Diamonds and Armed Conflict in Sierra Leone

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Proposal for Implementation of a

New Diamond Policy and Operations

USAID Office of Transition Initiatives (OTI)

Working Paper 05-08-00

1. INTRODUCTION

The link between diamonds and armed conflict in Sierra Leone is obvious, and has been exposed, investigated, and deplored by humanitarians, journalists, politicians, and diamond industry leaders. Less obvious are the complex, entrenched relationships between exploitative systems of financial intermediation and resource management, poverty, and the spectacular, mysterious wealth of the diamond trade. Diamonds have facilitated, not caused, armed conflict. Pre-war economic and social injustice, which developed during the war into the illegal, and finally criminal, behavior common of the diamond traffic, must be addressed as a complex development problem. To ignore it is to perpetuate the conditions that gave rise to the war, and invite its resurgence.

2. SUMMARY

The Problem

In 1999, Sierra Leone’s official diamond exports were slightly less than $1.5 million, compared to an industry estimate of $70 million as the real commercial value. The other $68.5 million of estimated value was lost to illicit and criminal activity. Diamond resources are linked to financing armed conflict. In addition, the problems of illicit diamond exports for Sierra Leone’s economy are as follows.

Low prices due to gray or black market. The purchase price to Sierra Leoneans is lower than the “fair market value” they would obtain from legitimate, competitive buyers. The discount is typical of any gray or black market.

Inequities in resource distribution. The allocation of value in the chain from digger to exporter is exploitative.

Loss of multiplier effect. The full value of diamond purchases does not circulate in Sierra Leone to generate more wealth.

Lack of reinvestment: This is similar to the multiplier effect, but is an additional problem, over and above the lack of spending in the economy, which is the demand side of the issue.

The Solution

The solution can be summarized simply. The market will correct illicit trafficking, if the following conditions are created:

Presence of legitimate buyers, trading competitively at world market prices;

Ability of buyers to trade in dollars, or to have fully convertible currency;

Presence of world class banking to provide safe deposit of stones and money;

Provision of credit to producers at fair market terms;

Existence of systems of financial intermediation, at fair, competitive, market rates, so that wealth can be accumulated, and reinvested into productive activities;

Transparency, disclosure and oversight of all diamond operations to prevent the operations of buyers who smuggle or undervalue stones, committing fraud on fees, licenses, and export taxes.

Cooperation of international diamond buying centers and authorities of importing countries to identify and prosecute the use of fraudulent Certificates of Origin.

Areas of Intervention

There are five areas of intervention to put Sierra Leone’s diamond sector on a legitimate and prosperous track:

Buyers: Attract legitimate buyers.

Foreign exchange: Trade in dollars or freely convertible foreign exchange.

Financial services: Create conditions for financial services to be established, including credit for diggers.

Oversight and denunciation of violators: Empower and educate citizens to provide citizens’ oversight of diamond operations.

Diamond industry and diamond importing countries: Continue to pressure to obtain their cooperation against smuggling and fraud.

There is no need for policing producers or production areas, restricting access, private security firms to enforce exclusive rights, etc. A market system will work if there are mechanisms to encourage or enforce disclosure of sales, to increase the cost of transacting illegal business, and to increase citizens’ disclosure and oversight by making communities have a stake in the legitimate diamond business.

The simple establishment of legitimate, world-class buyers will not suffice, and should NOT be started, even on a trial basis, without at least the adoption of new foreign exchange and banking policy. Unfair competition based in foreign exchange distortions can drive legitimate buyers out of the market before the rest of the financial systems have a chance to develop.

Developing financial intermediation and organizing diggers into producers’ cooperatives or associations will take some time. Initially, just the price differential between a fair world price and prices paid in the gray and black markets will induce dealers to sell to legitimate buyers. However, the incentives of the illegal trade will still be there, providing unfair competition to legitimate buyers who correctly value and declare their merchandise, and therefore pay sales or export taxes; and who pay the penalties of the foreign exchange market, unless they can conduct business freely in dollars or other convertible currencies. If these distortions are not eliminated, after an initial surge in business for legitimate buyers, the illegal market will close in, and Sierra Leone will be back to pre-war conditions.

