May 26, 2007

Are the Diamonds Forever?

Are the Diamonds Forever?

By Carol Matlack

A crackdown in Antwerp threatens the city's historic gem trade.


Dealmaking is part of the scenery in Antwerp's centuries-old diamond district. Passing one another on the narrow streets, traders nod in greeting while talking into cell phones. A black-hatted Hasidic broker, spotting a prospective customer, pulls a clear plastic bag of tiny, sparkling stones from his overcoat and launches into a rapid-fire sales pitch. At a nearby café, two men take turns peering through a jeweler's loupe at a pile of diamonds between their coffee cups.

But lately the buzz of commerce has been tinged with anxiety. Over the past 18 months police have repeatedly swept in, raiding offices and hauling away papers and gems as evidence in investigations of money laundering and tax evasion. One trader died of a heart attack during a police search of his home last December, prompting a protest by fellow traders, who shut down the district for a day.

Although fewer than 20 of Antwerp's nearly 2,000 trading companies have been raided, police have seized tens of millions of dollars' worth of diamonds. The gems are held as evidence while the probe continues. Adding to the tension, DeBeers Group's trading arm, which supplies 50 percent of the world's diamonds, warned Antwerp traders that they could be cut off if they don't follow industry rules against money laundering.

Traders say the pressure is spooking suppliers and customers alike, sending them to rival centers in Dubai, India, and Israel. Imports of rough diamonds, the uncut stones that are Antwerp's main business, fell 20 percent in April, though year-to-date figures remain above 2006. "People are afraid and upset," trader Shashin Choksi says, sitting in his office next to a refrigerator-size safe full of jewels.

Moving Money

No question, the $70 billion-a-year global diamond business has some ugly facets. Easy to transport and hard to trace, the precious stones are a favored vehicle for financing illicit activity, from drug trafficking to terrorism. "The diamond industry is very secretive. Large amounts of money can be moved around, and it's relatively easy to misstate the value," says Alex Vines, a former U.N. diamond-trade investigator who now heads the Africa program at Chatham House, part of London's Royal Institute of International Affairs.

Belgian authorities won't discuss their investigation. But the Diamond High Council, a quasi-governmental agency that oversees the Antwerp trade, says recent raids stemmed from a probe of a diamond shipping company, Monstrey Worldwide Services. Agents searched the company in October, 2005, and arrested its owner in a money-laundering investigation. Monstrey has shut its doors and no one from the company could be reached for comment, but police have seized the inventories of at least 16 traders who were its customers.

Antwerp traders fear the crackdown could end the city's reign as the world's No. 1 diamond center. Antwerp's first exchange opened in the 15th century, and although most cutting and polishing has relocated to cheaper locales such as China, 80% of the world's uncut diamonds still pass through the city. "If rough diamonds disappear from Antwerp, it is finished," says Koen Smets, a Belgian who buys diamonds from local traders and sends them to a factory in China for finishing.

The threat to their livelihood has united Antwerp's multicultural diamond community as never before. Over the past decade a growing population of Indians has gradually displaced Orthodox Jews as the dominant group of traders. But now, says third-generation Jewish trader Ziv Knoll, "we're all in the same boat." Knoll says he knows several traders who are relocating to Dubai and Tel Aviv. If the raids continue, he says, he may do the same. "We can't continue to work with constant harassment."

Matlack is BusinessWeek's Paris bureau chief.

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