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Sierra Leone Working Paper on Diamonds
Diamonds and Armed Conflict in Sierra Leone: Proposal for Implementation of a
New Diamond Policy and Operations
Working Paper 05-08-00
» 1. Introduction » 2. Summary » 3. Discussion » Summary Analysis Table
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". 1
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 buyers2 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, Côte 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.
|
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
|
Illicit
trade
Low prices in S.L.
|
Attract
world-class buyers to create competitive alternative to
current buyers
|
Level
playing field
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 |
FOOTNOTES
1 - William Reno, Department of Political Science, Northwestern University, Evanston, Illinois, USA "The Heart of the Matter", Ian Smillie, Lansana Gberie, and Ralph Hazleton, Partnership Africa Canada (PAC), Ottawa, Canada, January 2000. E-mail: pac@web.net.
2 - Information collected at the Strategic Planning Exercise for the CMRRD in Freetown, March 21-22, 2000.
|
