KPCS participants produce and trade the vast majority of rough diamonds in the world. However, the nature of diamonds and the lack of effective control systems create opportunities for illicit trade, including trade in conflict diamonds. By deterring potential illicit trading, effective control mechanisms could help prevent illicit diamonds from entering the legitimate trade. For example, without systems to accurately capture and analyze rough diamond trade data, KPCS participants cannot readily identify anomalies in imports and exports that could indicate illicit activity. Also, without effective systems for inspecting imports and exports or confirming import receipts, illicit rough diamonds could enter the legitimate trade. On November 5, 2002, 37 ministers and heads of official delegations launched KPCS, which contained elements for participants to consider in establishing control systems for monitoring the production and trade in rough diamonds. These elements included, among other things, systems for collecting and sharing data on production and trade of rough diamonds, inspecting the contents of import and export shipments to verify the details declared on the Kimberley Process certificate, and confirming import receipts with the foreign exporting authority. Implementation of KPCS began on January 1, 2003. Currently, 46 participants, including the European Community, voluntarily participate in KPCS and account for approximately 99.8 percent of the global production of rough diamonds. (See appendix IV for a timeline of KPCS and CDTA- related events and appendix V for the list of KPCS participants.) Consistent with KPCS provisions, the United States enacted CDTA on April 25, 2003, to establish an institutional structure for controlling and monitoring U.S. imports and exports of rough diamonds. The structure of KPCS includes a Chair and Vice-Chair, a Secretariat serving under the Chair, working groups, and committees; KPCS participants also hold an annual plenary meeting. Figure 1 depicts KPCS’s structure and the responsibilities of the Chair, Secretariat, working groups, and committees. In addition to participants, only applicants and official observers—including representatives from the diamond industry, non-governmental groups, and international organizations—can participate in KPCS meetings and activities. The Chair is responsible for overseeing the implementation of KPCS, leading the annual plenary meeting, overseeing the operations of three working groups and two committees, and the general administration of the Kimberley Process. Under the Chair, a Secretariat is responsible for scheduling meetings, circulating documents among participants, maintaining the KPCS Web site, and all other duties the Chair designates. The Secretariat does not have permanent staff. The country chairing the certification scheme is responsible for staffing the Secretariat. Currently, Botswana chairs KPCS and the Vice-Chair is from the European Community. KPCS holds a plenary meeting normally once per year, in which participants and official observers typically discuss and assess the implementation of the certification scheme. KPCS participants and official observers work together in monitoring, statistics, and diamond experts working groups, and in the Participation Committee and the Selection Committee, to strengthen the certification scheme. KPCS’s key provisions require participants to: enact or amend appropriate laws or regulations to implement and enforce the certification scheme, and maintain dissuasive and proportional penalties for transgressions; designate importing and exporting authorities; establish control systems designed to eliminate the presence of conflict diamonds from the rough diamond trade, such as systems for physically inspecting rough diamond import and export parcels; ensure that a Kimberley Process certificate accompanies each import and export shipment of rough diamonds; acknowledge the receipt of rough diamond import parcels to the foreign ensure that rough diamonds are imported and exported in tamper-resistant collect and maintain rough diamond data on production, imports, and exports; and collate and exchange such data with KPCS. CDTA provides the institutional structure for implementing its domestic and international provisions. Regarding domestic implementation, key CDTA provisions designate importing and exporting authorities, establish an interagency Kimberley Process Implementation Coordinating Committee for coordinating U.S. implementation efforts, give the U.S. government responsibility for overseeing any entity involved in the issuance of the certificates that must accompany each shipment of rough diamonds exported from the United States, impose civil and criminal penalties to enforce implementation of CDTA, and support the collection and exchange of U.S. import and export data on rough diamonds. Regarding international implementation, key CDTA provisions urge the U.S. government to strengthen KPCS by monitoring the effectiveness of the certification scheme and by sharing statistics, and allow U.S. agencies to make technical assistance available to countries seeking to implement KPCS. Consistent with the provisions of CDTA, the United States has used several U.S. agencies and USKPA to implement the domestic and international provisions of the act. State, the Treasury, Commerce, Homeland Security, and USKPA have had responsibilities for implementing the domestic provisions of CDTA. State and the Treasury have led these U.S. implementation efforts. State: The department co-chairs the U.S. interagency group for implementing CDTA. State is responsible for reviewing the activities of USKPA and its licensees and for annually reporting to the Congress the results of its review. The Treasury: The department co-chairs the interagency group for implementing CDTA. OFAC is responsible for promulgating the rough diamond regulations to implement CDTA. One of these regulations designates the final recipient of the shipment (i.e., the ultimate consignee) with the responsibility of confirming, with the foreign exporting authority, the receipt of a rough diamond import shipment. Homeland Security: Under CDTA, Homeland Security’s CBP is the importing authority responsible for regulating U.S. rough diamond imports. The department’s Bureau of Immigration and Customs Enforcement is responsible for pursuing criminal investigations related to violations of CDTA and its regulations. Commerce: Under CDTA, Census is the exporting authority responsible for regulating U.S. rough diamond exports. Also, Census is responsible for collecting and analyzing data on the U.S. trade of rough diamonds and reporting it to KPCS. USKPA: Unlike most KPCS participants, the United States has assigned the responsibility of issuing Kimberley Process