```
                                                                 
International Trade: Critical Issues Remain in Deterring Conflict
Diamond Trade (14-JUN-02, GAO-02-678).				 
                                                                 
The United Nations (U.N.) General Assembly defines conflict	 
diamonds as rough diamonds used by rebel movements to finance	 
their military activities, including attempts to undermine or	 
overthrow legitimate governments. The United States and much of  
the international community are trying to sever the link between 
conflict and diamonds while ensuring that no harm is done to the 
legitimate diamond industry, which is economically important in  
many countries. The principal international effort to address	 
these objectives, known as the Kimberley Process, aims to develop
and implement an international diamond certification scheme that 
will deter conflict diamonds from entering the legitimate market.
The nature of diamonds and the operations of the international	 
diamond industry create opportunities for illicit trade,	 
including trade in conflict diamonds. Diamonds are mined in	 
remote areas around the world and are virtually untraceable back 
to their original source once mixed and polished. The United	 
States cannot detect diamonds that might come from conflict	 
sources because the current diamond import control system does	 
not require certification of the country of extraction. At	 
present, there is no international system to certify the source  
of extraction. The Kimberley Process proposal for an		 
international diamond certification scheme does not contain the  
elements necessary to provide reasonable assurance that the	 
scheme will be effective in deterring the flow of conflict	 
diamonds.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-678 					        
    ACCNO:   A03593						        
  TITLE:     International Trade: Critical Issues Remain in Deterring 
Conflict Diamond Trade						 
     DATE:   06/14/2002 
  SUBJECT:   Foreign governments				 
	     International cooperation				 
	     International organizations			 
	     International relations				 
	     International trade				 
	     Precious stones					 
	     Crime prevention					 
	     Angola						 
	     Democratic Republic of the Congo			 
	     Kimberley Process					 
	     Sierra Leone					 
	     Liberia						 

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GAO-02-678
     
A

Report to Congressional Requesters

June 2002 INTERNATIONAL TRADE Critical Issues Remain in Deterring Conflict
Diamond Trade

GAO- 02- 678

Letter 1 Results in Brief 2 Background 4 Nature of Diamonds and
Nontransparent Industry Operations

Create Opportunities for Illicit Trade 7 United States Cannot Detect
Conflict Diamonds with Present Import

Controls 13 Kimberley Certification Scheme Lacks Key Aspects of

Accountability 15 Conclusion 22 Recommendation for Executive Action 22
Agency Comments 22

Appendixes

Appendix I: Scope and Methodology 25

Appendix II: Situation in Countries Primarily Associated with Conflict
Diamonds 28 Conflict and Diamonds in Angola 28 Conflict and Diamonds in the
Democratic Republic of the Congo 32 Conflict and Diamonds in Liberia 35
Conflict and Diamonds in Sierra Leone 38

Appendix III: Structure and Economic Importance of the International Diamond
Industry 43 Diamond Mining 43 Rough Diamond Trading 45 Rough Diamond Cutting
and Polishing 48 Economic Importance of the Diamond Industry 48

Appendix IV: Historical Data on African Diamond Exports 51

Appendix V: Comments from the Department of State 54

Appendix VI: Comments from the Department of the Treasury 57

Appendix VII: GAO Contacts and Staff Acknowledgments 59 GAO Contacts 59
Acknowledgments 59

Tables Table 1: Differences between Mining and Estimated Rough Diamond
Exports in Selected African Countries, 2000 9

Table 2: Estimated Rough Diamond Exports for Selected Nonmining Countries,
1996, 1998, and 2000 10 Table 3: Rough Diamond Export and Import Values for
Selected Countries, 2000 11 Table 4: Rough Diamond Mining, 2000 45 Table 5:
Estimates of the Economic Importance of Diamond Mining

for Selected Countries, 2000 49 Table 6: Value of Estimated Rough Diamond
Exports from Africa,

1990- 2000 52 Figures Figure 1: Map of Angola 30

Figure 2: Map of the DRC 34 Figure 3: Map of Liberia 37 Figure 4: Map of
Sierra Leone 41 Figure 5: Countries That Mine Rough Diamonds, 2000 44 Figure
6: Countries That Export Rough Diamonds, 2000 47

Abbreviations

DRC Democratic Republic of the Congo DTC Diamond Trading Company RUF
Revolutionary United Front U. N. United Nations UNITA The National Union for
the Total Independence of Angola

Lett er

June 14, 2002 The Honorable Frank R. Wolf Chairman Subcommittee on Commerce,
Justice, State & Judiciary Committee on Appropriations House of
Representatives

The Honorable Judd Gregg Ranking Minority Member Subcommittee on Commerce,
Justice, State & Judiciary Committee on Appropriations United States Senate

The Honorable Cynthia A. McKinney Ranking Minority Member Subcommittee on
International Operations and Human Rights Committee on International
Relations House of Representatives

The Honorable Tony P. Hall Ranking Minority Member Subcommittee on
Technology and the House Committee on Rules House of Representatives

The United Nations (U. N.) General Assembly defines conflict diamonds as
rough diamonds used by rebel movements to finance their military activities,
including attempts to undermine or overthrow legitimate governments. 1 These
conflicts have created severe humanitarian crises in countries such as
Sierra Leone, Angola, and Democratic Republic of the Congo (DRC). The United
States and much of the international community are trying to sever the link
between conflict and diamonds while ensuring that no harm is done to the
legitimate diamond industry, which is economically important in many
countries. The principal international effort to address these objectives,
known as the Kimberley Process, aims to

develop and implement an international diamond certification scheme that
will deter conflict diamonds from entering the legitimate market. The
Kimberley participants, including government, diamond industry, and 1 U. N.
General Assembly Resolution 55/ 56 (Jan. 29, 2001).

nongovernmental organization officials, reported back to the U. N. General
Assembly with a proposal they believe provides a good basis for the
envisaged scheme. 2 Consistent with the Kimberley Process, the U. S.
Congress has legislation pending that would require countries exporting
diamonds to the United States to have a system of controls to keep conflict
diamonds from entering their stream of commerce. You requested that we
review the conflict diamond trade and aspects of

U. S. and international efforts to deter this trade. In response, we
determined (1) whether the nature of diamonds and industry operations are
conducive to illicit trade, (2) whether U. S. government controls over
diamond imports enable detection of conflict diamonds, and (3) the extent to
which the Kimberley Process international diamond certification

scheme has the necessary elements to deter trade in conflict diamonds. As
discussed with your offices, our scope was limited by the lack of timely and
full access to State Department documentation and, as a result, our work on
the illicit trade and related crime was restricted. (See app. I for our
scope and methodology.) This report expands upon and updates

information provided in our February 2002 testimony before the U. S. Senate
Committee on Governmental Affairs Subcommittee on Oversight of Government
Management, Restructuring and the District of Columbia. 3

Results in Brief The nature of diamonds and the operations of the
international diamond industry create opportunities for illicit trade,
including trade in conflict diamonds. Diamonds are mined in remote areas
around the world and are

virtually untraceable back to their original source once mixed or polished-
factors that make monitoring diamond flows difficult. Diamonds are also a
high- value commodity that is easily concealed and transported. These
conditions allow diamonds to be used in lieu of currency in illicit arms
deals, money laundering, and other crime. Lack of transparency in

industry operations also facilitates illegal activity. Specifically, the
movement of diamonds from mine to consumer has no set patterns, 2 The
proposal was presented in the form of a Kimberley Process Working Document
titled Essential Elements of an International Scheme of Certification for
Rough Diamonds, With a View to Breaking the Link Between Armed Conflict and
the Trade in Rough

Diamonds (Nov. 29, 2001). Kimberley Process participants made a few
technical modifications to the proposal in March 2002. 3 U. S. General
Accounting Office, International Trade: Significant Challenges Remain in
Deterring Trade in Conflict Diamonds, GAO- 02- 425T (Washington, D. C.: Feb.
13, 2002).

diamonds can change hands numerous times, and industry participants often
operate on the basis of trust, with relatively limited documentation. All of
these practices reduce information about diamond transactions. The lack of
industry information is exacerbated by poor data reporting at the country
level, where import, export, and production statistics often contain glaring
inconsistencies.

The United States cannot detect diamonds that might come from conflict
sources because the current diamond import control system does not require
certification of the country of extraction. At present, there is no
international system to certify the source of extraction. Currently,
conflict diamonds are associated with four countries- Angola, Democratic
Republic of the Congo, Liberia, and Sierra Leone. Rough diamond imports

from Angola and Sierra Leone not bearing the official government certificate
of origin as well as all rough diamonds from Liberia are banned from the
United States. 4 U. S. Customs requires that all shipments from Angola and
Sierra Leone have a certificate of origin or other documentation

that demonstrates to Customs authorities that the diamonds were legally
imported with the approval of the exporting country?s government. 5 However,
without an effective international system that can trace the

original source of rough diamonds, U. S. Customs cannot ensure that conflict
diamonds do not enter the United States through an intermediary country. The
Kimberley Process proposal for an international diamond certification

scheme does not contain the elements necessary to provide reasonable
assurance that the scheme will be effective in deterring the flow of
conflict diamonds. We evaluated the scheme using aspects of established
criteria for accountability- control environment, risk assessment, control

4 The U. N. Security Council has imposed international sanctions on rough
diamond imports from Angola and Sierra Leone not bearing an official
government certificate of origin as well as all rough diamonds from Liberia.
5 There are no U. S. sanctions against diamonds traded from the Democratic
Republic of the Congo. Executive Order 13213 dated May 22, 2001, banned all
rough diamond shipments from Liberia. In accordance with section 202( d) of
the National Emergency Act (50 U. S. C. 1622( d)), the President extended
the ban through January 15, 2003.

activities, information and communications, and monitoring, 6 which provide
insights into the proposed scheme?s ability to deter trade in conflict
diamonds. Our evaluation of the scheme showed that it incorporates some
elements of accountability, such as requiring that Kimberley Process
certificates designating country of origin for unmixed shipments accompany
each shipment of rough diamond exports. However, some

important elements are lacking, and others are listed only as optional or
recommended. For example, the scheme primarily relies on voluntary
participation and adherence, which is not conducive to an adequate control
environment. Further, it is not based on a risk assessment in that some
activities that are important to a successful scheme, such as the flow of
diamonds from the mine or field to the first export are subject only to
?recommended? elements. Additionally, the period after rough diamonds

enter a foreign port to the point of sale within that country or to export
to another country will be covered by an industry system in which
participation is voluntary and monitoring and enforcement are selfregulated.
Although the Kimberley Process participants have achieved significant
cooperation among industry, nongovernmental organizations, and governments
to address trade in conflict diamonds, our work suggests that participants
face considerable challenges in establishing a system that

will effectively deter this trade. Without a realistic view of the diamond
industry operations and efforts to address the trade in these diamonds, the
international community and the U. S. government?s ability to deter trade in
conflict diamonds will continue to be hampered. We make a recommendation in
this report to the Secretary of State to work toward incorporating better
controls in the Kimberley Process international diamond certification
scheme.