Income and its Multiplier

The most important benefit of legitimate diamond operations will be the estimated $70 million per year paid to diggers and dealers, deposited into banks in Sierra Leone to be invested and consumed in Sierra Leone, if indeed fair prices and a system of financial intermediation are established successfully.

Alternative to the Free Market Approach

An alternative to the free market approach outlined above is to nationalize diamonds; create a joint venture (monopoly or oligopoly) with one or a few leading international diamond firms; exert controls to prevent unauthorized trading; and organize state spending, under the Commission for the Management of Strategic Resources, National Reconstruction and Development (CMRRD) or another mechanism, to distribute the wealth from the government’s share of diamond revenues. This would mean that diggers would be employees of the joint venture. There is considerable experience in Namibia, Botswana, and South Africa with joint ventures, however these are situations involving kimberlite mining. There is no successful nationalized, state-sponsored joint venture model for alluvial mining.

Role of the RUF

The Sierra Leonean war was brought to an end last July in a negotiated settlement. The Revolutionary United Front (RUF) was not defeated. Instead, they, and the mutinous army under the Armed Forces Revolutionary Council (AFRC), were granted amnesty as part of brokering the peace. The peace process has suffered very serious setbacks since early this year, with generalized violations of the cease-fire, numerous attacks on civilians, and the May remobilization of large numbers of combatants. Time will tell how the suffering and the unspeakable atrocities committed against civilians as tactics of war will be justly addressed, and how the peace process can be renewed and recovered. At the time of the negotiated peace, there was an expressed convergence between the RUF and the Government of Sierra Leone (GOSL) leadership on the causes of the conflict, and means to address them. Among them was an agreement on the importance of legitimate exploitation of diamonds, and a more equitable distribution of its wealth, for the benefit of Sierra Leone’s social and economic development.

3. DISCUSSION

Today’s mining and marketing of Sierra Leonean diamonds

Sierra Leone’s diamond production is alluvial, and is “mined” over a vast area of the country’s territory. Prior to the coup of May 1997, there were three diamond marketing centers: Bo, Kenema, and Koidu, the center of diamond-rich Kono District. Koidu was destroyed by the war in 1998, leaving Bo and Kenema as population and marketing centers. These are also the provincial capitals of the Southern and Eastern provinces, respectively. Both were safe havens throughout most of the conflict, but since the 1997 coup, Kenema has been a battleground between the RUF and Civil Defense Forces (CDFs), militias loyal to the Kabbah Government, with Kailahun and Kono associated with tight RUF territorial domination. Bo is the heartland of the Mende Kamajors, the basis of the CDFs, that swept the RUF out of the South and parts of the East in 1996, and have maintained control ever since. Thus, the RUF have been in control of mining areas in most of the Eastern province and Kono since 1997; the CDF have controlled mining areas in the South since 1996.

Alluvial diamonds are found by “diggers”, who manually, or with rudimentary equipment, sift through soil and sand, digging holes up to 30 feet in depth, in areas where they think it is most likely to find stones. Only men are diggers; women are farmers and petty traders, and service the household. Most diggers are the poorest of the poor, doing body-breaking work with no certainty of finding any stones, but with the illusion of uncovering a large stone that will provide wealth for life; not a common result for diggers.

Land is communally owned in Sierra Leone. “Leases” are managed and rents collected by traditional paramount chiefs. Diggers obtain permission to dig in specified areas from the respective chief. Because of the requirement to pay a land use fee, the diggers are generally financed by “dealers”. Dealers are business people who manage groups of diggers by advancing them food, tools, and basic household goods, which they deduct from the proceeds of sales of the stones the diggers turn over to them. Over time, poverty has conspired with ignorance to create a system of virtual servitude. A new observer to the scene can hardly imagine how such exploitation can exist in the 21st century.

The “dealers” sell to “buyers”, who export the stones. Stones can change hands several times among dealers before they are finally exported. Prior to the coup of May 1997, some buyers declared their stones to the Government Gold and Diamond Valuation Office (GGDO), which evaluated them for the purpose of export taxes and statistics. Others smuggled the stones out of the country, with no documentation or registration, and were able to market them, eventually, in mainstream international markets.

