Saturday, April 28, 2007


This is a totally useless article. I suggest stop reading right now and come back to this column next week. Have a nice weekend. If you are still with me, this article deals with the question of whether it is possible that a diamond polishing plant operated by the Hezbollah in southern Lebanon and would-be-again diamond miner Alan Bond may be facing similar legal and reputational challenges in marketing their output.

That sounds like a weird question, and it is hard to give an explicit answer – unless one goes by the letter and the spirit of international anti-money laundering laws, which, increasingly, have become an inherent part of the diamond industry’s compliance environment.

Let’s first take a look at Alan Bond, the flamboyant entrepreneur who also has a well-established criminal record. Bond, the business tycoon (from owning media to almost everything else) who in the early 1980’s was a five percent owner of the Argyle mine project in Australia, is again looking for a future in diamonds.

Says the Financial Times this week: “Alan Bond, the disgraced Australian businessman and American Cup winner, is looking at ways to raise money in London for an African diamond mining project, including a reverse take-over of AIM-listed River diamonds.” The paper wrote this quite matter-of-factly on the front-page of its companies’ section. The project it is referring to is the Kao diamond project in the Kingdom of Lesotho. Alan Bond’s Lesotho Diamond Company controls 93 percent of the project, which – he claims – may produce a total of five million carats during the next 10 years.

The Kao project, reputedly discovered in 1972 by U.S. explorers, has attracted the interest of many companies over the years, only for the companies to be put off by political uncertainty and technical difficulties. The last public company to be associated with the project before it caught Bond’s fancy was the controversial Canadian miner Diamond Works, which farmed into the Kao pipe in early 1998.

The Financial Times tried to be “nice” to Mr. Bond (who celebrated his 69th birthday this week) by merely calling him “disgraced.” It would be far more accurate to describe him as a convicted criminal who has admitted committing the largest corporate fraud in Australia’s history; this occurred many years before the world started to get used to Enron-type of swindles. Convicted to serve a seven-year jail term in 1997, the then ex-tycoon secured his release after only serving four years, when his lawyers caught a legal technicality that invalidated a judgment on appeal, which had handed out the sentence.

The fraud he committed “only” involved some A$1.2 billion – a colossal amount in the early 1990’s and, actually, still a gigantic sum in contemporary terms. You really must know what you are doing if you want to defraud the public of this kind of money.

The jail sentence was also related to an art swindle centering on the purchase of Vincent van Gogh’s “Irises” painting for $54 million — at the time a world record for a single painting. Bond had borrowed the money from Sotheby’s – but then simply reneged on his commitments and refused the payment, forcing Sotheby to sell the painting to a third party.

Some five years before going to jail, Bond himself went bankrupt. Poor guy. But don’t worry too much, as at some point, in 1995, his offshore family trust (that apparently remained untouchable and outside the bankruptcy) was willing to allocate $12 million to make a settlement with creditors who were owed $1.8 billion. The creditors ended up getting an extreme pittance, something like half-a-cent to the dollar, in a settlement that enabled Bond to get out of the bankruptcy.

Bond very much wants to take the Lesotho Diamond Company public and he is trying to achieve that through a reverse take-over through an existing listed company (River Diamonds, which has properties in Sierra Leone and Brazil). Some people – including some journalists – seem to have a very short memory.

Financial Markets Refused to Deal with Bond

It is exactly three years ago, around April 2004, that Alan Bond's Lesotho Diamond Corporation unsuccessfully approached at least 10 London brokers in a bid to complete a £30 million float in the London market. The London Times then conjectured that Bond's links to Lesotho Diamond Corp as a consultant and the size of his shareholding had dampened broker enthusiasm;a float on the Alternative Investment Market (AIM) had subsequently been pushed back initially by six months – but that delay has lasted until this very day.

At the time Bond served formally “only” as a consultant to the company, though he also had intimated that the always present offshore Bond family trust controlled sufficient shares for it to remain 30 percent shareholder of the company after the then contemplated float. (His son Craig also sits on the board of the Gibraltar-registered Lesotho Diamond Corporation.) The Financial Times says that Bond today owns 40 percent of the company, with RAB capital (a hedge fund) holding an additional 10 percent.

It clearly seems that the present contemplated reverse take-over of River Diamonds is just another way to go public – after failing to find backing for his own straightforward bid. Mining consultants SRK value the Kao project at US$250 million, making it a quite a substantial property. Actually, the projected production figures have recently jumped.