Background Currently, conflict diamonds are primarily associated with four
countries: Sierra Leone, Liberia, Angola, and the DRC. In all four
countries, the

production and/ or trade of diamonds have played a role in fueling domestic
conflict, or, as is the case with Liberia, fueling conflict in neighboring
Sierra Leone through the Revolutionary United Front (RUF). U. N. and U. S. 6
The U. S. government, industry, and international entities such as the World
Bank accept these internal control standards applied to organizations. See
Standards for Internal Control in the Federal Government, (GAO/ AIMD- 00-
21. 3. 1, Nov. 12, 1999) and Internal Control- Integrated Framework (1985)
published by the Committee of Sponsoring Organizations of the Treadway
Commission and used by the World Bank.

sanctions have been targeted at rough diamond exports from the RUF in Sierra
Leone; Liberia; and the National Union for the Total Independence of Angola
(UNITA) in Angola, but not on the rebel diamond trade in the DRC. Also, the
governments of Sierra Leone and Angola have instituted national diamond
certification schemes in which certificates of origin are issued and
accompany rough diamonds from export to import into a foreign country. (See
app. II for situations in Angola, the DRC, Liberia, and Sierra Leone.)

Adjacent countries, such as Congo- Brazzaville, Guinea, Cote d?Ivoire, and
the Gambia, have all been listed in U. N. reports as countries through which
conflict diamonds are smuggled. People named in U. N. reports for their
involvement in trading conflict diamonds have been citizens of the Middle

East, Europe, and the United States. Also, media reports have focused on the
possible use of diamonds by terrorists to fund their activities or store
their assets.

International Diamond The diamond industry involves over 100 countries
across the globe and Industry contributes to the economic well being of a
number of countries that mine

or cut and polish diamonds. In Botswana, for example, diamond sales account
for more than one- third of its gross domestic product. According to The
Mining Journal, the supply of rough diamonds mined worldwide was valued at
$7.86 billion in 2000. 7 Once manufactured into jewelry, industry experts
value the polished diamond content in jewelry retail sales

at about $13.7 billion. The international diamond industry includes three
structural components for rough diamonds: mining, trading and sorting, and
cutting and polishing. This industry is composed of both large and well-
organized operations as well as small, widely dispersed, unstructured ones.
For example, due to the

substantial capital required for deep mining, just four companies mine 76
percent of the world supply of rough diamonds. 8 Yet, across Africa,
countless individual diggers mine widely scattered alluvial fields for
diamonds. Similarly, while De Beers markets a large percentage of diamond
shipments to key trading centers, U. N. data suggest that more than 100

7 See Diamond Annual Review (2000), published by The Mining Journal, Ltd. 8
These four companies are De Beers Consolidated Mines Ltd., Alrosa Ltd., Rio
Tinto, and BHP Billiton. See Diamond Annual Review (2000), published by The
Mining Journal Ltd.

countries worldwide participate in rough diamond exporting. In terms of
cutting and polishing, markets have largely evolved to reflect labor costs,
with 9 out of 10 rough diamonds cut and polished in India. However, mining
countries such as Russia, South Africa, Botswana, and Namibia are trying to
expand their cutting and polishing activities to supplement mining revenues.
(See app. III for additional information on the structure of the
international diamond industry and the economic importance of this
resource.)

Kimberley Process In May 2000, African diamond- producing countries
initiated the Kimberley Process in Kimberley, South Africa, to address the
conflict diamond trade. Participants now include the European Union and
about 37 countries 9 involved in the production, export, and import of rough
diamonds; as well as representatives from the diamond industry, notably the
World Diamond Council, 10 and nongovernmental organizations. The goal is to
create and implement an international certification scheme for rough
diamonds, based primarily on national certification schemes and
internationally agreed minimum standards. The scheme?s objectives are to (1)
stem the flow of

rough diamonds used by rebels to finance armed conflict aimed at
overthrowing legitimate governments; and (2) protect the legitimate diamond
industry, upon which some countries depend for their economic and social
development. The Kimberley Process participants submitted a progress report
to the U. N. General Assembly accompanied by a proposal, dated November 28,
2001, that provided a basis for the envisaged international certification
scheme. 11 The officials of participating countries recommended that the U.
N. General Assembly support implementation of the proposed scheme for rough

diamonds and extended the Kimberley Process mandate to the end of 2002 to
allow time for resolution of remaining implementation issues. On March 13,
2002, the General Assembly adopted Resolution 56/ 263, which

encouraged Kimberley Process participants to resolve outstanding issues; 9
The U. S. Department of State leads an interagency working group that
provides input and representation at the Kimberley Process meetings. 10 The
World Diamond Council is an industry association composed of the World
Federation of Diamond Bourses and the International Diamond Manufacturers
Association, which

formed this body expressly to address conflict diamonds. 11 This document
was superceded by a slightly amended document on November 29, 2001.

urged finalization and implementation of the international certification
scheme; urged member states to actively participate in the proposed scheme;
and requested that the Kimberley Process participants issue a progress
report no later than the end of the 2002 session.

Subsequently, Kimberley Process participants met in March 2002 to resolve
outstanding technical issues 12 and modified the November 2001 proposal
accordingly. 13 Participants agreed that they would concentrate their
efforts on implementing the international certification scheme at the
national level. Those in a position to issue the Kimberley Process
Certificate were asked to do so immediately. All others were encouraged to
do so by June 1, 2002. Participants plan to hold the next plenary meeting in
Switzerland in November 2002 to prepare for the simultaneous launch of the
full certification scheme by the end of the year. 14 Nature of Diamonds

The illicit diamond trade, including that in conflict diamonds, is
facilitated and Nontransparent by the nature of diamonds and the lack of
transparency in industry

operations. Although industry and nongovernmental organizations have
Industry Operations made estimates of both the illicit and conflict diamond
trades, the criminal Create Opportunities nature of the activity precludes
determination of the actual extent of the

for Illicit Trade problem. Conflict diamond estimates vary from about 3 to
15 percent of the

rough diamond trade in value terms and are often based on historical
production capacities for rebel- held areas. Some industry experts dispute
the larger percentage, believing it includes nonconflict related smuggling.
12 The issues included compatibility of the international certification
scheme with

international trade law obligations such as those under the World Trade
Organization; the scope, nature, and publishing of statistics; the nature
and scope of monitoring and implementation (referred to as participant
measures); and the nature and scope of administrative support services
required for the optimal functioning of the scheme.

13 The proposal remains in the form of a Kimberley Process Working Document
titled Essential Elements of an International Scheme of Certification for
Rough Diamonds, With a View to Breaking the Link Between Armed Conflict and
the Trade in Rough Diamonds, as prepared by Kimberley Process participants
(March 20, 2002). 14 In the interim, the South African chair of the process
plans to identify a group to address technical issues and remaining concerns
about definitions.

Nature of Diamonds The nature of diamonds makes them attractive to criminal
elements. Facilitates Illegal Trade

Diamonds are found in remote areas of the world and can be extracted both
through capital- intensive deep mining techniques as well as from alluvial
sources using rudimentary technology. Individual diggers across west and
central Africa mine alluvial fields that are widely scattered and difficult
to monitor, a problem made worse by porous borders and corruption. Diamonds
are easy to conceal and smuggle across borders, and smuggling routes for
rough diamonds are well established by those who have done so for decades to
evade taxes or move stolen diamonds. Though experts may be able to identify
the source of an unmixed parcel of rough diamonds, once diamonds from
various sources are mixed, they become virtually untraceable. Identifying
the origin of alluvial diamonds is complicated by the fact that the river
systems depositing those diamonds

run across government- and rebel- held areas as well as national borders.
Although rough diamonds can be marked, once they are cut and polished, any
form of identification is erased. All of these factors, combined with
inadequate customs and policing worldwide, make diamonds attractive to
criminal elements who may use them to pay for arms, support insurgencies,

and plausibly engage in terrorism. Likewise, diamonds can be used as a means
of currency in connection with drug deals, money laundering, and other
crimes. They may also be used as a store of wealth for those wishing to hide
assets outside the banking sector where assets could be detected and seized.

Industry?s Lack of The industry?s lack of transparency is exhibited in the
complex and variable

Transparency Also way in which diamonds flow from mine to consumer and the
existence of Facilitates Illicit Trade

significant insufficiencies and inconsistencies in industry data. The
current trend to expand cutting and polishing activities within mining
countries may further limit transparency in international diamond trade
flows. The flow of diamonds from mine to consumer, referred to as the
?diamond

pipeline,? has no set patterns. Diamonds can change hands numerous times as
shown by the fact that the value of world rough diamond exports is three
times as large as the value of world rough diamond production. According to
industry experts, diamonds are sold back and forth and mixed and remixed,
making tracking a particular shipment through the pipeline and across
borders an arduous if not impossible task. Diamonds can be traded in smaller
markets and diverted through alternative routes either to disguise origin or
in response to lower taxes and less burdensome regulations. Thus, the threat
that the industry will move to another country

has also acted as a disincentive for individual governments to implement
stricter controls.

Limited transparency in diamond flows is also reflected in insufficient and
inconsistent data, not only for African countries but for industrial
countries and other trading nations as well. As shown in table 1, a
comparison of mining data with U. N. trade data suggest that the value of
estimated rough diamond exports in 2000 (calculated from global import data)
for a number of African countries differ significantly from the value of
those countries? production. For example, Liberia?s production was estimated
as worth only

about $27 million in 2000 and its estimated rough diamond exports totaled
about $102 million.

Table 1: Differences between Mining and Estimated Rough Diamond Exports in
Selected African Countries, 2000 Dollars in thousands (U. S.)

Estimated Estimated

Difference between mining

export mining and

value value a

estimated exports

Angola $739,662 $633,265 ($ 106, 397) Central African Republic 72,000
168,515 96, 515 Democratic Republic of

585,000 728,975 143, 975 the Congo (DRC) Guinea 103,500 163,166 59, 666

Liberia 27,200 101,861 74, 661 Namibia 419,120 709,000 289, 880 Sierra Leone
87,500 14,114 (73, 386) Tanzania 45,965 30,294 (15, 671) a Estimated exports
are derived using the sum of world imports from each country.

Note: None of these countries reported any rough diamond imports to the
United Nations. Source: Mining data are from The Mining Journal, Ltd. Trade
data are from the United Nations., except for Namibia, which did not report
its diamond trade statistics to the United Nations. Trade data for Namibia
are from the World Bank.

Table 2 shows that the United Nations reports rough diamond exports from a
number of countries that neither had mining potential in 2000 nor reported
any rough diamond imports. For example, estimated rough diamond exports from
Congo- Brazzaville, the Gambia, Aruba, the Netherlands Antilles, and the
United Arab Emirates each exceeded $10 million in 2000. However, for most
African nonmining countries, rough

diamond exports have decreased in 2000. (For additional information on
estimated rough diamond exports from African countries for 1990 through
2000, see app. IV.)

