Lacking Clarity

 
The exact structure of this deal between Botswana and De Beers is complex and confidential in a few key places, but it
promises Botswana continued revenue while handing power of the diamond industry to De Beers. The 2004 mining licenses
Botswana granted De Beers reaffirmed the company’s right to control the price of diamonds, pace of production, purchase
June 30th, 2016
 
The exact structure of this deal between Botswana and De Beers is complex and confidential in a few key places, but it
promises Botswana continued revenue while handing power of the diamond industry to De Beers. The 2004 mining licenses
Botswana granted De Beers reaffirmed the company’s right to control the price of diamonds, pace of production, purchase
partners, and other concessionary terms. The system was designed to ensure that while Debswana was, according to De Beers, a “minority acquiring shareholder ... its diamond production is fully attributable to the De Beers Group.”
 
Until 2014, financial details related to Debswana were kept under wraps, but in an effort to show the value gained
by Botswana through the relocation of the company’s sorting center, De Beers published what they said was the first
attempt “to quantify the economic value generated by the Partnership in Botswana in any one year.” De Beers calculated that it provided Botswana with $6.9 billion in revenue in 2014. The largest proportion, about $2.3 billion, is invested in rough diamond imports from South Africa, Namibia, and Canada, which were then aggregated in Botswana to be sold to bulk diamond buyers. The remaining figures are vague—$0.6 billion in service fees, $0.7 billion in dividends for shareholders, and $0.3 billion in retained earnings. The most interesting figure, though, is the $2.2 billion remitted to the government in taxes, royalties, and dividends. Figures pertaining to these key financial aspects are rarely
published.
 
The relationship between De Beers and the ruling BDP is also murky. There is past evidence that the BDP relies on direct
funding from De Beers. In his memoirs, the former minister of mineral resources, David Magang, wrote that De Beers financially supported former presidents. In one case, confirmed by local media, De Beers used a shell company incorporated in Panama to send money to a deeply indebted business owned by then-President Quett Ketumile Masire. De Beers responded to Botswana’s press saying that the payments to presidents and others were mere “donations.” At the time, De Beers was also funding consultants to guide the political direction of the BDP, and, since the BDP has never
lost an election, the diamond giant was de facto steering the nation. According to a classified U.S. cable published by Wikileaks, Debswana paid Lawrence Schlemmer, a consultant selected by De Beers, to reorganize the internal structure of BDP:
 
“The BDP first contracted Schlemmer after the 1994 election ... Schlemmer recommended that President [Quett Ketumile] Masire retire early and that the BDP bring Ian Khama into politics to unify the Party. The BDP scrupulously adhered to
his recommendations.” Despite such disclosures, the structure of mining contracts and the exact value of extracted diamonds, as well as Botswana’s 15 percent share in De Beers, remain unclear. The corporate structure of the
Debswana system operates through secrecy jurisdictions, such as Luxembourg and the British Virgin Islands, which allow
shareholdings and associated companies to withhold details about the real beneficiaries of companies.
 
Another part of the business structure that allows De Beers to manipulate the diamond trade out of the public eye is
the use of sightholders, the bulk diamond buyers approved by De Beers. The contracts with sightholders are secret, but De Beers is open about one factor it considers when approving a diamond buyer: De Beers has to know that the sightholder will keep the whole process hidden.
 
This allows De Beers to determine the quality and value of diamonds purchased and to whom and where the sightholder can
sell or trade. On approving sightholders, De Beers also demands to know their clients, markets, profits, and other details. While De Beers allows sightholders to refuse the parcels provided to them, they cannot choose the individual diamonds contained in those packages. Sightholders are then vulnerable to De Beers, who have not only learned every aspect of their business but can determine their profits by controlling the contents of their parcels.
 
In theory, sightholders are required to cut or polish some diamonds within the country of purchase. The costs, however, of doing this in Botswana range from $60 to $120 per carat— compared to $10-$50 in India. Exact figures aren’t public, but in practice, the high costs means little beneficiation actually takes place Botswana. The lack of transparency along the value chain makes it easy for companies to avoid following what rules there are.
 
A contract negotiated between De Beers and a prominent sightholder, Diacore, showed that De Beers traded high-value
diamonds through corporate structures that operated entirely through tax havens such as the British Virgin Islands. For instance, say a diamond is exported from Botswana and classified as “exceptional.” Exceptional refers to a gem quality rough diamond that is valued at more than $250,000.
 
In this instance, De Beers, through an unknown set of criteria, valued a single diamond at $19.5 million with the
sightholder paying half. The sightholder is incorporated in the British Virgin Islands as a holding company with financial advisers based in Switzerland. The company maintains over two-dozen shell entities, constantly changing names and forms. The agreement passes due diligence requirements as tax havens require little. The holding company is owned by several foundations, also incorporated in tax havens, acting as ultimate beneficial owners. There is no official exceptional diamond registry in Botswana, so it is impossible to know the volume and value of exceptional diamonds
exported either monthly or annually. In this way, it is nearly impossible to track who owns what, where the money is going, and how much money is flowing out of the country. The leak, known as the Panama Papers, from the offshoring law firm Mossack Fonseca demonstrated that this is not some outlandish hypothetical but rather business as usual.
 
Unlike other minerals bearing benchmarked prices, diamonds in Botswana are internally valued by De Beers. Depending on the quality of diamond and the valuators involved, one carat can be worth $1,000, $100, or $1. According to a former De
Beers director, Bertie Lincoln, in a rare quote given under oath at a South African court, the government’s only role is as “an auditor.” Lincoln told the court, “The value is the price which is in the [De Beers] Price Book. So the government valuator has got no input into the value of a diamond.” Through this process, De Beers can essentially set its own tax rate by determining the value of the diamonds on which government fees are levied. De Beers has established about 12,000 categories that can affect the formula, which is secret. That coupled with only sporadic checks on exported parcels against a price list provided to the government allows for rampant undervaluation of diamonds sent out of the
country.
 
Another way of avoiding taxes is to import high-value and low-volume rough diamonds and then re-export those same diamonds in parcels with high-volume, domestic rough diamonds. In 2010, for instance, when the stated export value of diamonds is compared to the production value at mine-gate, over $438 million vanishes at an undervaluation of $19 per carat. As the sole valuator in Botswana, De Beers runs the show. 

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