During the war, the role of dealers and buyers became quite murky. Buyers formerly would have been licensed firms, declaring at least some of their transactions to the government, obtaining Certificates of Origin, and dealing in the official foreign exchange market.

Throughout the early part of the war, and up until the time of the 1997 coup, when Bo, Kenema, and Koidu were safe havens, and Freetown and Makeni were scarcely even affected by the war, the smuggling of diamonds co-existed with the presence of these mainstream, “legitimate” Lebanese merchants, whose (probably not fully disclosed) transactions were not part of the war economy of the RUF, but were just part of an inefficient system that evolved to accommodate the many petty stakeholders in corruption.

The final plunge into the obliteration of mainstream commerce occurred when the Lebanese merchants fled, taking their stones, and leaving behind a small cadre of diamond runners who now serviced only the war-makers. Those doing business since the coup have had no pretext or cover of doing legitimate business, and even in 1999, after peace and the restoration of government, this lapse from a shadowy, mixed economy into near total crime has continued to this day, as evidenced by Sierra Leone’s diamond export statistics.

Even before the war started in 1991, the diamond market in Sierra Leone followed a downward spiral of degradation of legality (evidenced by declared value of exports) for many years. Two interesting summaries of this history have been recounted by the political scientist and historian Will Reno and by the authors of “The Heart of the Matter”.

Low Prices and Illicit Trade

Diamond smuggling in Sierra Leone goes on today because of the lack of legitimate buyers doing business in Sierra Leone. That sounds simple, but the restoration of legitimacy is not as simple as getting legitimate buyers to open buying offices, although that act is certainly a big part of the solution.

The physical smuggling of diamonds is nearly impossible to deter. Therefore, smuggling must be prevented by creating competitive business conditions for legal traders, making it easier and more profitable, or at least as profitable to do business legally. World-class diamond buyers affirm that the most important distortions to fair competition are lack of convertibility of foreign exchange and evasion of export taxes. They maintain that if they could buy diamonds in dollars, and if there were some way to prevent, or minimize, the evasion of export duties by smugglers, there wouldn’t be illicit buying operations.

Legitimate diamond buyers can be attracted by leveling the playing field for doing business, which fundamentally resides in these two issues: 1. Use of foreign exchange; and 2. Enforcement of payment of export taxes. Correct declaration of origin is related to both of these.

The foreign exchange requirement is a simple but controversial policy matter for the Sierra Leonean government. Some argue that to permit transactions in dollars is to surrender control over the country’s monetary policy, and thus to surrender sovereignty to international market forces behind the dollar. However, loss of sovereignty has not impeded many countries from establishing free trade zones, in which transactions are freely carried out in dollars. Contemporary international trade defines free trade zones not only in terms of geographic boundaries, but by sectoral boundaries. Thus, to practice a policy of free use of dollars or other convertible currencies for the diamond sector (and gold, or other strategic resources) is consistent with contemporary international trade promotion schemes. Excessive regulations, except for reporting requirements, become an excuse for graft and corruption, and begin to pile up distortions against legitimate business people. Sierra Leone has hit rock bottom in its foreign sector, with the near-total surrender of the value of its diamonds to international smugglers. Ultra-simple, ultra-modern policies should be tried.

As if the loss of value for legitimate trade and government revenues were not enough, low prices also characterize the war economy for diamonds. Just as stolen goods in any black market are sold at significant discount, industry experts say that Sierra Leonean stones, considered some of the finest gems in the world, are being sold at prices significantly below their fair market value, were they traded legitimately.

Certification of Origin and its Role in the Illicit Diamond Trade

All commodities traded internationally must carry a Certificate of Origin, generally issued by the Central Bank of the producing country. Certificates of Origin are used for balance of payments purposes, for statistical registration, to regulate foreign exchange, and by importing countries to regulate market access, through the application of import duties and other trade-regulating schemes. International trade agreements and practices define what is meant by “origin”, basically related to the percentage of value added to a commodity during its transit from the “original” producer to the final consumer. Various components and percentages of value added can be registered, and can cause the definition of origin to change. For example, cloth from Egypt becomes a garment from Italy, when it undergoes “substantial transformation”. Cloth from Egypt can also become cloth from Italy, depending on the relative amounts of value incorporated, even without substantial transformation into a different good.