Table 2: Estimated Rough Diamond Exports for Selected Nonmining Countries,
1996, 1998, and 2000

Dollars in thousands (U. S.)

1996 1998 2000

African countries Cameroon n/ a $5, 367 $884 Congo- Brazzaville 647,880 80,
858 39, 153 Gambia 129,237 101, 503 18, 396 Mali 8,573 2, 043 5, 476 Togo
2,865 1, 108 214 Uganda n/ a 1, 364 13 Non- African countries

Aruba n/ a 29, 932 19, 717 Cayman Islands 21,738 5, 981 5, 240 Lebanon 2,102
2, 428 356 Netherlands Antilles 124,834 28, 553 22, 892 Ukraine 1, 371 129
641 United Arab Emirates 3,861 9, 576 177, 424 Note: n/ a means not
available. None of these countries reported any rough diamond imports to the
United Nations. Estimated exports are derived using the sum of world imports
from each country.

Source: U. N. data.

For countries that report rough diamonds imports, U. N. data also reveals
large discrepancies between export and import values in 2000. For example,
as shown in table 3, Belgium reported exporting about $355 million worth of
rough diamonds to the United States while the United States reported
importing only about $192 million worth of rough diamonds from Belgium.

Table 3: Rough Diamond Export and Import Values for Selected Countries, 2000

Dollars in thousands (U. S.)

Export Import

value of value of

Exporter diamonds Importer

diamonds

Belgium $355,330 United States $191, 849 Canada 107,477 United Kingdom 347,
191 China 56,174 Hong Kong 3, 345 Hong Kong 77, 611 Belgium 174, 554

7,044 United States 43, 491 Israel 681 Armenia 17, 361

24, 165 Switzerland 44 112,053 United States 21, 163 Switzerland a 5,918
Belgium 65, 398

105 United Kingdom 3, 137, 088 United Kingdom 437, 523 Switzerland 1, 206,
817

289,626 United States 197, 381 United States 15, 796 Hong Kong 1, 267 a In
Switzerland, a large share of diamonds traded are actually internal
transfers for De Beers, which uses the area for security and insurance
reasons. Source: U. N. data.

The data inconsistencies in tables 1 through 3 can be attributed to a wide
variety of factors including:

 differences in the value exporters and importers assign to shipments;

 differences in interpretation of commodity codes so that recorded trade
data is internally inconsistent and inconsistent with production data; 15

 industry practices such as selling goods on consignment, physical
inspections requiring movements of shipments across borders, or 15 For
example, according to the U. S. Department of Commerce, 2001 exports of
diamonds that should have been classified as polished diamonds with a World
Customs Organization Harmonized System code of 7102. 39 were actually
classified as unsorted rough diamonds with a code of 7102. 10.

unloading stockpiles so that trade data differ from production capacities;

 false declarations by importers on where they obtained their shipment,
leading to data indicating a country?s exports exceed its production; or

 smuggling. Unfortunately, diamond trade data limitations have been
difficult to rectify given that the industry has historically avoided close
scrutiny. According to industry experts and government officials, U. S. and
international diamond

firms do not share trade information freely and business may be conducted on
the basis of a handshake, with limited documentation. Furthermore,
information problems resulting from industry?s lack of transparency are made
worse by poor data reporting from many mining and trading nations.
Stockpiles may not be reported, country of last export is recorded instead

of country of origin or extraction, 16 and some countries do not publish
rough statistics if the data could reveal commercially sensitive information
about a particular company. Most importantly, comprehensive international
data is not available in volume terms (carats), even though volume data are
a better indicator of true trade flows.

In addition to poor data, another factor with the potential to limit
transparency in the international diamond industry is the current trend
toward merging mining with cutting and polishing activities at the country
level. In response to reduced demand and declining rough diamond prices, a
number of mining countries are encouraging domestic cutting and polishing.
In mining countries, diamonds from other origins could be mixed with
domestically mined diamonds, cut and polished, and exported without
detection.

16 In particular, for countries like Congo- Brazzaville that do not report
rough diamond imports, a country like Belgium or the United States could
record rough diamond purchases as originating from Congo- Brazzaville when
in effect they are originating from another

country. This is because data reflects country of last export, rather than
country of origin.

United States Cannot Under its current import control system, the United
States cannot

Detect Conflict determine the true origin of diamond imports nor ensure that
conflict

diamonds do not enter the country. The nature of the commodity and Diamonds
with Present

industry makes verification of origin difficult. In 1998, as a result of
Import Controls Executive Orders, the United States began to enhance
controls to prevent conflict diamonds from entering the country from U. N.-
sanctioned sources. Since 1998, the United States has conducted eight
diamond- related investigations. However, as of yet, no federal prosecutions
relating to diamond smuggling have been undertaken. Without an effective

international system to identify the origin of rough diamonds, the United
States cannot detect diamonds from conflict sources sent to second countries
and then shipped to the United States.

Diamond Imports Subject to Diamond imports are subject to the same import
controls used for most General Import Controls;

commodities. Documentation accompanying diamond shipments entering Limited
Controls Added to

the United States must include a commercial invoice, country of last
Implement U. N. and U. S. export, total weight, and value. However, the
regulations do not require exporters to certify the country of extraction,
with the exception of rough Sanctions

diamonds directly from Angola and Sierra Leone. For example, rough diamonds
could be mined in one country and traded several times before reaching their
final destination. The ability to determine the true source of origin is
further impeded because U. S. import shipments can contain diamonds mixed
together from numerous countries.

Until 1998, the United States did not consider conflict diamonds a commodity
of focus. Since 1998, the United States put into place import controls to
target diamonds from UNITA in Angola, RUF in Sierra Leone, and Liberia- all
of which are also targets of U. N. sanctions. Rough diamonds from Liberia
have been banned from the United States. U. S. Customs requires that all
shipments from Angola and Sierra Leone have a national certificate of origin
or other documentation that demonstrates to authorities that the diamonds
were legally imported with the approval of the exporting country?s
government. However, the controls cannot prevent diamonds from these
conflict sources from being shipped to a second country and mixed within
shipments destined for the United States. Customs officials stated that
determining the original source of rough diamonds based on physical
inspection is virtually impossible; thus, U. S. Customs officials must rely
on the accuracy of the source cited in accompanying import documentation.

The U. S. ability to detect and deter conflict diamonds is further
complicated by inaccuracies in its diamond trade data. In fiscal year 2000,
U. S. Census data reported that about $816 million worth of rough diamonds
from 53 countries officially entered the United States through 21 different
ports of entry. However, based on irregularities found during our analysis

of the U. S. Census import and export data, the validity of this data is
questionable. A February 2002 review of U. S. import and export data by the
U. S. Census Bureau found that some of the irregularities were due to
misclassification of the diamonds. They noted that this problem resulted
from the lack of understanding by importers and exporters of the definition

of ?unsorted? diamonds. For example, in 2001, diamonds that should have been
classified as polished diamonds with a World Customs Organization Harmonized
System code of 7102. 39 were actually classified as unsorted rough diamonds
with a code of 7102.10. According to U. S. Census officials, they have
notified U. S. Customs of the problem and both agencies are taking steps to
correct these errors by educating importers and exporters on the correct way
to classify diamonds. Census will revise its 2001 published statistics, but
will not make this process retroactive to include prior year?s statistics.
17

Limited Number of Since the United States put into place import controls to
target diamonds Diamond Inspections and

from UNITA in Angola, RUF in Sierra Leone, and Liberia, there have been a
Seizures Yield No U. S. limited number of diamond inspections and seizures.
Under U. S. Customs Confirmed Cases of Conflict regulations, importers of
diamonds from Sierra Leone and Angola must present appropriate documentation
to U. S. Customs upon demand and are

Diamond Imports responsible for keeping certificates of origin on file for 5
years after

importation. If any intelligence is developed indicating that certain
importers are importing conflict diamonds, U. S. Customs can seize shipments
or develop leads by initiating formal investigations. According to U. S.
Customs officials, as a part of its regular compliance inspections, 35
physical inspections of rough diamond mixed shipments have been performed
since 1998. Of these, six cases were found to have minor discrepancies
primarily because of incorrect documentation or

17 It should also be noted that similar data inconsistencies have been found
in the Canadian import and export statistics. See Fire in the Ice: Benefits,
Protection and Regulation in the Canadian Diamond Industry (Jan. 2002)
published by the Diamonds and Human Security Project.

because the diamonds were misdelivered. 18 However, U. S. Customs told us
that it recently seized diamonds from two individuals based on the failure
to present proper export certificates. Both incidents involved passengers
arriving at the Baltimore- Washington International Airport on Air Ghana

flights who had also traveled to Sierra Leone.

 On December 31, 2001, U. S. Customs inspectors at BaltimoreWashington
International Airport searched a passenger?s luggage and found documents
that led the officers to believe the passenger might have been carrying
diamonds. When the officers asked if he was carrying diamonds, the passenger
removed a package from his pocket

and the diamonds were detained for formal U. S. Customs entry. The entry was
filed, but there was no accompanying certificate from the Republic of Sierra
Leone and 37 diamonds were seized. The diamonds remain in U. S. Customs?
custody, and the importer has petitioned for return of the diamonds.

 On February 4, 2002, an arriving passenger declared $12,350 in diamonds to
U. S. Customs officers at Baltimore- Washington International Airport. Upon
review of the certificate of origin, the U. S. Customs inspectors noticed
several inconsistencies that led them to believe the certificate was
fraudulent. The stones detained have been

released to the importer. The stones were determined not to be diamonds;
however, the fraudulent certificate has been seized. The U. S. Customs
Office of Investigations is reviewing this incident and further details are
unavailable.

Kimberley Certification The Kimberley Process proposal describing the
essential elements of an Scheme Lacks Key

international diamond certification scheme does not contain the controls
necessary to provide reasonable assurance that the scheme will be Aspects of

effective in deterring the flow of conflict diamonds. Without effective
Accountability

accountability, the certification scheme may provide the appearance of
control while still allowing conflict diamonds to enter the legitimate
diamond trade and, as a result, continue to fuel conflict. 18 According to
U. S. Customs officials, these compliance inspections were suspended after
September 11, 2001, because the agency?s primary focus has shifted to
security and antiterrorism efforts. According to the Treasury Department,
these compliance examinations resumed on May 1, 2002.

