Seeing through the sparkle: An overview of current risks in the global diamond trade

Given their rarity, diamonds have always been sought after, and have always been highly valued. The entire industry is worth billions of dollars, and has a multi-jurisdictional spread. Major touch points include New York, London, Antwerp, Dubai, Hong Kong, and Surat, in India. In addition, there are high mining and production costs, with important mining centres in Botswana, South Africa and Russia. 

The characteristics of such an industry lends itself rather conveniently, to avenues of financial crime, like with the global art sector, whose relationship with financial crime Risk Advisory had highlighted here. A 2013 report published by the Financial Action Task Force (FATF), an intergovernmental body that tracks financial crime, argues that the global nature of the diamond trade makes it amenable for laundering money across the world, and in large volumes, given the high values of diamonds. Further, despite interventions such as the Kimberley Process (2003) and the World Diamond Council’s System of Warranties protocol, tracing diamonds back to their source remains an imperfect process. Given this relative anonymity, and the high values, diamond trading becomes an ideal outlet for laundering money globally. Diamonds could also simply be stolen, and sold off, with the proceeds being used to buy other assets. 

In any case, diamonds have been documented as being sources of funding for rebel groups engaged in civil wars, earning the title of ‘conflict diamonds’. This is particularly true in regions closer to where they were mined. For instance, a 2011 CNN report had claimed that at the height of the civil war in Sierra Leone (1991-2002), conflict diamonds ‘represented approximately four percent of the world’s diamond production’. 

Lab grown diamonds, the technological intervention

Across 2022 and 2023, there was a remarkable rise in the production and sales of laboratory grown diamonds. As the name suggests, these are diamonds that, instead of being mined from their naturally occurring settings, are manufactured artificially in laboratories. CNN had reported that the sales of these man-made diamonds grew from around USD 1 billion in 2016, to USD 12 billion in 2022. There was a 38 percent increase between 2021 and 2022 itself. In major diamond production centres such as India, where 14 out of every 15 diamonds are either cut or polished, there is a broader push from the government towards lab-grown diamonds – in its 2023-24 Union Budget, the central Indian government had set aside USD 29  million for the creation of a lab-grown diamond manufacturing centre to be in Chennai, and had removed all import duties on diamond seeds, which are needed to grow the diamonds in labs.

There are two ways in which lab-grown diamonds are generally produced: the high pressure high temperature method (HPHT) or the chemical vapour deposition method (CVD). In both cases, the diamond seeds are placed in specialised chambers and acted upon by chemicals, over two to three weeks, which generally simulate conditions under which naturally grown diamonds occur. After this, they are cut and polished like regular diamonds. 

Major jewellers across the world have increasingly focused on the sales of lab grown diamonds as well. Pandora, the world’s largest jeweller, had announced in 2021 that they would aim to eventually move to ‘exclusively laboratory-made diamonds’, with Pandora CEO being quoted in the BBC as saying that it was ‘the right thing to do’. A Time article in June 2023 had indicated that lab-grown diamonds were also approximately ‘30-40 percent cheaper’ than their naturally occurring counterparts.

Importantly, due to its characteristics, lab grown diamonds could also mitigate the financial crime risks associated with diamond trading, to an extent. They are more affordable, and critically, are more traceable, as they originate in laboratories. Moreover, as part of the broader guidelines for lab grown diamonds published by the World Jewellery Confederation in 2021, lab-grown diamonds are to be accompanied by a product specification report, outlining the diamond’s size and specifications, rendering the process more transparent, and increasingly less obscure. 

Evolving regulatory requirements

While the impact of lab-grown diamonds on mitigating the risks of financial crime remains to be seen given its relative nascence, 2024 is more broadly an important year for regulations around the global diamond trade. On 1 January 2024, the Group of Seven nations (G7), along with the European Union (EU) announced the operationalising of a direct ban on diamonds originating in Russia. The Russian diamond mining company, Alrosa, has also been placed on sanctions watchlists by the US Office of Foreign Assets Control (OFAC). Additionally, from 1 September 2024, an indirect ban on diamonds originating in Russia will also be put in place – thus, diamonds mined in Russia but processed elsewhere, will also be barred from entering G7 and EU markets. These sanctions have been put in place in light of Russia’s war in Ukraine.

Despite this potentially causing disruptions in the global diamond trade, it is also the most significant regulatory intervention in the sector since the operationalising of the Kimberley Process in 2003. As part of this new regulatory framework, the EU would use blockchain technology to trace diamonds, and eliminate the circulation of conflict diamonds. It will also require all diamonds in the world to be physically certified in Antwerp, in its attempts to strengthen the Kimberley Process’ certification scheme. 

Such concrete steps being taken to clamp down on financial crime associated with diamond trading are welcome, but may not solve the encompassing problem itself. Financial institutions such as banks still remain susceptible to transacting money laundered through the global diamond trading sector. As the trade itself has various touch points, there is also limited uniformity and standardisation of financial crime regulation – they may be more stringent in some parts, and not in others. In such circumstances, multi-jurisdictional collaboration is key. In December 2023, for instance, customs authorities in India and Hong Kong together investigated and dismantled a money laundering network wherein foreign currency was remitted out of India, against lab-grown diamonds which were imported from Hong Kong, but declared as real diamonds. More broadly, due diligence and awareness of the evolving regulatory environment is key, alongside enhanced sources of wealth reviews, especially for financial institutions, to mitigate the risks highlighted, and ensure stronger compliance. 

With in-depth regional knowledge and a vast network of well-placed sources, Risk Advisory is well-placed to assist in such dynamic circumstances. We have conducted multiple investigations involving the global diamond trade, in jurisdictions spanning from India to the UAE, to Russia and Belgium. To discuss the contents of this article, or our investigative work in the global diamond market, please get in touch with one of our experts.