Thus, a “rough diamond” from Sierra Leone, once polished, has undergone substantial transformation, and is now a “polished diamond” from Belgium, the United States, or India. But a rough diamond from Sierra Leone, sold in Antwerp, resold in New York, and sold again ten times before it is finally polished, should still bear the same certificate of origin until it is transformed into a polished stone. “Re-labeling” without substantial transformation is against international agreements and trade practices.

Importing countries have tolerated massive abuses in certification of origin. It is safe to say that there is a very small illicit market for polished stones; and virtually all diamond jewelry is sold to consumers who buy in the formal, legal market. Thus, somewhere along the way, rough diamonds from Sierra Leone and other countries at war whose production is being smuggled, are being illegally removed from their country of origin and are being introduced into mainstream, legal markets, in violation of international trade agreements and practices, with the complicity of the conventional diamond trade, both public and private sectors.

Industry estimates of today’s annual value of Sierra Leone’s diamond production are $70 million. In 1999, official, legitimate exports from Sierra Leone were $1.5 million. Where is the other $68.5 million? How does it get mainstreamed into the legitimate trade of rough diamonds, to become polished stones, and become jewelry in respectable stores, bought by thousands of “law-abiding” citizens?

All of these smuggled diamonds are being traded with incorrectly issued Certificates of Origin. The importing countries should bear part of the burden of verification.

The literature is somewhat confusing on the issue of the ability to recognize or identify the origin of rough stones, simply by knowing their characteristics or attributes. There seems to be consensus that it is easier to ascertain the identity of a “parcel” of stones of same origin, as opposed to a single stone, or stones of mixed origin. Therefore, once “parcels” are mixed, determining origin is nearly impossible. If there were any intention of identifying origin during marketing, then clearly the industry would have ways of keeping stones in separate “parcels” for that purpose. For example, some gemstones are labeled with their origin deliberately, such as Kanchanabury rubies. Clearly, the differentiation and tracing of origin through different transactions and transformations could be done, if there were the interest and intention to do so. The diamond industry practice of mixing rough stones makes it conveniently difficult to trace origin.

Discussion of “laser labeling” is interesting, but begs the issue of correct adherence to rules of origin by the industry, which could institute means to prevent the massive abuses of Certificates of Origin. It is the abuse of certification of origin that permits smuggled merchandise to enter the formal market with almost no difficulties or penalties to the seller.

Contribution of Importing Countries and the International Diamond Community to Sierra Leone’s Solutions

The international diamond community, including public and private members, can reduce their complicity and tolerance for false declarations of origin. This is being aired in the international press as a moral issue, due to the connection between illicit diamonds and war in Africa. However, it could become the subject for trade complaints by producing countries against importing countries. The effect on trade and national image, especially for Belgium and Israel, would be considerable.

Ironically, the diamond giant De Beers might stand to gain the most from disruption or boycott of trade in alluvial diamonds from conflict countries. This is because De Beers probably has the greatest likelihood of being able to certify the origin of its traded stones, due to the high proportion of its vertical integration.

The De Beers posture for many years has been to promote the general expansion of the diamond industry, for example, by investing millions of dollars in generic advertising. It would be out of corporate character for De Beers to accept that the reputation of the diamond industry as a whole should become blemished by conflict diamonds. If they could segment the market into conflict and non-conflict diamonds, they could well stand to gain instead of lose in their individual situation within the industry. However, this is sheer speculation about consumers’ reactions, and the ability to achieve such a segmentation, and the risk is probably too high for De Beers to even consider. De Beers instead is actively pursuing a strategy of addressing smuggling. They can be expected to cooperate with solutions to Sierra Leone’s problems of enforcing origin, due to: the high quality of Sierra Leonean diamonds, which makes it worth the trouble; and the real possibility of identifying Sierra Leonean rough stones.