certificates to a private entity rather than to a government agency. USKPA produces these certificates and currently relies on 17 licensees for issuing them. Interagency Coordination Committee: State and the Treasury co-chair an interagency committee, the Kimberley Process Implementation Coordinating Committee, that CDTA created for coordinating U.S. government activities on rough diamonds. Aside from convening and leading committee meetings, State and the Treasury have no formal authority over the actual activities of the other agencies in carrying out their assigned CDTA roles. Nevertheless, U.S. officials noted that the formal and informal interagency coordination processes have effectively addressed many operational issues. For example, State and other U.S. agencies recently met to discuss topics such as U.S. options for providing additional diamond-related technical assistance; U.S. comments on recommendations made to KPCS on the preliminary results of the 3-year review of the certification scheme that is currently under way on issues such as creating and financing a KPCS Secretariat; and the issues raised at the June 2006 KPCS intersessional meeting in Gaborone, Botswana, including enhancing KPCS monitoring and statistics. State, Census, USAID, and USGS are involved in implementing the international provisions of the act. See table 1 for a brief description of the responsibilities of these agencies. Consistent with KPCS, the key international provisions of the act cover the United States’ participation in KPCS and the U.S. technical assistance to participants seeking to implement KPCS. State leads U.S. efforts in KPCS and works with other U.S. agencies to, among other things, strengthen KPCS by monitoring its effectiveness in preventing trade in rough diamonds. State and other U.S. agencies participate in various aspects of KPCS, including attending annual (and other) KPCS meetings, and serving on KPCS working groups and committees. For example, State serves on the KPCS working group on monitoring, which is mandated to monitor and assess implementation of KPCS by all participants. Also, State and Census serve on the KPCS statistics working group and USGS has done statistical analysis of rough diamond trade data for the monitoring working group. The CDTA authorizes federal agencies to provide technical assistance to countries seeking to implement KPCS. Thus far, State and USAID have provided diamond-related assistance to Sierra Leone, and State and USGS have provided this assistance to Liberia. Specifically, through Management Systems International, USAID has provided technical assistance to Sierra Leone to help the country gain control of its trade of rough diamonds. State has recently funded USGS to provide, through Constella Futures International, technical assistance to Liberia for implementing KPCS. U.S. entities responsible for implementing the domestic provisions of CDTA have improved the system for collecting and sharing U.S. trade data on rough diamonds and have established systems for controlling the U.S. trade in these diamonds, yet these systems are still vulnerable to illicit trade. Because most of these vulnerabilities involve limited government monitoring or oversight, U.S. control systems cannot help deter illicit rough diamonds from entering the legitimate trade. Since the enactment of CDTA in 2003, Census has steadily improved its system for capturing and reporting U.S. rough diamond trade statistics in response to KPCS concerns. However, this system needs further improvement to assure that the rough diamond trade does not include illicit diamonds. CDTA recommends that the executive branch keep and publish statistics on rough diamond imports and exports, recognizing that reliable and comparable data on the international trade in rough diamonds are an essential tool to effectively implement the certification scheme. These data can help to identify any irregularities or anomalies that might indicate the presence of conflict diamonds in the legitimate trade in rough diamonds. For example, because the Republic of Congo was not able to explain its reports of rough diamond exports that were far in excess of its known production capacity or imports, KPCS decided to ban this country from participation in the certification scheme in 2004. KPCS has expressed several concerns about the trade data the United States has submitted. Subsequent to the enactment of CDTA, Census reported U.S. rough diamond trade data to KPCS that contained a greater volume of exports than imports. For example, it reported that the United States had exported about 3 million carats more than it imported in 2003. As a non-producing nation, this excess in exports was not plausible and raised concerns about the accuracy of the U.S. trade data and the potential laundering of rough diamonds through the United States. In fact, because the United States does not produce rough diamonds and cuts and polishes some rough diamonds, exported carats should, on average, be lower than imported carats. In 2005, the KPCS peer review visit to the United States recommended that Census identify all anomalies within the systems for recording data and correct them as necessary, that the United States provide explanations for the large differences between exports and imports in 2003 and 2004 to the KPCS Working Group on Statistics, and that the group follow up on this issue with the U.S. authorities. To improve the quality of its data and to comply with KPCS data requirements, Census made a number of changes, including the following: Census officials indicated they had identified anomalies that affected the accuracy of the data, including the misclassification of shipments by individual filers and the Census’ use of a method that altered some shipments by recalculating quantities of exports or imports based on historical price data. Census continues to pursue potential causes of inaccuracy in U.S. rough diamond import and export data. Specifically, Census officials told us of their efforts to determine how many carats of rough diamonds are entering the United States under the generic U.S. Goods Returned Code. In addition, Census officials also reconcile U.S. trade data bilaterally with other trading partners, as this can also help to identify any data anomalies. In early 2006, Census started collecting and reporting data from Kimberley Process certificates. This change harmonized the U.S. system for data collection with the vast majority of other KPCS participants. Before this change, Census used data from its traditional customs-based method to report to KPCS, which can be different from data collected based on Kimberley Process certificates. Census now checks its own data against the monthly data it receives from USKPA on the disposition of certificates