Achieving Transparency

By partnering with De Beers, Botswana is party to the secretive, monopolistic business practices that underpin the diamond industry. The Botswana government’s ability to reel in corporate misbehavior is hamstrung by the fact that it works so closely with De Beers—the most important player in the system that keeps diamond prices high through artificial pricing and scarcity. It’s a system that benefits Botswana through elevated diamond prices, but at the same time, De Beers also seems to participate in business practices that deprive Botswana of taxes. So, what is the lesser
June 30th, 2016
By partnering with De Beers, Botswana is party to the secretive, monopolistic business practices that underpin the diamond industry. The Botswana government’s ability to reel in corporate misbehavior is hamstrung by the fact that it works so closely with De Beers—the most important player in the system that keeps diamond prices high through artificial pricing and scarcity. It’s a system that benefits Botswana through elevated diamond prices, but at the same time, De Beers also seems to participate in business practices that deprive Botswana of taxes. So, what is the lesser
evil?
 
It’s impossible to tell since the necessary data isn’t public. And, even if the answer was to root out transfer pricing in an effort to acquire higher taxes, the governing party is compromised by its entanglements with De Beers.
There are ways, however, to make Botswana’s economy more transparent. To start, there should be disclosure of mining contracts in order for citizens to access and influence the terms and conditions. The secretive valuation formula of diamonds produced in Botswana should also be made public to ensure that transfer pricing manipulation doesn’t allow profits to escape the country untaxed. The internal financial structure of the BDP, including “donations” to the
party and any corporate ties to the diamond sector, should further be disclosed.
 
Country-by-country reporting for the diamond sector needs to be released showing disaggregated information, such
as the names of linked companies and jurisdictions, where profits are recorded, where taxes are paid, net assets, and
beneficial owners. Moreover, an exceptional diamond registry that is publicly accessible must be created so that citizens can see the value of their diamonds and ensure their respective countries profit from them.
 
In Botswana, democracy has been perverted. A company needs a country to thrive; a political party needs the company to maintain its hold on the government; and a company benefits from a friendly party in power. Within this incentive structure, De Beers will help Botswana to a certain degree, and as long there are diamonds in the mine, revenue will continue to be generated. Yet Botswana’s paper success does not translate to the kinds of gains the country should be receiving. Disclosure of key information and removal of De Beers’ monopoly would liberate the economy and its democracy. (1)
 
1. A shorter version of this report was published in the World Policy Journal (WPJ) Summer Issue, 2016.
 
The actual shareholding of GRB in De Beers is complex. In August 2004, the GRB formally received a 15% shares in DB Investments SA (Luxembourg) ceded from Debswana in exchange for 25 year renewal on Jwaneng, the world’s largest diamond mine by value, alongside Orapa, Damtshaa and Letlhakane. The licenses were originally meant to expire in 2017. The license gave De Beers the right to control the pace of production, pricing of produced diamonds, purchase partners and other concessionary terms. The total assets held by DB Investments as of 2013 totalled $1.59 billion. Assessing the value of 15% shares from DB Investments, according to 2013 data, is $238 million.
 
Earlier, in 2001, DB Investments was formed as a special purpose vehicle through which Anglo-American, Debswana and the Oppenheimers could control 100% of De Beers. De Beers then became a wholly owned subsidiary of DBI. The purpose of DBI’s creation, it appeared, was also to intertwine Debswana with the Oppenheimer family, then acting as the leadership of De Beers: (“the continued leadership and expertise of the Oppenheimer family and Anglo; developing a closer, strategic relationship with Debswana and the Botswana Government”). Debswana was locked as the sole diamond producer in
Botswana. The system was designed to ensure that while Debswana was a, ‘minority acquiring shareholder....its diamond production is fully attributable to the De Beers Group.’
 
In 2007, DB Investment (Luxembourg) documents revealed a complex system of A shares, B shares, preference shares, scheme A shares and scheme B shares. All shareholders, according to dated documents obtained, grant power-ofattorney
to Charl Brand, a South Africa attorney employed by Maitland which holds offices across numerous tax havens and which represents the offices of the shareholders in the Isle of Man, Guernsey, Luxembourg and South Africa. The
corporate structure of the De Beers-Debswana system is not only opaque but primarily operates through tax havens including Luxembourg and the British Virgin Islands.
 
These are also secrecy jurisdictions which allow shareholdings and associated companies connected to the entities to withhold details of who ultimately benefits and what the purpose and power within the overall company is of these
entities. Unknown beneficiaries or ultimate owners of shares are potential vehicles for lifestyle accounts of political as well as financing and legitimation of the BDP as a political vehicle/party potentially through dividends. The sale
of Oppenheimer interests from 2011 directly followed the close of a 60 year upward ban on De Beers in the US due to the Oppenheimer-led price-fixing monopoly over diamond valuation that violated anti-trust laws.
 
Consequently, Anglo-American purchased the Oppenheimer’s 40% shares of 4.5 million B shares for $5.1 billion. An estimate of Debswana’s shares, using the dated De Beers configuration, reveals a share value of $1.8 billion – effectively one quarter of Debswana’s annual production in 2013. Meanwhile, all shares are not equal: some enable decision-making, others represent a purely economic interest. While Debswana receives dividends from De Beers, apparently through Delibes, the British Virgin Islands-based financial entity, it is unclear whether or how Debswana is
able to influence any decision-making in De Beers.
 
When posed with questions, the former reverted all interview queries to the latter. ALL SHARES NOT EQUAL

 

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