Additionally, the corporate leadership of De Beers and of other lead industry firms seem to genuinely deplore the connection between diamonds and violent conflict in Africa, and be committed to achieving results in reducing smuggling.

Once legitimate, world-class buyers are attracted to Sierra Leone, the issue becomes whether or not to limit their number, and how to prevent collusion in a monopsony. The diamond industry, world-wide, is not characterized by free competition, therefore even if no restrictions were put in place for trading in Sierra Leone, collusion and price leadership would still be tendencies of the imperfect market.

The range of policies to attempt to address these (well-known) market imperfections is also well known, and includes the following:

  • Price disclosure and price discovery (by periodic, random, surprise audits of parcels);
  • Periodic auctions of randomly selected parcels to establish benchmarks and price parameters;
  • Definition and prosecution of financial crimes that can distort normal market operations;
  • Enforcement of fair trade practices locally:
    • Stiff penalties for violations (such as revoking residency for foreigners, mandatory jail sentences for financial crimes)
    • Mandatory disclosure of sales information
    • Engagement of community stakeholders to monitor full disclosure (see section on community stakeholders, below)
Poverty and Diamonds: the Root Causes of the War

Adopting the above policies will lead to significant improvement in the Sierra Leonean diamond market, reducing illicit transactions to a minimum, creating a business environment for legitimate, world-class buyers to return to Sierra Leone. However, solving the illicit marketing problem will not address the fundamental development problems that are the root causes of the war. The war in the East and South was about poverty, corruption, and bad governance. Genuine peace will be about the ability of the post-war structures to achieve development.

Poverty, exploitation of diggers, and the inequities of income distribution from diamonds requires developing mechanisms for breaking the dependence of diggers on dealers. This is a problem of credit. Establishing workable credit schemes requires assisting diggers to organize into cooperatives or similar producer associations, ensuring sound management of resources by the household, and pooling the risk associated with mining. Disclosure of success and failure is essential to sound credit schemes, and runs contrary to traditional social and economic practices in Sierra Leone.

The same shroud of mystery that has cloaked the international diamond trade, permitting crime and injustice to flourish in parallel to legitimate business, is at the core of the poverty and economic injustice facing diggers. Secrecy about the income of traditional authorities and politicians is part of the system that prevents poor people from obtaining a fair share of this income pie. Without transparency there cannot be good governance. Without transparency there will not be fair income distribution, fair trade practices, and sound credit and financial institutions. This is a fundamental choice Sierra Leonean leaders must make.

Traditional authority can prevail and be strengthened. But it must evolve to allow broader participation and transparency.

One of the most difficult endeavors of development is creating sound credit schemes, which include their delivery systems, strategic use of credit by borrowers, and the interface between local management, public financial and monetary policy, and commercial banking. In the case of diamond producing areas in post-conflict Sierra Leone, the problem is straightforward: there is one leading sector, and a finite number of potential clients. They can be easily profiled, to determine strengths and weaknesses of household behavior, as regards resource management. One possibility would be to involve women as responsible managers of household credit, and perhaps in the management of “village-based” or extended-family producer cooperatives. The relationship between the income of diggers and other forms of production and consumption, primarily done by women, make this a logical choice.

The problem of the low multiplier in the Sierra Leonean economy is a way of saying poverty is constantly reproducing itself despite the presence of spectacular wealth. The low multiplier relates to the amount of income staying in Sierra Leone, and to the way that income is or is not being utilized for investment. Getting more money into the hands of Sierra Leoneans is part of the solution. Too much of the value of the diamond trade belongs to people who are not reinvesting in Sierra Leone. Another part is to have more efficient financial intermediation: an elegant term that means getting money from the pockets of those who have money to those who use it for production; not by confiscation, but by lending and borrowing. This is standard banking practice, and it is dramatically lacking in Sierra Leone; and nearly absent in the diamond sector.

The first step to developing financial intermediation is to create safe deposit capabilities for stones and money up country, and to build standard commercial banking on this base. A world-class international bank is an absolute prerequisite. Accompanying enabling conditions are: some training of potential borrowers in how to use commercial banking (literacy is not required, just knowing the basic rules), and a way to pool the risk of diggers.