issued each month. This extra step has helped Census to identify errors involving quantities or shipments that were misclassified as rough diamonds. Census and CBP modified the Automated Export System (AES) and the Automated Broker Interface (ABI), so that these computer systems, through which filers enter export and import shipment data, require Kimberley Process certificate numbers when entering information on rough diamond exports and imports. With these changes, filers will now receive an error if they do not provide a Kimberley Process certificate number after entering a rough diamond tariff code. Prior to these modifications, polished diamonds and diamond jewelry could be (and were) misclassified as rough diamonds. Census stopped estimating the quantity for shipments that fell outside of a reasonable price range. As figure 2 shows, Census’ actions resulted in a significant reduction in the reported discrepancies between U.S. rough diamond export and import data. Compared to the nearly 3 million carat discrepancy reported between imports and exports in 2003, by 2005 Census reported an excess in exports of less than 300,000 carats compared to imports. However, Census has not determined whether this annual excess of U.S. exports compared to imports is reasonable for a non-mining country and, thereby, does not involve illicit rough diamonds. Factors that might contribute to this annual excess include the levels of inventories held and the volume of cutting and polishing done in the United States. CBP has established a system for controlling U.S. rough diamond imports through documentation review and physical inspections. However, because these physical inspections do not occur periodically or regularly, the system cannot ensure that illicit shipments of rough diamonds are not entering the country. Furthermore, since 2003, U.S. importers have failed to confirm rough diamond import receipts with foreign exporting authorities, resulting in U.S. non-compliance with this KPCS standard. See figure 3 for a graphic depiction of the import control process and weaknesses in U.S. government oversight. CDTA prohibits the importation into the United States of any rough diamond that has not been controlled through KPCS, which details a number of requirements to control imports of rough diamonds. For example, the United States must: require imports to contain a valid Kimberley Process certificate; ensure that no shipment of rough diamonds is imported from a non- ensure that rough diamonds are imported in tamper-resistant containers; establish a system of internal controls designed to eliminate the presence of conflict diamonds from rough diamond import shipments. To implement CDTA import provisions, CBP created a system that selects all rough diamond import shipments for documentation reviews. Depending on the approach CBP uses for physical inspections, the system might choose all or some of these shipments for physical inspections, although not periodically or regularly. CBP controls about 300 ports of entry into the United States. Although rough diamonds come into the United States through multiple ports of entry, about 85 percent of them come through one port of entry—John F. Kennedy (JFK) Airport in New York City. Under the current system, after a rough diamond import arrives at a port of entry, the customs broker sends the hard-copy entry documentation to the CBP office at the port, at which time the information is entered into CBP’s computer system for review. All rough diamond shipments must, at least, receive a document review by an import specialist, who verifies that the Kimberley Process certificate is authentic and ensures that the information on the certificate (such as the certificate number, and the value and quantity of the rough diamonds) matches the information on the invoice accompanying the shipment. If the reviewing import specialist detects a problem with the documentation, the shipment is detained until CBP obtains the necessary documentation to release the shipment. The shipment may be seized if the information is not obtained within a certain time frame. CBP has used four approaches to select imports of commodities for physical inspections. In the case of rough diamonds, this means physically opening and examining the content of import parcels. First, given the large number of imports arriving into the United States every day, CBP uses an approach to identify high risk import shipments for physical inspections. According to CBP documentation, this approach enables CBP to balance its efforts to enforce CDTA with the agency’s Priority Trade Issues and other responsibilities. Second, CBP has a compliance measurement program that randomly selects shipments for physical inspection across all ports. Less than 1 percent of rough diamond shipments each year are selected for a physical inspection through this program, according to CBP. Third, physical inspections occur at the discretion of the ports. At JFK, for instance, CBP physically inspects shipments for different reasons, including (1) intelligence information entered into CBP’s computer system before the shipment arrives at port; (2) suspicious discovery in the documentation review; (3) shipments from unknown importers; or (4) other information. Finally, CBP inspected all rough diamond imports that came into JFK on two occasions in 2004 and 2005. According to CBP documentation, on these two occasions, inspections found a high rate of importer compliance with U.S. requirements regarding declaration of rough diamond imports. Since 2003, CBP has seized seven shipments for violations of CDTA. One case involved a rough diamond import without a valid Kimberley Process certificate that was not packed in a sealed tamper-resistant container. Of the remaining six cases, three closed cases were resolved through the administrative process, with one resulting in a fine. Three cases are open and proceeding through the administrative process. Although CBP has used four approaches for selecting rough diamond import shipments for physical inspections, none of these approaches results in periodic or regular physical inspections. According to accepted government internal control standards, control activities such as periodically or regularly reviewing assets—in this case, rough diamond shipments—should be evaluated periodically or regularly to ensure that they are still appropriate and working as intended. While the total inspection of rough diamond imports at JFK, referred to above, helped CBP to assess the effectiveness of its import control systems during two periods of time, the agency has no policy or plan for conducting these total inspections periodically or regularly in any of its ports of entry. Furthermore, CBP has no policy or plan for conducting other physical inspections