The Kimberley scheme primarily provides a description of what participants
should do as well as ?recommendations? and ?options.? The March 20, 2002,
document describing the scheme is divided into sections

covering definitions, the Kimberley Process Certificate, undertakings
concerning international trade in rough diamonds, internal controls at the
national government and industry levels, cooperation and transparency, and
administrative matters. Elements of internal controls are addressed
throughout the document, including the requirement that the Kimberley
Process certificates, designating the country of origin for unmixed parcels,
accompany each shipment of rough diamonds and that the certificates be
readily accessible for a period of no less than 3 years. However, the scheme
lacks key aspects of effective controls, and some ?controls? are considered

?recommended? or ?optional.? To assess the scheme, we looked at evaluations
of other international certification schemes and other sources for relevant,
applicable criteria. We believe the best criteria available are based on
published standards for internal control that have been developed for
organizations. 19 The Kimberley Process participants recognize the
importance of internal controls, 20 and the U. S. government, industry, and
international entities such as the World Bank have accepted these standards.
While the

Kimberley Process is not an organization and we do not expect the Kimberley
Process scheme to completely address all aspects of accountability, the
criteria provide useful insights into the Kimberley Process scheme?s ability
to achieve basic objectives of accountability and transparency.

The guidelines include five control elements- control environment, risk
assessment, control activities, information and communications, and
monitoring. A review of the Kimberley Process scheme using these five
control elements reveals significant challenges despite the gains reached by
bringing together industry, nongovernmental organizations, and governments
to address this serious humanitarian issue.

19 See Standards for Internal Control in the Federal Government, (GAO/ AIMD-
00- 21. 3. 1, Nov. 12, 1999), and Internal Control- Integrated Framework,
published by the Committee of Sponsoring Organizations of the Treadway
Commission. 20 According to the November 2001 Kimberley Ministerial
statement, ?an internal certification scheme will only be credible if all
participants have established effective internal systems of control designed
to eliminate the presence of conflict diamonds in the chain of producing,
exporting, and importing rough diamonds within their territories??

Control Environment: A control environment is one with a structure,
discipline, and climate conducive to sound controls and conscientious
management. The Kimberley certification scheme faces serious challenges in
achieving these elements.

 The Kimberley Process scheme primarily relies on voluntary participation
and adherence making support and implementation of the scheme highly
dependent on varying levels of political will and industry commitment. The
scheme lacks an international authority or mandate. There is no authorizing
mandate in U. N. Security Council Resolutions, U. N. General Assembly
resolutions, or treaty status at this time. The form the final document will
take (an agreement, memorandum of understanding, guidance, or some other
form) has not yet been

determined. Despite efforts to recruit more members, some key diamond
trading countries have not participated in the Kimberley Process. Moreover,
some participants continue to disagree with the definitions of conflict
diamonds, 21 participant, and observer within the Kimberley Process scheme
and it remains unclear what impact this could have on their future support
and participation.

 While Kimberley participants identified some possible administrative
support functions 22 and made some preliminary decisions regarding who may
carry out the functions, they have not concluded their analysis and have
made no commitments to staffing or funding. 23 At the March 2002 Kimberley
Process plenary meeting, some participants expressed

concern that without this information it will be difficult, if not 21 Under
the Kimberley scheme, conflict diamonds means rough diamonds used by rebel
movements or their allies to finance conflict aimed at undermining
legitimate governments, as described in relevant U. N. Security Council
resolutions as they remain in effect, or in other similar Security Council
resolutions which may be adopted in the future, and as understood and
recognized in U. N. General Assembly Resolution 55/ 56, or in other similar
General Assembly resolutions which may be adopted in future. Some
participants stated that they could not agree in advance to what the U. N.
may adopt in the future concerning conflict diamonds.

22 According to the Kimberley Process proposal, administrative support
functions could include serving as a channel of communications; and
maintaining and making available a collection of laws, regulations; etc. 23
Researchers reviewing multilateral environmental agreements have noted that
institutional arrangements have come to be seen as crucial to such
agreements? effectiveness, and that the lack of institutions limits the
capacity to monitor states? implementation of and compliance with treaty
requirements or to take action when noncompliance is ascertained.

impossible, to develop the national legislation needed to implement the
scheme within the expected time frame.

 Individual participants are required to set up a system of national
internal controls and effective enforcement and penalties. It is unclear how
and when the capabilities of different participants to do so will be

assessed and, where needed, assistance provided. If countries fail to comply
with the essential elements of the scheme, then they can be excluded from
trading with participants. However, whether national implementation of this
provision will comply with trade agreements such as those under the World
Trade Organization has been a point of

contention since early in the process and remains under discussion. 24 Risk
Assessment: A risk assessment is a mechanism to identify, analyze,
prioritize, and manage risks to meet objectives. The Kimberley Process does
not include a formal risk assessment and thus participants cannot be assured
that they have appropriately identified, prioritized, and addressed the
risks. Three potential high- risk areas the Kimberley Process scheme does
not adequately address include the following.  Industry experts and
Kimberley participants agree that unless the

segment of the diamond pipeline from when the diamond is first discovered in
the alluvial field or mine to the point it is first exported is subject to
controls, conflict diamonds may enter the legitimate trade.

The scheme does little to address this issue, offering only recommendations
encouraging participants to license diamond miners and maintain effective
security.  Industry and others hold stockpiles of diamonds with
undocumented sources, and the number of diamonds held in stockpiles may be

considerable. Since the Kimberley scheme requires information on origin, it
is unclear how these diamonds will be addressed. Apparently,

24 Under the Kimberley scheme, participants are to ensure that no shipment
of rough diamonds is imported from or exported to a nonparticipant. However,
article XI of the General Agreement on Tariffs and Trade (GATT), 1994,
obligates countries to refrain from imposing quantitative restrictions or
similar measures (as opposed to duties, taxes or other charges) on the
importation of products from other countries. Two exemptions contained

within the GATT may justify a violation of Article XI. Article XXI (b)
allows a country to impose trade restrictions it considers necessary for the
protection of its essential security interests. Article XX contains an
exception for measures designed to protect human life or health.

any conflict diamond could be claimed as a stockpiled diamond at the
scheme?s initiation.

 The period after rough diamonds enter a foreign port until their point of
sale as rough diamonds, polished diamonds, or jewelry or until exported to
another country will be covered by an industry system called a chain of
warranties in which participation is voluntary and monitoring and
enforcement are self- regulated. 25 As rough diamonds are exported from
subsequent countries or the European Union, governments will issue a new
Kimberley certificate to accompany each shipment, yet it is unclear how
governments can rely on the voluntary industry system to ensure

that the shipments are free from conflict diamonds.

Control Activities: Control activities consist of policies, procedures,
techniques, and mechanisms that ensure that management directives are
carried out in an effective and efficient manner to achieve control
objectives. The Kimberley scheme?s inconsistent attention to control
activities raises concerns, such as the following:

 While some internal controls are delineated, others are recommended or
considered optional without clear justification, and many controls are to be
developed at the national level where capabilities and political will
differ.  The industry chain of warranties is based on voluntary
participation and

self- regulation. Although the scheme requires that all sales invoices of
participating industry be inspected by independent auditors to ensure that
the diamonds come from nonconflict sources, an audit trail is problematic in
an industry where diamonds are sorted and mixed many times. Information and
Communications: An information and communication

mechanism is needed for recording and communicating relevant and 25
According to industry officials, the World Diamond Council will strongly
recommend that its member organizations require their individual members to
make the following statement on all invoices for the sale of rough diamonds,
polished diamonds, and jewelry containing diamonds. ?The diamonds herein
invoiced have been purchased from legitimate sources not involved in funding
conflict and in compliance with United Nations resolutions. The seller
hereby guarantees that these diamonds are conflict free, based on personal
knowledge and/ or written guarantees provided by the supplier of these
diamonds.? Membership in the World Diamond Council and its membership
organizations is voluntary.

reliable information to those who need it in a form and time frame that
enable them to carry out their internal control responsibilities. Although
the Kimberley Process has made progress in identifying information to be
communicated among participants, concerns regarding the Kimberley Process
scheme?s mechanism for information and communication remain.

 The Kimberley Process participants recently made progress identifying
statistics to be shared (production, import, and export data) and in setting
reporting time frames. However, the statistics are to be made available to
an ?intergovernmental body? or another ?appropriate mechanism? for
compilation and then to be made available for analysis

by ?interested parties? and by the Kimberley Process participants,
individually or collectively. Thus, participants have not yet reached
agreement on who will compile the statistics, how this will be done, and

at what cost, as well as specifically who will analyze the data, how they
will analyze it, and how and when they will report their results. This is of
particular concern to some countries and industry that wish to protect what
they consider sensitive information and, conversely, to others including
nongovernmental organizations that want as much transparency as possible.

 Given the problems identified with international rough diamond trade data,
it remains unclear what steps will be taken to improve and standardize
country reporting. It is unclear whether all diamondproducing countries
currently have the capacity to provide accurate data and what assistance, if
any, will be needed or provided.

 The European Union will function as one trading organization under the
Kimberley scheme. It remains unclear how its data will be compiled,
reconciled, and shared in a timely manner. While the predominant diamond
industry is found in Belgium and the United Kingdom, all 15 European Union
countries have reported diamond flows to the United Nations.

Monitoring: A monitoring mechanism consists of continuous monitoring and
evaluation to assess the quality of performance over time in achieving the
objectives and ensuring that the findings of audits and other reviews are
promptly resolved. Even acknowledging sovereignty and data sensitivity
constraints, the Kimberley Process scheme?s monitoring

mechanisms still lack rigor, relying primarily on voluntary participation
and self- assessment. For example,

 Monitoring is based on participants? reporting of other participants?
transgressions to initiate a review mission. A participant can inform
another participant through the chair if it believes the laws, regulations,
rules, procedures, or practices of that other participant do not ensure the
absence of conflict diamonds in the exports of that other participant. 26
Yet, there is no initial requirement that any one participant

review another participant?s compliance with the international certification
scheme so as to raise the initial question about compliance with the chair
or other participants. It appears that only the obvious cases will be
addressed.

 Review missions and their size, composition, terms of reference, and time
frame are to be conducted with the consent of the participant concerned.
Terms are to be based on circumstances and established by the chair in
consultation with the participants. Although sovereignty is a legitimate
issue raised by some participants concerned about the extent of monitoring,
the extent to which participants can use sovereignty and

national laws to refuse terms of the review mission remains unclear.

 A report on the results of a review mission, as well as comments from the
participant concerned, are to be posted to the restricted access section of
an official certification scheme Web site no later than 3 weeks after
completion of the mission and are to remain confidential. The scheme does
not discuss a mechanism for ensuring that the findings of

the review missions are promptly resolved and for disclosure of this
information to anyone other than the participating countries.

 The scheme states that participants should exchange information, including
self- assessments, to arrive at best practices; yet no guidelines were
provided for self- assessment.

 Although the scheme states that the industry system of warranties will
help facilitate tracing rough diamond transactions by government
authorities, no government- monitoring plan for the system has been
proposed. 26 Such information may be reviewed at the annual plenary meetings
at which time, participants can, upon the chair?s recommendation, decide to
implement verification measures such as requesting additional information
and clarification from participants and conducting review missions when
there are credible indications of significant noncompliance with the
international certification scheme.

 The scheme has no provision for external audit of the scheme?s
administration.