Diamond digging, in the aggregate is not risky; but each individual’s activity for a finite period of time is risky. Either risk is pooled by the credit provider (by building in a margin for individual default) or it is pooled by the user. Pooling risk by the user seems to be a more attractive option, as this method automatically provides for group or peer compliance with disclosure. This is also consistent with the extended family and community safety-net concept of the traditional society.

The preceding discussion forms the basis for the following recommended Policy Actions and Program Actions.

Policy Actions

By the Sierra Leonean Government

The following are areas for action that involve policy decisions by the GOSL.

  • Foreign Exchange: ability to hold foreign currency banking accounts and transact business in foreign currency or freely convertible foreign currency
  • Regulation of Business: existing laws and regulations, and the role of the Ministry of Mines, are probably adequate for registration, licenses, and land-use fees. However, it is safe to say that international labor conventions are not being followed in Sierra Leone.
  • Taxation: 2.5 or 3.0 percent export or value added taxes are consistent with regional levels; preferential status on income taxation could be justified as export promotion in a free trade regime; the important new policy is the distribution or allocation of tax revenues to create stakeholders in full disclosure (see below) and to finance regulatory services of the Ministry, CMRRD, and GGDO.
  • Certificates of Origin: obtain assistance from the World Trade Organization or bilateral partners to review procedures for issuance; request collaboration of WTO and importing countries to detect and prosecute fraudulent Certificates of Origin.
  • Enforcement of fair trade: valuation and penalties for false valuation; penalties for violating registration, disclosure of sales, and tax evasion.

    System of audit and periodic auctions to establish benchmarks and price parameters.

  • Banking: promote operations of commercial banks up country, including special lending windows to wholesale credit to producers cooperatives for diggers; transactions in dollars and other convertible currencies.
    By the international community

    Recommended areas for international engagement, in some cases by governments and in some cases by the diamond industry, are as follows:

  • Crack down on smuggled diamonds (smuggled means any diamond of S.L. origin which is not traded with a genuine Certificate of Origin issued in S.L. to a registered authorized diamond buying firm
  • Scrutinize financial links to detect the possibility of financial crimes: follow the trail of payments
  • Obtain the cooperation of world diamond buying centers to: 1.detect fraudulent Certificates of Origin, 2. denounce to importing authorities, and 3. refuse to buy goods of questionable origin.
  • Obtain the commitment of the main buying centers, world-wide (De Beers leadership) to educate themselves to recognize stones of Sierra Leone origin in order to implement the previous recommendation.

    Program Actions

    The following are programmatic actions that can be taken with funding from foreign assistance.

  • Help the GOSL develop the policies stated above.
  • Help the GOSL set up offices, hire and train staff, and begin operations in support of the new diamond policy and operations. The Ministry of Mines and GGDO have competent staff with considerable expertise, but they are part of the historical system, and also need training to put new policies in place. Key contributions of the CMRRD are expected to lie in oversight of the overall GOSL policy, to make sure that S.L. does not revert to pre-war business as usual. This involves vigilance against corruption in disclosure of sales by buyers, valuation both by private and public sectors, and providing oversight of the new credit and cooperative production schemes that are at the core of increasing the income to diggers.
  • Help civil society groups and traditional authorities develop ways to support credit and developmental programs for increasing income to diggers; promote ways to identify cheaters and corruption related to disclosure of sales (see section on stakeholders, below)
  • Establish program of information sharing and training regarding new diamond policy and operations, particularly as it relates to new opportunities for credit and cooperative organization for digger, and how to negotiate a fair price, including options of direct sale to international buyers.
  • Training in the use of commercial banking for diggers and digger cooperatives.
  • Training for women and other economic decision-makers on the use of credit, how to pool risk to access credit by households whose men are diamond diggers, and overall resource management in a household or extended family group that involves diggers, farmers, and petty traders.
  • Help develop strategic partnerships between commercial banking, community action to promote the new diamond policy and operations, and the GOSL/CMRRD.