periodically or regularly. Without these types of physical inspections, the United States cannot ensure that its import control system deters illicit rough diamond shipments. The United States has not fully complied with the KPCS standard that requires KPCS participants to confirm rough diamond import receipts to the relevant foreign exporting authority. The 2005 KPCS peer review reported that the implementation of this requirement has been sporadic and recommended that the United States take steps to ensure that it enforces this provision. During our fieldwork, we found that the United States had not confirmed receipt of most import shipments to foreign exporting authorities of four KPCS participants, which are key U.S. trading partners, and the United States did not know the extent to which it had not confirmed import receipts with the rest of the participants. For example, the United States confirmed receipt of 2 percent of rough diamond import shipments from Belgium in 2004, and 18 percent of these shipments in 2005. All other countries confirmed receipt of 95 percent of rough diamond import shipments from Belgium in 2004, and 97 percent of these shipments in 2005. See table 2 for U.S. confirmation of import receipts to four countries, and all other countries’ confirmation of import receipts to three of these four countries in 2004 and 2005. The United States has delegated the responsibility for confirming rough diamond import receipts to importers. Through OFAC, the Treasury clarified this requirement in its September 2004 revisions to the Rough Diamond Control Regulations by making the ultimate importer (i.e., the ultimate consignee instead of the importer-of-record) responsible for confirming rough diamond import receipts to the relevant foreign exporting authority. The revised regulation also requires that the ultimate importer send the confirmation within 15 calendar days of the import’s arrival at the U.S. port of entry, and clarifies that the confirmation may be in any form and may be submitted electronically, by mail, or by courier. The regulations include civil and criminal penalties for any person who violates, or attempts to violate, any order or regulation issued under CDTA. The United States has not made any U.S. agency responsible for tracking these import confirmations, and has only learned about the U.S. failure to confirm import receipts when exporting authorities from other countries have complained about this problem. In response to these complaints, the United States has recently taken steps to improve the compliance of U.S. importers with this KPCS requirement. Between April and June 2006, State sent letters to about 150 U.S. importers reminding them of the requirement under the rough diamond control regulations to confirm receipt of rough diamond imports to foreign exporting authorities. Based on information provided by State to OFAC, in August 2006, OFAC opened investigations and started to issue administrative subpoenas to importers who had not confirmed import receipts. If any importer continues to fail to confirm import receipts, that is, fail to comply with the regulation, civil penalties may result. These enforcement efforts have had a positive effect on U.S. compliance with this requirement, but the United States is not yet fully compliant. As of June 2006, for instance, Belgium reported receiving confirmations of import receipts for 35 percent of its shipments to the United States, compared to 18 percent in 2005. Likewise, Canada reported receiving confirmations of import receipts for 33 percent of its shipments to the United States compared to 16 percent in 2005. Despite these improvements, the United States is far from fully complying with this requirement. Because the United States has not assigned an agency to track confirmation of import receipts by importers, it cannot monitor the compliance of importers with this KPCS standard and also is not able to detect possible diversions of rough diamond import shipments. See figure 3 for a depiction of the rough diamond import process and existing weaknesses. State, Census, and USKPA have established a system for controlling U.S. rough diamond export shipments. However, the system shows weaknesses because it involves little direct U.S. government monitoring, thereby preventing the United States from being sure that illicit shipments are not leaving the country. See figure 4 for a depiction of the export control process and weaknesses in U.S. government oversight. CDTA requires exportation of any rough diamond from the United States to be substantially consistent with KPCS, which details a number of requirements to control rough diamond exports. For example, the United States must: ensure a Kimberley Process certificate accompanies each shipment of rough diamonds on export, and that the certificates meet the minimum requirements set out by KPCS; ensure that no shipment of rough diamonds is exported to a non- ensure that rough diamonds are exported in a tamper-resistant container; establish a control system designed to eliminate the presence of conflict diamonds from export shipments of rough diamonds. Under the oversight of State, USKPA, through its licensees, issues Kimberley Process certificates. According to a State report to Congress, USKPA, which is comprised of representatives of the diamond industry, was established in 2003 to issue and control Kimberley Process certificates for rough diamond exports from the United States. To issue U.S. Kimberley Process certificates, USKPA subcontracted out to 17 licensees. These licensees represent companies that ship on behalf of third parties, as well as companies engaged in the business of buying and selling rough diamonds that agree to fulfill the requirements of KPCS and all relevant U.S. laws and regulations. Each licensee also agrees, through contractual agreements, to a set of fixed procedures in order to qualify to obtain and use Kimberley Process certificates when exporting rough diamonds. Under these procedures, licensees agree to maintain a supply of Kimberley Process certificates in safekeeping, keep records for 5 years for each shipment where a Kimberley Process certificate is issued, and submit to an audit by USKPA. Also, licensees/shippers agree to complete an application form. Licensees submit monthly and annual reports to USKPA with all of the certificates issued in that period. These reports are forwarded to State and Census. See table 3 for the number of certificates issued by the United States from 2003 to 2005. CDTA requires that State conduct an annual review of the standards, practices, and procedures of USKPA to determine whether these activities are in accordance with KPCS, and that State report the results of the review to Congress. State has reported as required; however, the