How the prices are being inflated in the inclosed diamond market

Source: Sunday Standard

Sunday Standard investigations have turned up documented information showing that the Botswana’s 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 “free ports” of Switzerland, their value increases by up to 200 percent. (A freeport is a free-trade zone where products can be stored duty-free while awaiting re-export). This suggests that the Botswana government is losing significant tax revenues when the diamonds are being undervalued on export only to assume a higher value abroad. The value of the gems varies greatly depending on which country imports them from Botswana.

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 percent increase in value.

Regarding the destination of the stones shipped from Botswana, 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 $67,4 bln. This figure includes rough diamonds directly exported from Botswana by Debswana - a branch of De Beers. 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 percent increase in value.

Sometimes the run-up is even bigger. In 2016 about 269 rough gem carats originating from Botswana were re-exported from Switzerland to Laos at $16, 5 million, 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 $27.8 bln. 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.

This happens due to the inclosed nature of the diamond market. Internal agreements, aiming at reaching huge revenues are a common thing between producers and resellers, as there’s minimal risk that this will ever be investigated by the government services. Only open diamond market will be able to sustain fair pricing due to its transparency.