Swiss Governmental AML/CFT Progress Report

Before elaborating on the question put at the outset on the challenges facing both Bond and Hezbollah diamond manufacturers, a quick word about this week’s Swiss government annual Anti-Money Laundering (AML) and Terrorist Financing (CFT) report – a progress report on that country’s adherence to the relevant compliance laws. The Swiss government reports an increase in the “quality” of the suspicious activities reports filed by mostly the large private banking institutions and by major foreign banks.

Banks understand much better that, under Swiss laws, tax evasion is not money laundering predicate offenses that need to be reported. They also understand that a questionable transaction is ONLY questionable if there is a reason to believe that the moneys involved are derived from criminal origins.

And reporting they are! According to the Swiss authorities – and this really applies universally to all money-laundering and terrorist-financing laws – the key in determining what money is crooked depends on the SOURCE of funds. Banks will tell you that it is very difficult to assume that an ex-convict, who has embezzled hundreds of millions of dollars in the past – is not using some of these funds to get a new start in business.

The AML/CFT laws applicable to the diamond industry specify to diamantaires to either refuse or report on an action involving diamonds, which may have been acquired by using questionable (read: criminal) funds.

Would an Alan Bond-owned and operated diamond mine fall in such category?

Diamond Cutting in southern Lebanon

Before answering that let’s see what Hezbollah has to do with this argument. An American investigative journalist, living in Beirut, has been investigating in the past few months diamond manufacturing in diamond factories owned and operated by Hezbollah in southern Lebanon. The journalist comes warmly recommended by the U.S. Department of State; the guy is serious and thorough. Much of his investigation focuses on how the rough diamonds reach the factories.

I don’t want to report details on what this reporter has found because it is his story – and when ready, the report will appear in the major U.S. publication that is employing the journalist. As Lebanon is (again) a member of the Kimberley Process, one must assume that the rough supplied to the Hezbollah factories are not conflict diamonds.

However, Hezbollah is listed by the U.S. government as a banned terrorist organization. One must assume that the funds used to purchase the rough diamonds for polishing come from an illegal (or criminal) source, something one also might assume when someone with questionable funds finances a diamond mine.

These diamonds are not conflict diamonds in the traditional sense. No, in my book, they are simply “dirty diamonds.”

Many diamond traders may shrug this off and argue that this isn’t a perfect world, and there is a limit to how much a trader can do due diligence – or is willing to do due diligence on the sources of the moneys used to secure the diamonds offered for sale. And that applies both to rough and polished.

Some time ago we reported on the Sierra Leone Diamond Company where the controlling shareholder disclosed in a stock market filing that he had been convicted in the past of narcotics dealing, and a range of violent offenses. In the legal community, all moneys used in business by someone with a narcotics dealing background is, almost by definition, “dirty money.” It didn’t prevent the company from going public, nor does it prevent it from selling its diamonds.

The point I am making is that somehow there are laws that are not being upheld. Most industry participants couldn’t care less – and any diamond that is not a “conflict diamond” is considered an o.k. diamond for all intent and purposes. The Hezbollah factories will do well, so will any Alan Bond owned diamond mine - if he finds the diamonds as suggested. But traders dealing with these kinds of situations may not be aware of the “risks” they are taking.

The “risks” come from the banks – which have become far more conscious of these issues and are reporting any transaction with a party they consider questionable to the authorities. Our product is a “sensitive” product – its value lies in the confidence and trust of the public in diamonds. This isn’t oil or uranium. This is diamonds.

The risks became very clear from this week’s Swiss government reports, as is it apparent from the behavior by other banks, including diamond-financing institutions. A trader may not mind purchasing these goods – by just doing lousy due diligence – but banks may think otherwise.

There are diamonds, which, legally, should be viewed as “dirty diamonds.” One may argue about the definition, the circumstances, the “seriousnessness” of the violation of laws, or the interpretations. Some may argue that Alan Bond may not be the best of example and say that he is o.k. now – and we hope that they can substantiate that position if ever asked to. Chances are that the issue will not come up and that one can buy his diamonds, or southern Lebanese polished, without worry.

The point we try to make here is that even if a diamond has a Kimberley Certificate, it doesn’t mean that the stone is o.k. It still can be a “dirty diamond,” and governments are increasingly going to greater length to investigate and prosecute. But who cares? Diamond Best Practice Principles have become largely irrelevant – they are hardly being enforced. Those fraudsters who bribed the GIA to secure fraudulent certificates to defraud the consumers are still among the industry’s most powerful and respected companies.

So who would care about ex-convicts, ex-narcotics traffickers, or Hezbollah diamonds? As long as the diamonds are “conflict-free” even the NGO’s don’t really care. So what’s the down-side? I told you at the outset, this is a totally useless article. If you nevertheless have come to these lines, I apologize for having wasted your time. I promise, I won’t do it again.

Have a nice weekend.

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