content of the annual report is more descriptive than evaluative. According to State, it has not used a formal plan for overseeing USKPA and its licensees. State is currently developing this plan and has tested some of its elements in 2006, according to State officials. The implementation of this plan would help State to conduct periodic or regular, independent, and systematic oversight of USKPA and its licensees to make sure that they conform with KPCS standards. The U.S. government monitors the export process using electronic data checks rather than physical inspections of rough diamond shipments. While USKPA reviews licensees, it does not have a plan for conducting these reviews. Finally, KPCS participants reported to us that they had received U.S. Kimberley Process certificates that did not comply with the certification scheme requirements. Direct government involvement in the operational export process is limited to Census’ electronic data checks through AES. Once Census validates a shipment for export based solely on data submitted through AES, no other government agency reviews the shipment. The contents of the parcels are never physically inspected by any government agency, USKPA, or its licensees. According to a senior official at CBP, no one at CBP physically inspects rough diamond export shipments before they are sent, and no requirement exists for submitting a Kimberley Process certificate to CBP for these export shipments. In its final report, a peer review team sent by KPCS to the United States to assess implementation of the certification scheme found that the U.S. export regime would benefit from a more hands-on approach by the government and recommended conducting physical inspections of exports periodically or regularly to ensure that, among other things, the description on the certificate matches the contents of the shipment. The private sector, through USKPA and its licensees, plays a significant role in the U.S. export process, yet these private entities do not verify the contents of rough diamond exports either. According to a co-director of USKPA, the agency takes no responsibility for the information on the certificate; the licensee and exporter assume this responsibility. Likewise, a senior official from State maintained that the licensees are responsible for providing truthful data—thus ensuring that the contents meet the information on the documentation. However, according to two USKPA licensee freight forwarders responsible for issuing about half of the U.S. Kimberley Process certificates in 2005, they also do not examine the contents of rough diamond parcels they ship. For rough diamonds, they rely on the warranty the exporters sign on the application attesting that the shipment has been handled in accordance with KPCS. The licensees maintain that the exporters are responsible for collecting and retaining documentation showing that the diamonds were legally imported into the United States. Without an effective monitoring strategy that includes a plan for conducting physical inspections periodically or regularly, the United States cannot be assured that its internal controls for exports sufficiently prevent export of illicit shipments. This weakness of the U.S. export process could allow illicit diamonds to enter the legitimate trade. Under its licensing agreement, USKPA can review a licensee’s books, records, and other documents to verify compliance with the agreement. According to a USKPA co-director, USKPA has visited five licensees. However, USKPA does not have a plan to conduct these monitoring visits, nor does it have any protocol for selecting which licensees will receive a visit. The visit might include a review of the security measures used to store the certificates, packing procedures, and record-keeping for every application received, as well as interviews with the employees involved in these processes and those who prepare monthly or annual reports. USKPA gave us visit summaries from its annual reports to State. USKPA did not give us any other documentation regarding these reviews. Without an established monitoring strategy, plan, criteria, and documentation, USKPA cannot be sure that its licensees are meeting their requirements to prevent illicit exports of rough diamonds from the United States. Some countries have reported quality control problems with U.S. Kimberley Process certificates. For example, in 2005, one country reported receiving 26 U.S. Kimberley Process certificates with corrections (correction fluid such as Liquid Paper or Wite-Out had been used to amend errors on them). Also, 10 certificates had typographical errors, and 5 had incorrect dates. In the same year, another country reported receiving 21 U.S. Kimberley Process certificates with typographical errors and 5 certificates with correction fluid. These quality issues raise the possibility that the certificates have been tampered with and, thus, do not meet KPCS requirements. In the absence of physical inspections of U.S. rough diamond exports, foreign importing authorities have alerted U.S. officials of these problems. In response, these officials began conducting outreach efforts to exporters to address these issues. Internationally, the United States has helped to strengthen KPCS by participating in KPCS activities and providing assistance to help Sierra Leone and Liberia comply with KPCS, but this assistance faces challenges. The United States has helped strengthen KPCS by participating in the activities of its working groups and committees and assuming lead roles; for instance, the United States led a peer review visit to Brazil and offered to identify and coordinate donor assistance to countries seeking to implement or strengthen KPCS. Also, the United States has provided approximately $7.57 million in assistance to the diamond producing countries of Sierra Leone and Liberia to implement systems for controlling their trade in rough diamonds. However, the effectiveness of assistance- related efforts in Sierra Leone and Liberia is constrained by the limited capacity and resources of these countries to implement KPCS and the need to harmonize diamond policies among these countries and other countries in the region. Donors and diamond producers are considering a regional approach to help enhance the effectiveness of donor assistance. With State leading U.S. efforts, the United States has helped strengthen KPCS by regularly attending KPCS-related meetings and serving on the three KPCS working groups and the two KPCS committees. CDTA expresses the sense of the Congress that the United States should strengthen KPCS by monitoring the effectiveness of the certification scheme in stemming trade in rough diamonds not controlled by KPCS. To this end, the United States has taken the following actions: The United States