    Enabling and Disabling Conditions to Build Peace

    Human rights activism

    International human rights activism is widely credited with bringing the plight of abused civilians in Sierra Leone to the attention of international political leaders, thus creating the conditions for diplomatic and peace-keeping support to match what was already being done by the international community on humanitarian response. An important contribution to peace by human rights activists is their work to expose the link between armed conflict and diamonds in Africa, which has been taken on by the UN Security Council’s subcommittee on sanctions, particularly targeting Angola. This, together with other diplomatic initiatives, such as a series of consultations by the U.S. State Department on armed conflict and diamonds in Africa, have raised the noise level to such a pitch that diamond industry leaders have actively engaged. Importing authorities in Belgium have made some tentative, constructive statements, as well.

    There is not yet a tight set of new policies and industry practices in place that will reign in illicit and criminal activity related to diamonds. In particular, the possible link with international financial crimes has not yet been sufficiently explored to rule out or confirm its importance. However, the ball of political inquiry is now rolling downhill, set in motion by human rights activists, and is gathering momentum as concerned political and industry leaders from importing countries add their own initiatives to the cause for legality and economic justice.

    Going beyond head wagging and hand wringing, diamond industry leaders have a crucial role to play. Without industry leadership, this conundrum cannot be deciphered. It is the industry that has structured itself over decades, it is the industry that knows where and how its complacent tolerance of abuses lies, and it is the industry that can help to correct it.

    Stakeholders

    Social scientists will note that implicit in the preceding discussion is a stakeholders analysis. The heart of the matter is that the victims of war must be empowered to act as the stakeholders for development. One of the most dramatic developments in Sierra Leone’s war, and of great interest to development professionals, was the action taken by the Mende “kamajors” in defense of their villages. Kamajors are the traditional hunters of the Mende tribe, the predominant ethnic group found in the Southern and Eastern provinces of Sierra Leone. They were mobilized in 1995 by various chiefdoms, and evolved into the Civil Defense Forces, a loose alliance of similar groups from all regions of the country, involving various ethnicities, but dominated by the Mende kamajors.

    The Civil Defense Forces (CDFs) have been described recently as a combatant force that must be demobilized, and certainly they should not continue as an active armed militia which would rival formal sector structures of law and order. But the successful grass-roots initiative of the kamajors indicates that empowerment of communities to take effective collective action as stakeholders is possible. A similar manifestation was exhibited in 1995 and 1996 by a loose coalition of women’s organizations, that was leveraged by activist women leaders to achieve the conduct of elections and the peaceful transfer of power from military rule to the democratically elected government of President Kabbah in 1996. Unfortunately, this movement receded after accomplishing the focused intervention related to the election of 1996.

    Emerging stakeholders offer the key to permanent peace. Empowering the stakeholders in the diamond producing areas to enforce legality is certainly the most efficient mechanism, and probably the only effective mechanism, to curb massive illegality in diamond operations.

    Disclosure of diamond transactions is one of the necessary conditions for a (legally) functioning market system. This disclosure is necessary for payment of taxes and identifying smuggling. It is the diggers, their households, their extended families, their neighbors, and the traditional authorities that know what really happens above and below the surface of society. It is these people, the ultimate victims of war or beneficiaries of peace, that hold the key to disclosure. The mechanisms to reinforce silence and passive complicity have been stronger than the rewards for disclosure. The key to disclosure is to build in incentives for it, by those who have the information.

    Incentives and disincentives

    The need to establish security up-country is cited today as the prerequisite for re-attracting world-class diamond buyers. But it would be a mistake to do this and simply revert to the pre-war systems of the 70s and 80s. There are well-entrenched markets for smuggling stones into Guinea, Liberia, Cote d’Ivoire or other countries that have been the pass-through, providing Certificates of Origin that enable the stones to be introduced into the mainstream, formal world diamond market.

    Smugglers deal in dollars. If legitimate buyers cannot deal in dollars, or freely convertible currency, this creates the first and most powerful disincentive to legality. The argument of sovereignty seems hollow, when confronted with the loss of sovereignty that Sierra Leone has suffered through war. Thus, transactions in dollars for the diamond sector seem to be a necessary condition to success.