Conclusion Given the opportunities for illicit trade posed by the nature of
diamonds and diamond industry operations and the varying levels of will and
capacity

to address the illicit trade, the challenges to deterring conflict diamonds
are daunting. It is important to set realistic expectations and recognize
that the Kimberley Process international diamond certification scheme is not
expected to stop conflict on its own. There is the hope, however, that an
international diamond certification scheme will make trade in conflict
diamonds more difficult, resulting in less funding for conflict. But the
scheme cannot accomplish this without reasonable participation and

vigilance by diamond producing and trading countries and industry and
inclusion of sound controls that meet basic accountability and transparency
objectives. Without an effective international system that can trace the
original source of rough diamonds, nations cannot ensure that

conflict diamonds do not enter their countries and without accurate
international trade data, nations cannot readily identify and rectify
transgressions. The scheme as currently designed was achieved through
considerable effort and negotiation, but additional improvements are needed
to establish adequate controls to deter the conflict diamond trade.

Unless the challenges we identified can be reasonably addressed, the scheme
risks the appearance of control while still allowing conflict diamonds to
enter the legitimate diamond trade and, as a result, continue to

fuel conflict. Recommendation for To help ensure that Kimberley Process
participants, including the United Executive Action

States, achieve their goal to establish an international certification
scheme for rough diamonds that will stem the flow of conflict diamonds while
protecting the legitimate diamond industry, we recommend that the

Secretary of State in consultation with the relevant government agencies
work with Kimberley Process participants to develop better controls
including a reasonable control environment, risk assessment, internal
controls, information sharing, and monitoring. Agency Comments We received
written comments from the Department of State and the

Department of the Treasury. These comments are reprinted in appendixes

V and VI. In addition to their overall comments, Treasury provided technical
comments, which we incorporated in the report as appropriate. In response to
GAO?s recommendation, the Department of State commented that GAO had given
insufficient weight to the political commitments achieved through the
Kimberley Process in developing the international rough diamond
certification scheme. The State Department commented that it would be more
appropriate to focus on the Kimberley Process scheme as a dynamic effort to
reconcile competing priorities rather than assess the scheme against a set
of accountability measures. While State agreed that the international rough
diamond certification scheme would need improvement and refinement as
participants gain experience with its practical implementation, it did not
believe that additional controls could be realistically negotiated prior to
the scheme?s

launch. While we recognize the inherently political and voluntary nature of
international agreements, we believe that in order to attain the stated
goals of the Kimberley Process- to stem the flow of conflict diamonds while
protecting the legitimate trade-- it is necessary to go beyond the political
commitment with a view to a realistic assessment of what has been achieved
and what remains to be done. We acknowledge that the scheme as currently
designed was achieved through considerable effort and negotiation, but
additional improvements are needed to establish adequate controls to deter
the conflict diamond trade. We do not expect the Kimberley Process scheme to
completely address all aspects of

accountability, but the criteria we use to assess the scheme provides useful
insights into the scheme?s ability to achieve basic objectives of
accountability and transparency. Despite the efforts gained through
negotiation, without effective accountability, the certification scheme may
provide the appearance of control while still allowing conflict diamonds to
enter the legitimate diamond trade, and as a result, continue to fuel
conflict. We agree with State that the international rough diamond
certification scheme will need improvement and since the Kimberley Process
remains a dynamic process in which any participant may propose modifications
prior to plenary meetings, we continue to believe that the process can
benefit by State working with Kimberley Process participants to improve
controls.

The Department of State also expressed concern about our statement in the
report describing a scope limitation: ?Our report was limited by the lack of
timely and full access to State Department documentation and as a result

our work on the illicit trade and related crime was restricted.? We
acknowledge the assistance provided by State during the review. However, our
standards require that we report any methodological limitations. The
Department of the Treasury did not agree with our recommendation that the
Secretary of State, in consultation with relevant government agencies, work
with Kimberley Process participants to develop better controls. Treasury
believes that such steps would be unlikely to increase

enforcement and would substantially increase costs and divert enforcement
resources. However, Treasury did not explain why improved controls would not
add to effectiveness and how improvements would substantially increase costs
or divert enforcement resources.

We are sending copies of this report to the Secretary of State, the
Secretary of the Treasury, and interested congressional committees. We also
will make copies available to other interested parties upon request. In
addition,

the report will be available at no charge on the GAO Web site at http://
www. gao. gov. If you or your staff have any questions regarding this
report, please call me at (202) 512- 4128. Other GAO contacts and staff
acknowledgments are listed in appendix VII.

Loren Yager Director, International Affairs and Trade

Appendi Appendi xes x I

Scope and Methodology To determine whether the nature and operations of the
international diamond industry are conducive to illicit trade, we
interviewed and reviewed documentation from cognizant representatives of the
U. S. and foreign diamond industry, U. S. and foreign governments, the
United Nations, Interpol, and nongovernmental organizations, as well as
recognized industry experts. We acquired official international diamond

production and trade data and reviewed industry journals and reports. For
information on diamond mining, we analyzed data from the Annual Review of
Mining published by The Mining Journal, Ltd. 27 For information on the
international rough diamond trade, we analyzed data from the United Nations?
Commodity Trade Statistics Database. Where possible, we

supplemented and verified these data with information from the U. S.
International Trade Commission, World Bank Country At a Glance Tables,
International Monetary Fund Country Statistical Appendixes, and diamond
company annual reports. To the extent possible we reviewed State Department
documentation. However, our scope was limited by the lack of timely and full
access to State Department cable traffic and thus could not be assured that
we had reviewed all information concerning related crime including
terrorism.

We note, however, several limitations in the existing data: diamond trade
data can vary significantly depending upon the source, and the data are
often incomplete. Given these data caveats, we found that the most
comprehensive source for international data was the United Nations (U. N.).
28 However, when we examined the U. N. data, we found that the majority of
countries with known diamond mining did not report their rough diamond
export flows. Therefore, given that U. N. import data were relatively more
comprehensive, we often inferred ?estimated exports? of

rough diamonds using world import flows. 29 Moreover, the data are only as
27 According to the author, these mining data are based on official
statistics from mining company reports, government data, and estimates of
artisanal production from field observations. 28 We used the following U. N.
Harmonized System of Classification Codes (HTS) for our data on the rough
diamond trade: 7102. 10 for unsorted diamonds, 7102. 21 for unworked
industrial diamonds, and 7102. 31 for unworked nonindustrial diamonds.
According to the

United Nations, its commodity trade data are compiled from information sent
by the Customs department, the national statistical office, or the Central
Bank of approximately 110 countries annually. 29 Inferring exports from
import data is a common analytical technique since exporters have an
incentive to under- declare the value of shipments to pay fewer taxes.

good as what each country reports to the United Nations, as they are not
validated by the United Nations.

To determine whether U. S. government controls over diamond imports enable
detection of conflict diamonds, we examined U. S. Customs? procedures for
importing, tracking, and monitoring U. S. diamond imports; applicable laws,
executive orders, regulations, and implementing policies relating to diamond
imports; and data on the value of U. S. rough diamond imports and the number
of countries exporting them to United States, including the ports of entry.
We met with officials at the U. S. Treasury Office of Foreign Asset Control,
U. S. Customs, the Departments of Justice

and Commerce, and the Federal Trade Commission to obtain their views on the
effectiveness of U. S. import controls in deterring the trade of conflict
diamonds.

To determine the extent to which the Kimberley Process international diamond
certification scheme has the necessary elements to deter trade in conflict
diamonds, we obtained the most current Kimberley Process documentation and
assessed the scheme using criteria based on standards of control that have
been developed for organizations. To determine the

best available criteria for assessing the scheme, we reviewed international
agreements and certification schemes for other commodities to find those
most applicable to the diamond situation. In doing so, we reviewed studies
and interviewed officials of the U. S. Trade Representative, State
Department, U. S. Fish and Wildlife Service, United Nations, foreign
governments, European Commission, nongovernmental organizations, and others
about such schemes and their effectiveness. Our review revealed that agreed
upon standards for internal controls that have been developed for
organizations provided the best basis for sound criteria. 30 To ensure our
understanding of the components of the Kimberley Process scheme and
challenges to the development and implementation of the scheme, we
interviewed and assessed documentation from Kimberley Process participants
and others including representatives of U. S. and foreign governments, the
diamond industry, nongovernmental organizations, and the United Nations. We
also observed Kimberley Process negotiations in Brussels, Belgium; Moscow,
Russia; London, United Kingdom; and Ottawa,

Canada. 30 See Standards for Internal Control in the Federal Government,
(GAO/ AIMD- 00- 21. 3. 1, Nov. 12, 1999), and Internal Control- Integrated
framework (1985), published by the Committee of Sponsoring Organizations of
the Treadway Commission.

We conducted fieldwork in Washington, D. C., and New York; Antwerp and
Brussels, Belgium; Moscow, Russia; London, United Kingdom; and Ottawa,
Canada. We also met with the government, industry, and nongovernmental
officials of other Kimberley Process participant countries at the Kimberley

Process meetings, the United Nations, their embassies in the United States,
and at our offices in Washington, D. C., and San Francisco. We performed our
work from March 2001 through March 2002 in accordance with generally
accepted government auditing standards.

Situation in Countries Primarily Associated

Appendi x II

with Conflict Diamonds Conflict diamonds are currently most closely
associated with Angola, Sierra Leone, Liberia, and Democratic Republic of
the Congo (DRC). Understanding both the major events over time and the
diamond industry in these countries provides context for better
understanding the conflict diamond issue and international as well as U. S.
efforts to address this issue

in these countries. Conflict and Diamonds in Angola

Timeline of Major Events, 1991- 2002

1991 Signing of Bicesse Accords ends long- running civil war between Popular
Movement for the Liberation of Angola government and competing forces. 1992
President Jose Eduardo Dos Santos and the Popular Movement for the

Liberation of Angola government win plurality in United Nations (U. N.)
monitored elections. The National Union for the Total Independence of Angola
(UNITA), led by Jonas Savimbi, rejects the election results and

resumes fighting. 1993 United Nations sanctions UNITA. 1994 Government and
UNITA sign Lusaka Protocol in an effort to end fighting. 1995 United Nations
authorizes peacekeeping mission. Various U. N. verification

and peacekeeping missions have been in Angola since 1989. 1997 Angolan
government and UNITA establish power sharing Government of

National Unity and Reconciliation. United Nations approves establishment of
U. N. Observer Mission in Angola to help consolidate peace.

1998 Fighting resumes again between government and Jonas Savimbi?s faction
of UNITA. UNITA?s participation in government is suspended.

U. N. Security Council imposes worldwide ban on purchases of unofficial
Angolan diamonds and orders UNITA bank accounts and financial assets frozen.
1999 Mandate for U. N. Observer Mission in Angola expires and, due to
continued

failure of peace process, is not extended. The U. N. office in Angola is
authorized and given a limited, mostly humanitarian, mandate.