regularly attends KPCS meetings, which aim to strengthen the certification scheme and assess its effectiveness. According to U.S. officials, the United States has regularly participated in KPCS meetings, including the annual KPCS plenary and intersessional meetings, to discuss and assess KPCS implementation. Also, it crafted compromises and negotiated solutions to disagreements among KPCS participants. The United States serves as a member of the Statistics Working Group and, according to U.S. officials, through diplomatic channels has encouraged and assisted several participants to provide required statistical reports to KPCS in a timely manner. Also, the United States, through Census, has analyzed production and trade data for the Statistics Working Group and, through USGS, has done it for some of the KPCS peer review teams. The United States serves as a member of the Monitoring Working Group, which monitors how individual participants implement KPCS. The primary activity of the Monitoring Working Group has been to conduct peer reviews, which include peer review visits to examine participants’ efforts to implement KPCS. Since the first peer review visit to the United Arab Emirates in May 2004, KPCS has conducted 31 review visits, including the KPCS peer review visit to the United States in 2005. Officials from State and other U.S. entities have participated in KPCS peer review visits to the following ten participants: United Arab Emirates, Russia, Guinea, India, Sierra Leone, Sri Lanka, Ghana, Togo, Brazil, and Guyana. The United States also participated in the recent Kimberley Process special mission to Liberia. The United States serves on two KPCS committees: the Participation Committee, which assists the Chair of the Kimberley Process in handling the admission of new participants to KPCS; and the Selection Committee, which reviews and assesses the credentials of candidates for the position of Vice-Chair. The United States has recently led two KPCS activities. Specifically, the United States offered to identify and coordinate donor assistance for implementing KPCS at the plenary meeting in Moscow, Russia, in November 2005. Also, the United States led the KPCS peer review visit to Brazil in April 2006. The United States has provided about $7.57 million in assistance to help Sierra Leone ($6.13 million) and Liberia ($1.44 million) implement KPCS, but the limited capacity and resources of these two recipient countries and the need to harmonize diamond policies with other countries in the region have restricted the effectiveness of this assistance. Donors, including the United States, are considering using a regional approach to enhance the impact of diamond-related assistance. Table 4 shows the U.S. diamond- related assistance to these two countries. The United States, as part of its support to the Lome Peace Accord in 1999, helped Sierra Leone initiate diamond policy reform. From September 1999 to March 2007, USAID, through five rough diamond-related projects, plans to provide about $6.13 million in assistance to support Sierra Leone’s efforts to control rough diamonds at the national and local level. Between 1999 and 2001, USAID’s Office of Transition Initiatives (OTI) provided, through Management Systems International (MSI), about $1.26 million in funding under one project to support government efforts to gain control of its production of and trade in rough diamonds. Between 2002 and 2007, USAID plans to provide, again through MSI, about $4.87 million in assistance under four projects to further enhance the country’s efforts to gain control over its rough diamonds. The specific programs are outlined below. Between 1999 and 2002, OTI, through MSI, provided about $1.26 million, under the Diamond Management Program, to support Sierra Leone in its efforts to develop and implement diamond policies and a system for controlling the trade in rough diamonds. The two primary objectives of the program were to (1) help Sierra Leone bring diamonds under control of the government and (2) cut the trade in conflict diamonds to diminish this trade’s financing of warfare. According to a USAID-sponsored evaluation, the primary achievement of the program was to assist the government in establishing a Certificate of Origin system that the country needed to have in place to be able to export rough diamonds. Although this program was largely advisory, it also included providing training and equipment to the Ministry of Mineral Resources’ monitoring staff. The evaluation considered the program a success because legitimate exports of rough diamonds increased from $1.2 million in 1999 to $26 million in 2001. At the end of the OTI-funded Diamond Management Program, USAID granted about $62,000 to MSI, under the Diamond Project, to continue working on rough diamonds from August 2002 to November 2002. This funding helped MSI get ready to start a larger program, called the Diamond Policy and Management (DIPAM) program. From 2002 to 2004, USAID, through MSI, provided $940,000, under the DIPAM program, to further help Sierra Leone control its rough diamonds at both the national and local level. According to MSI’s project closeout report, DIPAM had five policy objectives, and successfully implemented programs in support of each of them: Legitimize policy reform. MSI, through DIPAM, worked with the government of Sierra Leone to apply economic incentives to shape the behavior of both domestic and international actors in the diamond sector, and promote legitimate mining and marketing. For example, the project explored ways to reward citizens for mining rough diamonds legally and for ensuring that their neighbors also did so. Increase community benefits from mining. DIPAM focused on increasing community benefits in two ways: by maximizing direct income within the country from the production and sale of rough diamonds, and by encouraging the government to return a portion of rough diamond export tax revenues to communities through the Diamond Area Community Development Fund (DACDF). DACDF distributes one-fourth of revenue earned from export taxes on rough diamonds to communities holding mining licenses. In 2005, over $900,000 in DACDF funds were turned over to these communities. In one community we visited, these funds helped to build a police facility and a town hall. Engage civil society with government in mining policy deliberations and monitor the government’s performance. DIPAM worked to strengthen community-based institutions to help them more explicitly represent community interests with respect to diamond mining and alternative development activities. Establish dialogue among communities, the government, and the private sector in industrial mining. DIPAM established forums where community voices could be heard. For example, project officials worked