.9bn in revenue generated by De Beers in 2013, Botswana accounted for $4.2bn.
The diamond market runs very differently from other commodity markets. Diamonds mined by Debswana are mostly exported to De Beers’ subsidiaries abroad or to De Beers’ preferred buyers – companies known as “sightholders”. These sightholders receive special parcels at “sights” (buyer events) held throughout the year.
De Beers determines the type or quality of diamond each approved sightholder receives. Parcels provided to sightholders are based on De Beers’ access to privileged information including the sightholders’ sales and markets.
Unlike gold, platinum or other high-value minerals, the value of diamonds remains confidential and highly subjective. Diamonds are graded from gem quality down to industrial, based on the qualities inherent in each stone. De Beers lists more than 12,000 different categories in a pricebook, but won’t say how it values stones or determines the various types of diamonds. Once the rough gem-quality diamonds are cut and polished – or even set into jewellery – they enter the wholesale and retail global markets. Belgium, Israel and India are leaders in the diamond- processing industry, while the US and China offer some of the world’s largest retail markets.
Sightholders, who are usually based in Belgium, the US or India, are allowed to accept or reject the parcels but they are not allowed to negotiate price or to select diamonds themselves. If a sightholder rejects a parcel, future parcels may be of lesser quality – or the sightholder may be excluded from future sights.
But while De Beers demands access to proprietary information from its sightholders, the company guards its own data and valuation methodologies fiercely.
The sightholder system ensures a controlled supply of diamonds to the world market. Only a limited number and type of diamonds can enter the markets through specific sellers, limiting the supply of gem diamonds and raising their price. For 60 years, the system was condemned as price-fixing by the US, which banned De Beers until 2012, when the company made a $295m settlement to diamond buyers and retail consumers negotiated by the US Justice Department.
The practice was not limited to De Beers, which produces just over a third of the world’s gemstones. Russia’s diamond group Alrosa produced the most diamonds overall. A spokesperson for the state-owned Alrosa claimed that if the price of diamonds isn’t supported, a diamond becomes a “mere piece of carbon”.
It appears that De Beers may stockpile an unknown quantity of rough diamonds to create a scarcity of rough gems. Furthermore, the value of the gems varies greatly depending on which country imports them from Botswana.
For example, Switzerland shows a pattern of importing gemstones before exporting them at much higher values, without having added value to the stones by cutting or polishing them.
Between 2003 and 2016, confidential data shows the value of diamonds originating in Botswana and traded between Switzerland and other countries totalled $67.4bn. This figure includes rough diamonds directly exported from Botswana by Debswana.
Records show that these companies pay an average of $519/ carat for rough stones that are then re-exported at $1,644/carat – a 216% increase in value.
Sometimes the run-up is even bigger. Last year, 269 rough gem carats originating from Botswana were re-exported from Switzerland to Laos at $16.5m, or more than $61,000/carat. In 2016, Swiss freeports exported parcels worth $118m to the US, averaging $84,000/carat. An analysis of this official inter-government data shows that by the time the rough diamonds left Switzerland for other countries, they had increased in value by $27.8bn.
At least half of this multi- billion “re-export” trade in rough diamonds appears to be the same stones in different packages: subsidiaries of companies received and repackaged diamonds into new parcels with new invoices. The data shows that the rough diamonds were re-imported and re-exported between different jurisdictions, particularly tax havens, at increasingly higher values.
Data analysis identified 17.1m carats of rough diamonds originating from Botswana from 2003 to 2012. When the stones left Botswana, they were valued at an average of $125.9/carat. When they were re-exported from foreign countries, they were valued at an average of $223.8/carat, for a total of more than $3.8bn over the period – a 77.6% increase in value.
Diamonds exported directly to Belgium or India are likely to be cut and polished, thus legitimately increasing their value. But some companies ship stones through Swiss freeports where the average diamond imported from foreign countries other than Botswana is priced at more than $800/carat.
Corporate secrecy laws prevent digging deeper into who is exporting the rough diamonds at what increases and why. For example, the average re-export value of all diamonds originating from Botswana in the same period is unknown.
Companies sending or receiving diamonds from tax havens and freeports do not need to indicate Botswana as the country of origin. Nor is there any external authority that scrutinises imports and exports of rough diamonds. The data does not show the names of the subsidiaries or their parent companies. De Beers insists the methodology behind its valuation process is confidential.
While they supply rough gems to their clients, what they do with their purchase is up to them. The company would not comment on how or whether prices of rough exported diamonds might change. One internal government report claims Botswana’s average diamond values – the prices allocated by De Beers – are “estimates” rather than reflections of true value.
Botswana’s 15% share in De Beers, according to the company’s own report, was designed to ensure that while Debswana was, according to De Beers, a “minority acquiring shareholder … its diamond production is fully attributable to the De Beers Group,” meaning Botswana could not mine the diamonds without De Beers’ help. This potentially shifts Botswana’s leverage from a position of strength to one of dependence as De Beers finances half the government budget at a minimum.
The government is losing significant tax revenues if the diamonds are being undervalued on export only to assume a higher value abroad. Given the advantageous terms under which it trades in Botswana’s mineral riches, it makes business sense for De Beers to donate funds to make donations to the country.
New African Magazine