Angolan armed forces destroy conventional military capacity of UNITA and
scatter rebels. UNITA regroups as a guerrilla force. 2000 Government creates
Angola Selling Corporation to market all diamonds produced in Angola.

Conflict continues with UNITA weaker but persistent as a guerrilla force.
2001 President Dos Santos announces he will not run in next elections. Next

elections remain unscheduled. 2002 UNITA leader Jonas Savimbi is killed by
government forces.

UNITA and government sign cease- fire agreement, pledging to abide by terms
of the 1994 peace accord.

Diamonds in Angola Diamonds are found throughout the country, though most
are in the northeast provinces of Lunda Norte and Lunda Sul. Approximately
10 to 15 percent of Angolan diamonds are industrial quality with an average
value of $70 per carat, according to industry experts. The rest are high
quality gem diamonds with an average value of $250 to $327 per carat.
Artisanal diggers mine roughly two- thirds of Angolan diamonds. For a map of
Angola, see figure 1.

Figure 1: Map of Angola

Source: CIA World Factbook 2001.

According to a U. N. Security Council report, diamonds have been a strategic
resource for UNITA during its three wars. 31 Prior to the cease- fire
agreement, a U. N. official reported that the rebels were still smuggling

diamonds, and the extent of UNITA?s stockpiles is unknown. However, after 31
United Nations Security Council, Final Report of the Monitoring Mechanism on
Angola Sanctions, S/ 2000/ 1225 (New York: Dec. 12, 2000).

UNITA lost ground in 1999, the government of Angola began restructuring the
diamond industry and established the Angola Selling Corporation in February
2000 to be the sole legitimate buyer of Angolan diamonds. The Angola Selling
Corporation comprises a 51 percent state interest, in the form of the
Sociedade de Commercializacao de Diamantes, with the remaining 49 percent
reportedly privately owned by Belgian interests and an Israeli diamond buyer
with interests in the Russian diamond industry. The government of Angola
also established a certificate of origin scheme

and initiatives to register miners and traders in order to document the
origin of diamonds and reduce informal markets. Angola Selling Corporation
officials claim that rising government diamond revenues and a

decrease in diamond territories held by UNITA as a result of battlefield
losses indicate that trade in Angolan conflict diamonds is decreasing.

According to industry experts, Angolan diamond production is estimated at
about $740 million in 2000 with the majority of official Angolan exports
sold to Belgium. 32 Although the government of Angola is still struggling to
control nonconflict illicit trade, U. N. and State Department officials have

stated that UNITA became a less important force in the diamond trade as its
mining areas were recaptured. Nonetheless, an October 2001 U. N. report
theorized that UNITA might still be selling between 25 to 30 percent of

illegal diamonds leaving Angola. 33 32 See Diamond Annual Review (2000)
published by The Mining Journal Ltd. 33 United Nations Security Council,
Supplementary Report of the Monitoring Mechanism on Sanctions Against UNITA,
S/ 2000/ 966 (New York: Oct. 12, 2001).

Conflict and Diamonds in the Democratic Republic of the Congo

Timeline of Major Events, 1994- 2002

1994/ 95 Regional refugee crisis caused by war in neighboring Rwanda
introduces large numbers of ethnic Hutu into the border region between Zaire
and Rwanda. 1997 Alliance of Democratic Forces for the Liberation of Congo-
Zaire, led by Laurent Kabila, overthrows regime of Mobutu Sese Seko by armed
force,

with the support of the Rwandan and Ugandan governments. Zaire is renamed
Democratic Republic of the Congo. 1998 War breaks out between the DRC
government and rebel forces when Kabila

tries to expel Rwandan military forces that helped him overthrow Mobutu.
Governments of Burundi, Rwanda, and Uganda depend on Rwandan military
presence for protection from armed groups operating in the eastern DRC, and
thus oppose expulsion of Rwandan presence.

1999 Lusaka Accords signed by the government of the DRC, Angola, Namibia,
Rwanda, Uganda, Zimbabwe, and major rebel forces, calling for a cessation of
hostilities by all forces in DRC. All parties violate cease- fire agreement.

U. N. Security Council authorizes establishment of the U. N. Organization
Mission in Democratic Republic of the Congo to assist in implementing the
cease- fire.

2000 Despite U. N. efforts and diplomatic activity, little progress is made
implementing the Lusaka Accords. 2001 President Kabila is assassinated and
his son, Joseph, takes over. Under

Joseph Kabila?s leadership, progress is made toward establishing peace.

2002 Some skirmishes by nonstate forces continue. Inter- Congolese dialogue,
as called for in the Lusaka Accords, results in a political agreement signed
by most political parties and rebel groups in the DRC.

Diamonds in the DRC Diamonds in the DRC are generally mined in the East and
West Kasai Provinces around the towns of Tshikapa and Mbuji- Mayi with some
mining around the city of Kisangani. Diamond production in the DRC is more
than half artisanal, and more than 70 percent of DRC diamonds are industrial
quality with an average value of only $35 per carat, according to industry

experts. For a map of the DRC, see figure 2.

Figure 2: Map of the DRC

Source: CIA World Factbook 2001.

Societe Miniere de Bakwanga, a parastatal that formerly held a monopoly over
DRC diamond production, is the DRC?s largest mining company. In addition to
Societe Miniere de Bakwanga, Cosleg, a company owned jointly

by the Zimbabwean Defense Forces and the DRC army, was created in October
1999 to initiate mining operations in south- central DRC areas previously
owned by Societe Miniere de Bakwanga and to purchase artisanal diamond
production. However, in an attempt to regulate the diamond trade through a
more controllable monopoly system, the Israeli

firm, International Diamond Industries, was given exclusive rights in July
2000 to buy and market diamonds from Societe Miniere de Bakwana and other
trading firms in territories controlled by the DRC government. International
Diamond Industries? tenure was contentious, however, and the original 18-
month contract was repealed in April 2001. According to an official at the
U. N. Development Program, a new mining code to liberalize trade has been
developed in the DRC and is currently being prepared for

implementation. There is no sanctions regime against diamonds traded from
the DRC. According to a U. N. report, however, the DRC plays a vital role as
a smuggling route for diamonds from Angola and elsewhere, and thus those

seeking to control conflict diamonds need to address the DRC?s role in the
conflict diamond trade. In addition, diamonds from artisanal mining have
provided funding to rebels in the simmering conflict within the DRC.
Industry experts estimated that diamond production in the DRC was worth

about $585 million in 2000. U. N. trade data suggest that exports of rough
diamonds totaled about $729 million, with the majority being imported into
Belgium but with South Africa and United States as important buyers in

recent years. Conflict and Diamonds in Liberia

Timeline of Major Events, 1989 - 2002

1989 National Patriotic Front of Liberia, led by Charles Taylor, begins
rebellion against government.

1990 Economic Community of West African States sends the West African
Economic Community Military Observer Group as a peacekeeping force.

Liberian President Samuel Doe is executed by splinter group of the National
Patriotic Front of Liberia.

1996 Abuja Peace Accord signed. Implementation of Abuja Accord begins with
disarmament program managed by the West African Economic Community Military
Observer Group. 1997 Charles Taylor is elected president in elections
declared free and fair by

international observers. 2000 The United States imposes travel restrictions
on Taylor government due to

its ties with Sierra Leone?s Revolutionary United Front (RUF). 2001 U. N.
Security Council imposes sanctions on Liberia, including a ban on

diamond exports because of Liberia?s role in fomenting conflict in Western
Africa.

Armed incursions of Liberian rebels from Guinea take place in Liberia?s Lofa
county. Liberian and Guinean relations continue to deteriorate.

Foreign Ministers of the Mano River Union countries (Liberia, Sierra Leone,
and Guinea) meet in Monrovia to discuss a head of state summit among the
three nations.

2002 President Charles Taylor declares a state of emergency as Lofa county
fighting spreads towards Monrovia. Refugees from Lofa flow into refugee
camps and neighboring countries.

Diamonds in Liberia Liberian diamond production was estimated by industry
experts to have been 160, 000 carats worth approximately $27.2 million in
2000. All of

Liberia?s current production is alluvial. For a map of Liberia, see figure
3.

Figure 3: Map of Liberia

Source: CIA World Factbook 2001.

Liberia has been linked by the United Nations to the trade in conflict
diamonds, particularly the trade in diamonds produced by Sierra Leone?s RUF.
34 In March 2001, the U. N. Security Council imposed a series of 34 United
Nations Security Council, Report of the Panel of Experts appointed pursuant
to Security Council resolution 1306 (2000), paragraph 19, in relation to
Sierra Leone, S/ 2000/ 1195 (New York: Dec. 20, 2000).

punitive sanctions on the Taylor regime, including a global prohibition on
the direct or indirect import of rough diamonds from or through Liberia.
Ironically, follow- up reports by the United Nations stated that Liberian
diamonds are now being smuggled through Sierra Leone.

According to U. N. data, in both 1998 and 1999, more than $270 million worth
of rough diamonds were imported worldwide from Liberia, most of which,
according to the Congressional Research Service, 35 were attributed

to diamonds smuggled from Sierra Leone and the transshipment and reexport of
diamonds from Russia and elsewhere to avoid Belgian import tax payments.
Year 2000 imports of rough diamonds from Liberia fell to about $102 million,
according to U. N. data.

Conflict and Diamonds in Sierra Leone

Timeline of Major Events, 1991- 2002

1991 RUF, led by Foday Sankoh, begins rebellion against government of Joseph
Momoh.

1992 Sierra Leonean Army Captain Valentine Strasser assumes power after
leading a coup to oust Momoh from office. 1994 RUF overruns diamond areas
and begins to threaten Freetown. 1995 The government of Sierra Leone hires a
private security force, Executive Outcomes, to fight the rebels. Executive
Outcomes drives the RUF from

Freetown and proceeds to retake many diamond areas. 1996 Ahmad Tejan Kabbah
of the Sierra Leone People?s Party wins presidential elections.

35 Congressional Research Service, Diamonds and Conflict: Policy Proposals
and Background (Dec. 5, 2001).

Government of Sierra Leone and RUF negotiate Abidjan peace agreement, but it
fails.

1997 RUF leader Sankoh is arrested in Nigeria. Members of Sierra Leone Army,
calling themselves the Armed Forces Revolutionary Council, overthrow Kabbah
government and join forces with the RUF. 1998 RUF/ Armed Forces
Revolutionary Council junta is driven out by West Africa?s Economic
Community Military Observer Group; Kabbah

government is restored to power. U. N. Security Council establishes U. N.
Observer Mission in Sierra Leone. 1999 Government and RUF sign power-
sharing agreement, the Lome Accord.

Foday Sankoh is released on pardon. U. N. replaces observer mission with
larger mission, the U. N. Mission in Sierra Leone, to assist government in
implementing Lome peace agreement.