directly to help property owners express their grievances regarding the mining practices of a large mining company. Improve environmental management of artisanal mining. In September 2004, DIPAM succeeded in getting the government of Sierra Leone to release funds to reclaim land at an illegal mining site that was shut down. The government had set aside a portion of the revenue that it had received from selling mining licenses to pay for environmental reclamation. However, the government had never released it before. From 2003 to 2004, USAID, through MSI, provided about $1.08 million, under the Peace Diamond Alliance Support Project (PDA), to help Sierra Leone establish a public/private partnership for mining rough diamonds. MSI implemented this project in an integrated manner with the DIPAM cooperative agreement discussed above. The approach of the PDA has been to remove diamonds from the smuggling chain by providing incentives for legal export, chiefly by increasing benefits at the local level. Specifically, PDA worked to improved diamond management in mining communities by encouraging cooperation among government, businesses, and civil society. The PDA offered training for members of mining cooperatives (which are largely made up of unskilled workers) on a number of issues, such as valuing stones and improving environmental and safety practices. Figure 5 shows diggers working at a diamond mining site in Sierra Leone. In addition, the PDA helped to organize 35 mining cooperatives between 2003 and 2004, mainly in the Kono District, which is one the main diamond mining areas in Sierra Leone. However, only five of these cooperatives mined rough diamonds in 2005 and only one of them continues to mine rough diamonds in 2006. The measure of success for the DIPAM/PDA programs was the degree to which legal diamond exports increased and the degree to which benefits were returned to communities. By the above measures, the DIPAM/PDA projects were successful, according to MSI’s project closeout reports. For instance, legal diamond exports have increased from $10 million in 2000 to over $140 million in 2005. U.S. and Sierra Leone government officials view the increase in legal diamond exports as an indicator that more diamonds are being traded licitly. From 2004 to 2006, USAID, through MSI, has implemented the Integrated Diamond Management Program (IDMP), to support Sierra Leone efforts to improve the management of Sierra Leone’s diamond sector at both the national and local levels. State has provided about $2 million to support this program. In July 2006, USAID approved about $790,000 in additional funding to extend this program until March 2007. At the national level, IDMP continues to help the High-Level Diamond Steering Committee (HLDSC) and its ad hoc Technical Committee in their efforts to support the government of Sierra Leone formulate diamond-related policy. At the local level, IDMP continues to support the PDA, described above, and other local initiatives. Sierra Leone agreed to create HLDSC to advise the government on the effective management and control of the country’s rough diamond resources. HLDSC members include Sierra Leonean government ministers as well as the U.S. Ambassador and equivalent representatives from the United Kingdom, the European Community, and the UN. The committee formed a technical advisory group to address issues raised by the government or donors in early 2004. The committee and its ad hoc technical committee serve as key policy forums for enhancing national diamond-sector policy development and implementation. They analyze strategic policy issues and advise the government on important diamond- sector policy. For example, recent discussions focused on the establishment of diamond cutting and diamond polishing legislation and procedures, and policies for transparent land allocation to diamond companies. MSI serves as the secretariat for both committees. For this reason, these committees have relied on U.S. assistance for guidance, recommendations, and support, according to recent program status reports. In 2005, State asked USAID to transfer funds to USGS for developing and implementing a program to help Liberia move toward compliance with KPCS. With this funding, from September 2005 to December 2006, USGS, under an agreement with State and through Constella Futures International, plans to provide about $1.44 million in rough-diamond- related assistance under one project to help Liberia in its efforts to comply with KPCS. The U.S. assistance focuses on developing and implementing a capacity- building and a technical training program in a broad range of rough diamond activities, such as improving the government capacity for controlling the production and trade in rough diamonds and related geological and commercial activities. For instance, this program includes funding for building a secured annex behind the Ministry of Lands, Mines, and Energy to house Liberia’s rough diamond exporting and importing authority, as well as for buying vehicles and equipment needed to support this authority and the ministry’s efforts to monitor rough diamond mining activities. In Monrovia, Liberia, we observed a subcontractor working on the secured annex that will house the exporting and importing authority. Figure 6 shows the secured annex under construction. Recent status reports on the U.S.-funded assistance effort in Liberia indicate that the U.S program is helping Liberia make progress in different areas. For example, the construction of the annex is almost finished, Kimberley Process certificates are under development, and training of different staff needed to implement KPCS is under way. U.S. and program officials noted that, despite the progress made through the support of the U.S. assistance program, Liberia still does not have an effective system for controlling its production and trade in rough diamonds, which is needed to comply with KPCS. In May 2006, the UN completed an assessment of the status of Liberia’s efforts to comply with KPCS and a second Kimberley Process Expert Mission visited Liberia to independently assess the status of these efforts. The UN reported that Liberia still did not comply with KPCS. The UN report, for instance, noted that the components needed for a credible, internationally-accredited certification scheme for rough diamonds were still some months away. In June 2006, the UN decided to extend its rough diamond-related sanctions on Liberia for another 6 months, with the option of assessing the country’s efforts to comply with KPCS again in another 4 months. In August 2006, the Kimberley Process Expert Mission to Liberia reported that Liberia had made some progress towards establishing a system of internal controls, which is crucial to the effective implementation of KPCS. However, it