    Circumventing payment of export (or value added) taxes is the next incentive for illicit transactions. Three percent cash up front, taken off the entire value of a transaction, presents an incentive to either smuggle, or to undervalue diamonds. This requires the complicity of authorities issuing Certificates of Origin and valuing stones, and fiscal authorities responsible for tax collection

    The single most powerful instrument against tax evasion and corruption is for there to be a balance of stakeholders inside of a system that will automatically identify corruption, by having a stake in correct practices.

    The collection of taxes needs to be linked as directly as possible to the receipt of benefits from those taxes by those people who have knowledge about who and how much taxes should be paid. The following distribution of revenues from the diamond export tax is recommended. The level of diamond export taxes should be harmonized between producing countries. Sierra Leone could justify a lower tax than its neighbors as a short-term mechanism (incentive) to reestablish legitimate transactions.

    0.5 % to CMRRD to cover its operating costs

    0.5 % to the GOSL to cover costs of the Mining Ministry, GGDO, Bank of Sierra Leone and other regulatory functions of diamond operations

    1.0 % to the community development council or local government of the chiefdom where the diamond was declared to be found

    0.5 % to the general Treasury, to be used for national health and education programs and assistance to war victims

    2.5% Total

    Order of Magnitude of the Benefits of Legitimate Diamond Operations

    Taxes

    The following table presents projected annual receipts from diamond export taxes, for different levels of total exports.

    Tax recipient Exports of: $ 5 million Exports of: $10 million Exports of: $30 million Exports of: $50 million Exports of: $80 million
    CMRRD $25,000 $50,000 $150,000 $250,000 $400,000
    GOSL for diamond regulatory functions $25,000 $50,000 $150,000 $250,000 $400,000
    Chiefdoms that produced stones $50,000 $100,000 $300,000 $500,000 $800,000
    National Treasury for development programs $25,000 $50,000 $150,000 $250,000 $400,000
    TOTAL $125,000 $250,000 $750,000 $1,250,000 $2,000,000
    Income and its Multiplier

    The most important benefit of legitimate diamond operations will be the estimated $70 million per year, or more, paid to diggers and dealers, deposited into banks in Sierra Leone to be invested and consumed in Sierra Leone, if indeed fair prices and a system of financial intermediation were established successfully.

    Postscript

    The end of war will not happen because of diamond industry leadership, despite how important it is. Peace will be permanent when diggers are not so destitute and disenfranchised that they can be recruited and intimidated into waging a war of cruelty against their own kinspeople. Peace will be permanent when power in the society is more evenly distributed between rulers and the ruled, and when there are mechanisms for poor people with initiative to invest, develop, and use for themselves and their families the fruits of their labor, without exploitation.

    Building peace is building alternative economic and political systems from within the Sierra Leonean society, finding those transformational elements that have been exposed during this cathartic war, and empowering the victims of war.

    SIERRA LEONE: SUMMARY ANALYSIS OF CURRENT DIAMOND SECTOR

    PROBLEMS AND RECOMMENDED SOLUTIONS

    PROBLEMS SOLUTIONS NEED TO: REQUIRES:
    Illicit trade

    Low prices in S.L.

    Attract world-class buyers to create competitive alternative to current buyers Level playing field

    • $
    • Export taxes

    Prevent collusion, low prices, low valuation

    Prevent false Certification of Origin

    Enforcement of fair trade

    • Penalties (revoke residency)
    • Disclosure of sales
    • Stakeholders assist with disclosure

    Audit + periodic auctions to establish benchmarks & price parameters

    Financial crimes: define & prosecute

    Poverty

    Exploitation of diggers

    Poor income distribution

    Credit and organization for diggers, to break dependence on dealers Assist w/ org. of cooperatives

    Ensure sound management of resources by diggers’ household

    Pool risk

    Involve women to manage credit
    Low multiplier / low reinvestment

    In S.L.

    Financial intermediation: need banking services to channel money from those who have it to those who use it Create safe deposit capabilities

    Create commercial banking up country

    International banks

    Responsible borrowers

    Collective risk

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