The disarmament and demobilization of combatants stall and fighting
continues. U. S. Agency for International Development?s Office of Transition
Initiatives begins providing technical assistance to government of Sierra
Leone to address conflict diamonds. 2000 RUF takes approximately 500 U. N.
peacekeepers and military observers

hostage. All are eventually released. RUF leader Sankoh is recaptured and
imprisoned. All imports of diamonds from Sierra Leone are banned by U. N.
Security Council Resolution 1306.

Diamond exports resume when government of Sierra Leone presents elements of
new export regime.

RUF and government sign Abuja Agreement cease- fire, but RUF does not disarm
and at end of year controls almost two- thirds of country. 2001 U. N.
Mission in Sierra Leone increases in strength and deploys throughout

the country. Disarmament, demobilization, and reintegration process gains
speed. United Nations authorizes a Special Court for Sierra Leone and is
working to develop a Truth and Reconciliation Commission for the country.
2002 The Joint Committee on Disarmament, Demobilization and Reintegration,

composed of representatives of the government of Sierra Leone, the RUF and
the U. N. Mission in Sierra Leone, declare the disarmament process complete.

Presidential and parliamentary elections have been announced for May 2002.

Diamonds in Sierra Leone Diamonds in Sierra Leone are principally found in
the east and southeast portions of the country. Diamond deposits are
primarily alluvial, with some kimberlite deposits. According to industry
experts, Sierra Leone diamonds are of a high quality with an estimated
average carat value of $250 in 2000. For a map of Sierra Leone, see figure
4.

Figure 4: Map of Sierra Leone

Source: CIA World Factbook 2001.

The Sierra Leone diamond market suffered from corruption and mismanagement
throughout the 1970s and 1980s, causing a rise in smuggling. In the 1990s
the RUF became involved in mining and trading diamonds to help fuel its
rebellion against the government of Sierra Leone. Between 1997- 1999, only
36,384 carats were officially exported, compared

with roughly 2 million carats annually in the 1960s. According to a U. N.
report, it has been estimated that, in 1999, the government of Sierra Leone
lost approximately $68. 8 million worth of diamond exports to criminal

activity. 36 The United Nations has also found that Liberia, Guinea, and
Burkina Faso are important destinations for smuggled Sierra Leone diamonds.
The United Nations banned the import of all diamonds from Sierra Leone in

July 2000, with the provision that rough diamonds controlled by the
government of Sierra Leone through a fully operational diamond certification
scheme would be exempted. By October 2000, the government of Sierra Leone
was able to implement the called for diamond certification scheme developed
with the help of the High Diamond Council of Belgium,

and the governments of the United Kingdom, the United States, and Belgium,
and was thus exempted from the ban. According to a government official from
Sierra Leone, however, some RUF diamonds might simply be

flowing through the legitimate system now. In addition, diamond mining by
all parties has continued at a rapid pace since disarmament, according to U.
S. State Department officials. The United Nations reports official diamond
imports in 2000 from Sierra Leone as about $14 million. Industry experts,
however, report Sierra Leone

production of rough diamonds at more than $87 million in 2000. 36 United
Nations Security Council, Report of the Panel of Experts appointed pursuant
to Security Council resolution 1306 (2000), paragraph 19, in relation to
Sierra Leone,

S/ 2000/ 1195 (New York: Dec. 20, 2000).

Structure and Economic Importance of the

Appendi x I II

International Diamond Industry Further understanding the diamond industry?s
structure and importance provides insights into the challenges faced by
those attempting to address conflict diamonds. Diamond mining is
characterized by large, contained, deep- mining operations and widely
scattered alluvial surface mining operations, the former of which could be
somewhat more easily subject to controls. While the majority of rough
diamonds are traded through a small number of key countries, diamonds are
traded around the world, contributing to the difficulty in tracking their
origin. Though cutting and polishing is largely driven by labor costs and
expertise, more mining countries are trying to encourage domestic cutting
and polishing activities in order to supplement mining revenues. For a
number of mining countries,

revenues earned from the international diamond industry are economically
significant. Diamond Mining Figure 5 shows that diamond mining occurs in
approximately 20 different countries worldwide; however, the majority of
rough diamonds are

extracted in deep mines located in seven countries.

Figure 5: Countries That Mine Rough Diamonds, 2000

Source: The Mining Journal, Ltd.

Moreover, because of the substantial capitalization and sophisticated
infrastructure required for deep mining, diamond mining in these seven
countries is done primarily by one of four large companies (see table 4).

Table 4: Rough Diamond Mining, 2000 Currency in thousands of dollars (U. S.)

Percent of world Location of mining

Value of mined supply of

Mining company operations diamonds diamonds

De Beers Botswana, Namibia, $3, 541, 720 45 Consolidated Mines South Africa,
and Ltd.

Tanzania Alrosa Ltd. Russia 1, 595,000 20 BHP Billiton Canada 453, 555 6 Rio
Tinto Australia 360,600 5 Other mining

Africa, China, and Latin 1, 906,120 24 operations America Total $7,856, 995
100

Note: Companies listed are those that mine in countries characterized as
having primarily deep mining operations.

Source: Mining Journal.

Although world diamond mining is highly concentrated, the share of rough
diamonds mined in African countries by entities other than De Beers- 22
percent- is nevertheless significant in terms of value: about $1. 8 billion
in production value and about $2 billion in exports in 2000. For these
African countries, much of the rough diamond supply is found in surface
alluvial fields. Alluvial diamonds are collected by individual artisanal
diggers using a simple sieve or shovel, sold to local dealers, and
eventually exported.

Rough Diamond As with mining, the majority of rough diamonds are traded
through a few Trading

key markets, though a much larger number of countries engage in the trade.
The De Beers Diamond Trading Company (DTC) markets approximately 65 percent
of rough diamond production by value. This includes all diamonds from De
Beers? mining operations and the operations of its partnerships in Namibia
and Botswana and a portion purchased from

Alrosa Ltd. and BHP Billiton. After purchase, the DTC sorts its rough
diamonds at its London office and sells them to designated buyers called
sight- holders at scheduled times throughout the year. About half of De
Beers? sight- holders trade through their offices in Antwerp, Belgium, which
is also the principal market for non- DTC diamonds. According to the Belgian
Ministry of Economic Affairs, Antwerp is the largest trading center for
rough diamonds with between 5 million and 10 million rough stones

checked daily at the Antwerp Diamond Office. As important cutting and
polishing markets and hosts to a number of other De Beers? sight- holders,
the United States, India, and Israel are also large diamond trading centers.
Though trading of rough diamonds is dominated by the DTC, United Nations (U.
N.) data suggest that more than 100 countries worldwide export rough
diamonds. Figure 6 shows that 77 percent of total rough diamond

exports in 2000 came from either a mining country or one of five main
trading centers. The remaining, 23 percent of rough diamond exports, worth
approximately $5.4 billion, came from 77 other countries around the world.

Figure 6: Countries That Export Rough Diamonds, 2000

a The five largest reported trading centers are Belgium, India, Israel, the
United States, and the United Kingdom. Source: U. N. data except for
Botswana, Namibia, and South Africa, which did not report their diamond

trade statistics to the United Nations. Data for Botswana and Namibia are
from the World Bank, and data for South Africa are from the South African
Revenue Service.

Rough Diamond There are a number of established centers for cutting and
polishing of Cutting and Polishing

rough diamonds, as well as emerging markets. Currently, India is the world?s
largest cutting and polishing center with around $6. 5 billion of polished
diamond exports in both 1999 and 2000. Driven partially by low labor costs,
9 out of 10 rough diamonds are cut and polished in India by a workforce of
approximately 700, 000. Israel, Belgium, and China are also

large cutting and polishing centers, and the United States is an important
center for polishing of high quality gems. Despite the existence of
established cutting and polishing centers, some

countries that mine rough diamonds are trying to expand cutting and
polishing activities to capture the value added revenues and expand
employment. 37 According to industry experts, though mining countries
currently supply less than 10 percent of the polished market, they expect a
larger share of this activity to be diverted from traditional centers to
mining countries due to political and economic pressure on those governments
to

create opportunities for increased mineral wealth. For example, both Namibia
and South Africa have legislation mandating some domestic cutting and
polishing.

Economic Importance The international diamond industry provides substantial
economic benefits of the Diamond

to a number of countries, though direct economic contributions vary
depending on the extent of conflict or nonconflict related smuggling, the
Industry way diamonds are mined, the presence of activities such as cutting
and polishing, and the government tax system. 38 Table 5 lists estimates of
the economic importance of diamond mining in a

few select countries and suggests that diamond sales can account for a
significant portion of total merchandise exports and gross domestic product.
For example, in countries with mostly alluvial mining, diamond

37 Though profit margins in cutting and polishing are relatively smaller
than in mining, cutting and polishing is a labor- intensive activity and
generates employment. Industry experts estimate that in Botswana, for
example, 23 jobs are created for every $2 million of capital employed in
mining while 170 jobs are created for every $2 million of capital employed
in cutting and polishing.

38 Potential direct economic contributions may include diamond sales
revenues, foreign exchange generated from diamond exports, government
revenues, wages for employees, and industry investments. Indirect benefits
may include payments for support services such as transportation or
insurance and/ or social investments made by large diamond companies.

exports in 2000 accounted for 74 percent of total merchandise exports in the
Central African Republic and 21 percent of total merchandise exports in
Guinea. In countries with mostly deep mining, this share was 79 percent for
Botswana and 48 percent for Namibia.

Table 5: Estimates of the Economic Importance of Diamond Mining for Selected
Countries, 2000

Currency in dollars (U. S.)

Rough diamond

Value of Government

exports as% of diamond mining

revenues Current

total as% of gross

from employment

merchandise domestic

diamond in diamond

exports product

industry industry

Countries with alluvial mining Angola 8. 1 8.4 $66, 000,000 unknown a
Central African

74.2 7. 4 not available unknown Republic Guinea 21.3 3. 3 not available
unknown

Sierra Leone 18.6 13.7 423,418 b unknown Countries with primarily deep
mining Botswana 78.7 40.1 1, 197, 800,000 6, 000 Namibia 47.9 12.0
48,000,000 2, 000 South Africa 5.0 0. 9 53, 043,478 15, 200 a In countries
with alluvial mining done by artisanal operators, the number of diggers is
often unknown due to the absence of a legal framework requiring
registration. b According to the U. S. Agency for International Development,
the Sierra Leone government started

charging a 3 percent tax on rough diamond exports in 2000. This estimate
includes possible export tax revenues but does not include possible revenues
from diamond licenses. Source: Trade data is from the U. N., except for
Botswana and Namibia whose trade data is from the

World Bank. Mining values are from The Mining Journal, Ltd; Gross domestic
product figures are from the World Bank; and employment estimates are from
the U. S. State Department. Estimates of government revenues are from the
following: Angola?s is from the diamond mining company Ascorp, Botswana?s
and Namibia?s are from De Beers, with supporting data from the World Bank,
South

Africa?s is from the U. S. State Department, with an exchange rate provided
by the World Bank, and Sierra Leone?s is from the United Nations.

In addition to exports, economic contributions are most visible in Botswana,
where diamond sales account for more than one- third of its gross domestic
product and provide over $1 billion in government revenues (worth half of
total government earnings) and 6,000 jobs. Debswana, a joint venture mining
company between De Beers and the government, is the second largest employer
in the country and returns more than 70 percent of

its profits to Botswana in the form of taxes, royalties, dividends, and
activities such as cutting and polishing. According to the International
Monetary Fund, the diamond industry has allowed Botswana to earn

foreign exchange reserves, create government budget surpluses, and become a
growing economy in Africa.

Though somewhat less prominent, the diamond industry is also visibly
important in Namibia and South Africa. In Namibia, diamond earnings account
for 12 percent of its gross domestic product and the industry employs up to
2,000 people. Namdeb, a joint venture company between De Beers and the
government, is also the largest taxpayer. In South Africa, the

diamond industry makes up a smaller share of the economy given the greater
level of economic diversification. Nonetheless, more than 15, 000 people are
employed in the South African diamond industry and, according to the U. S.
Department of State, an estimated three to six jobs in support service
industries are generated for each job in mining.

Appendi x V I Historical Data on African Diamond Exports According to
official United Nations (U. N.) data, estimated exports of rough diamonds
from nonmining African countries decreased in 2000. As shown in table 6, the
total value of rough diamonds reportedly exported from these countries went
from about $293 million in 1990 to about $793 million in 1996 to only about
$64 million in 2000. Accounting for a large part of this trend, rough
diamond exports went from about $648 million in 1996

to about $39 million in 2000 for Congo- Brazzaville and from about $129
million in 1996 to about $18 million in 2000 for the Gambia.

Table 6: Value of Estimated Rough Diamond Exports a from Africa, 1990- 2000

Currency in thousands of dollars (U. S.)

1990 1991 1992 Producing countries

Angola $260,546 $48, 677 $182, 784 Botswana 1, 412,000 1, 455, 000 1, 374,
000 Central African Republic 75, 178 78, 539 76, 337 Democratic Republic of
the Congo 289, 020 473, 436 384, 883 Ghana 140, 470 105, 360 112, 924 Guinea
82, 835 91, 254 102, 032 Ivory Coast 101, 322 112, 073 110, 932 Kenya 89 27
1, 036 Liberia 390, 833 136, 313 312, 739 Namibia 328, 000 n/ a n/ a Sierra
Leone 84,342 131, 793 210, 271 South Africa 516,417 329, 813 154, 830
Tanzania 7, 964 146 360 Zimbabwe n/ a 114 505

Total: Producing countries $3, 689,017 $2, 962, 543 $3, 023, 635
Nonproducing countries

Benin 1, 162 n/ a n/ a Cameroon 205 175 29 Congo- Brazzaville 122,167 167,
683 335, 170 Gambia 77, 956 102, 058 130, 973 Guinea Bissau n/ a 68 n/ a
Mali 11, 305 36, 655 34, 983 Nigeria 73,391 53, 471 647 Rwanda n/ a n/ a 213
Senegal 326 9, 415 698 Togo 5,642 3, 648 3, 596 Uganda n/ a n/ a n/ a Zambia
1,320 3 8

Total: Nonproducing countries $293, 473 $373, 175 $506, 316 Total $3,
982,489 $3, 335, 717 $3, 529, 950

1993 1994 1995 1996 1997 1998 1999 2000

$143,464 $123, 535 $161,510 $253,636 $322,969 $352,725 $551, 131 $633, 265
1,379,000 1,384, 000 1, 437,000 1, 721, 000 2,095,000 1,477,000 2,132, 000
2, 164, 000

84,959 62, 076 90, 093 112,655 106,374 160,415 156, 031 168, 515 471,625
750, 674 824,525 856, 020 722,098 677,269 833, 510 728, 975 204,130 264, 885
212,316 225, 678 202,859 133,568 206, 784 58, 952 191,622 113, 854 101,856
85,348 115,690 125,087 143, 275 163, 166 106,259 71, 326 129,043 210, 533
116,723 44,469 52, 219 61, 244

306 42 18 n/ a 1 46 59 0 291,745 318, 212 766,156 556, 313 328,923 277,458
290, 243 101, 861

n/ a n/ a n/ a n/ a n/ a n/ a 459, 000 709, 000 92,629 104, 288 108,805 113,
825 129,009 73,941 34, 393 14, 114 167,215 146, 493 194,136 515, 000 860,385
851,454 1,297, 676 1, 390, 456

222 5, 974 215 1,682 6, 579 5,518 8, 144 30, 294 1,658 3, 802 5, 613 9,762
7, 888 1,235 1, 557 1, 976

$3, 134,833 $3,349, 161 $4, 031, 286 $4, 661, 453 $5, 014,499 $4, 180,187
$6,166, 022 $6, 225, 819

n/ a n/ a 3,419 1, 343 1,061 421 103 21 3 4 348 n/ a 2,565 5,367 5, 812 884
327,590 260, 429 430,506 647, 880 503,555 80,858 64, 194 39, 153 64,594 59,
144 122,394 129, 237 132,716 101,503 54, 650 18, 396

69 32 n/ a n/ a n/ a n/ a 1,289 n/ a 15,268 13, 985 14, 510 8,573 3, 350
2,043 4, 734 5, 476

449 3, 252 4 20 n/ a 4 n/ a n/ a n/ a 29 442 n/ a 712 16 236 n/ a 3 875 505
1, 985 3,174 256 58 n/ a 4,800 18, 139 22, 758 2,865 3, 453 1,107 15, 646
214

n/ a n/ a n/ a n/ a 203 1,364 1, 170 13 63 36 688 597 381 25 15 39

$412,840 $355, 924 $595,573 $792,500 $651,171 $192,965 $147, 907 $64, 197
$3, 547,673 $3,705, 085 $4, 626, 859 $5, 453, 953 $5, 665,670 $4, 373,152
$6,313, 929 $6, 290, 016

a Estimated exports are derived using the sum of world imports from each
country. Note: n/ a means not available. Source: U. N. data except for
Botswana, Namibia, and South Africa, which did not report their diamond
trade statistics to the United Nations. Data for Botswana and Namibia are
from the World Bank. Data for South Africa are from the South African
Revenue Service.

Appendi x V Comments from the Department of State

Comments from the Department of the

Appendi x VI Treasury

Appendi x VII

GAO Contacts and Staff Acknowledgments GAO Contacts Phillip Thomas (202)
512- 9892 Kathleen Monahan (415) 904- 2237 Acknowledgments In addition to
those individuals named above, Zina Merritt, Kendall Schaefer, Sharla
Draemel, Mark Dowling, and Janey Cohen made key contributions to this
report. (320027)

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GAO United States General Accounting Office

Why GAO Did This Study

Conflict diamonds are used by rebel movements to finance their military
activities, including attempts to undermine or overthrow legitimate
governments. These conflicts have created severe humanitarian crises in a
number of African countries (see map below). An international effort called
the Kimberley Process, in which the United States participates, aims to
develop a diamond certification scheme to deter the flow of conflict
diamonds. GAO was asked to assess the challenges associated with deterring
trade in conflict diamonds.

June 2002 INTERNATIONAL TRADE Critical Issues Remain in Deterring Conflict
Diamond Trade

This is a test for developing Highlights for a GAO report. The full report,
including GAO's objectives, scope, methodology, and analysis is available at
www. gao. gov/ cgi- bin/ getrpt? GAO- 02- 678. For additional information
about the report, contact Loren Yager at 202- 512- 4128. To provide comments
on this test Highlights, contact Keith Fultz (202- 512- 3200) or e- mail
HighlightsTest@ gao. gov.

Highlights of GAO- 02- 678, a report to Congressional Requesters.

What GAO Recommends

GAO recommends that the Secretary of State, in consultation with relevant
government agencies, work with Kimberley Process participants toward
incorporating better controls in the certification scheme, including a
reasonable control environment, risk assessment, internal controls,
information sharing, and monitoring.

State commented that GAO focused on accountability measures rather than on
the political achievements gained. State recognized the need for
improvements, but did not see these as possible before launching the
certification scheme.

United States General Accounting Office

What GAO Found

The nature of diamonds and the international diamond industry?s operations
create opportunities for illicit trade, including trade in conflict
diamonds. Diamonds are a high- value commodity easily concealed and
transported, are mined in remote areas worldwide, and are virtually
untraceable to their original sources. These factors allow diamonds to be
used in lieu of currency in arms deals, money laundering, and other crime.
Further, there is limited information publicly available about diamond
industry operations.

The United States cannot detect diamonds that might come from conflict
sources because the current diamond import control system does not require
certification of the country of extraction. At present, there is also no
international system to certify the source of extraction. While the United
States bans diamonds coming from Angola, Sierra Leone, and Liberia that are
subject to U. N. and U. S. sanctions, in the absence of an international
certification system, this does not prevent conflict diamonds shipped to an
intermediary country from being mixed into U. S.- destined shipments.

GAO?s assessment of the Kimberley Process?s proposal for an international
diamond certification scheme found it did not contain the controls necessary
to ensure that it will be effective in stemming the flow of conflict
diamonds. We evaluated the proposal using established criteria for assessing
accountability and found that its heavy reliance on voluntary participation
and lack of attention to potential high- risk areas suggest that
participants may face major challenges in implementing an effective scheme
to deter trade in conflict diamonds.

Primary countries associated with conflict diamonds.

G A O Accountability Integrity Reliability

Highlights

Page i GAO- 02- 678 Conflict Diamonds

Contents

Contents

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Page 1 GAO- 02- 678 Conflict Diamonds United States General Accounting
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Washington, D. C. 20548 Page 1 GAO- 02- 678 Conflict Diamonds

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Appendix I

Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix II

Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix II Situation in Countries Primarily Associated with Conflict
Diamonds

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Appendix III

Appendix III Structure and Economic Importance of the International Diamond
Industry

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Appendix III Structure and Economic Importance of the International Diamond
Industry

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Appendix III Structure and Economic Importance of the International Diamond
Industry

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Appendix III Structure and Economic Importance of the International Diamond
Industry

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Appendix III Structure and Economic Importance of the International Diamond
Industry

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Appendix III Structure and Economic Importance of the International Diamond
Industry

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Appendix III Structure and Economic Importance of the International Diamond
Industry

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Appendix IV

Appendix IV Historical Data on African Diamond Exports

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Appendix IV Historical Data on African Diamond Exports

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Appendix V

Appendix V Comments from the Department of State

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Appendix V Comments from the Department of State

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Appendix VI

Appendix VI Comments from the Department of the Treasury

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Appendix VII

United States General Accounting Office Washington, D. C. 20548- 0001

Official Business Penalty for Private Use $300

Address Service Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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