also noted that Liberia still lacks, for instance, a system of internal controls that will ensure that conflict diamonds are not entering its production. Sierra Leone and Liberia’s limited capacity and resources to fully implement KPCS, and the countries’ need to harmonize diamond policies with other countries in the regions, constrains the effectiveness of donor assistance. Although U.S. assistance has provided training, equipment, and vehicles to help Sierra Leone monitor diamond mining areas and borders to prevent illicit activities, government officials told us during our visit to that country that they did not have enough capacity and resources to accomplish their mission. For instance, these officials emphasized that they did not have enough vehicles for monitoring large diamond mining areas under their jurisdiction. Because these vehicles included many motorcycles, these officials also noted that they faced many difficulties reaching many mining areas given the bad conditions of the roads and remoteness of mining sites. According to U.S. and Liberian officials, without the U.S. and other donor assistance that is providing training, equipment, and vehicles to help Liberia comply with KPCS, the country would not be able to implement the control systems needed for monitoring trade in rough diamonds, large mining areas, and highly porous borders. Also, the UN Mission in Liberia (UNMIL) in March 2006 noted that the problem of porous borders and insecurity in the Mano River Basin area— which includes Liberia, Sierra Leone, Guinea, and Cote d’Ivoire—has contributed to difficulties in effectively dealing with illicit trading of diamonds. Donors and diamond producers are considering a regional approach to help enhance the effectiveness of donor assistance because this assistance is constrained by the limited capacity and resources of these countries and the need to harmonize diamond policies among countries vulnerable to illicit cross border diamond trading. In February 2006, at a meeting of alluvial diamond producers, participants encouraged regional and subregional cooperation by harmonizing and reinforcing mechanisms to fight more efficiently the illicit cross border trade of diamonds. Also, the reports of the KPCS peer review visits to Sierra Leone and Liberia stress the importance of harmonizing diamond-related policies of these (and other) countries in the Mano River region to avoid the illegal transfer of rough diamonds across borders. For instance, when Sierra Leone significantly raised its diamond-related tax rate above the tax rate of other countries in the region in early 2006, it experienced a drop of rough diamond exports that led it to rescind the tax rate increase. Public and private officials have stated that employing a regional approach for some rough diamond-related assistance would improve the impact of this assistance, thereby further deterring illicit diamond trading. These officials have noted that harmonization of taxation and other laws among countries within a region is needed to dissuade people from illegally moving diamonds across borders. In June 2006, representatives from Sierra Leone, Liberia, Guinea, and Cote D’Ivoire, along with representatives from the United States and other donors, met to discuss rough diamond-related issues—including policy areas for potential regional harmonization. According to U.S. officials, the conference highlighted the importance of regional harmonization, as well as the complexity—given the differences in national laws—of trying to find common positions that could be adopted by all the countries within a region. The United States is considering using a regional approach to enhance the impact of some of its diamond-related assistance. This regional assistance would complement country-specific assistance provided to diamond-producing countries within a region. A system for controlling the trade in rough diamonds will be effective only if it has control mechanisms designed to curtail or deter the trade in conflict diamonds. The United States has established a multi-agency system aimed at controlling trade in rough diamonds (thereby curtailing trade in conflict diamonds) but, because of weaknesses of the system, the United States cannot ensure that illicit rough diamonds are not traded. To succeed, KPCS depends on all participants having strong control systems and procedures for collecting and sharing trade data on rough diamonds, for inspecting imports and exports of these diamonds, and for tracking confirmations of import and export receipts. Since implementing CDTA, the United States has made significant improvements to its system and procedures for collecting and sharing data and for controlling the rough diamond trade. However, a continual excess of exports over imports raises concerns because the United States is not expected to have such excess of exports over time (it does not produce rough diamonds and polishes some rough diamonds domestically) and because U.S. agencies have not conducted an analysis that might help to explain a persistent excess of exports. Also, the United States has not had a policy and plan for periodically or regularly physically inspecting imports and exports of rough diamonds to ensure that illicit rough diamonds do not enter the legitimate U.S. trade of these diamonds. In addition, the United States has failed to confirm most rough diamond import receipts to foreign export authorities, thereby failing to comply with a KPCS standard. The United States relies on the ultimate recipients to confirm import receipts, but it has not tracked whether these recipients do so. Moreover, although State and Census have received annual activity reports from USKPA, and State has reported to Congress on USKPA activities, State has not had a plan for overseeing the activities of USKPA and its licensees, who issue the U.S. Kimberley Process certificates. Although USKPA has reviewed the activities of 5 of its 17 licensees, it has not had a plan and protocols for conducting these reviews. These weaknesses diminish the effectiveness and deterrent effect of the U.S. and international systems for controlling imports and exports of rough diamonds. The United States has helped to enhance KPCS by, among other things, participating in the decision making and operational aspects of the certification scheme, and has supported the adoption of KPCS by providing technical assistance to two African diamond-producing countries, Sierra Leone and Liberia. The United States has participated in KPCS since its inception, and has recently assumed leadership roles, by identifying and coordinating donor assistance to diamond producing countries, and leading a peer review visit to Brazil. The United States has helped Sierra Leone and Liberia in their efforts to meet the minimum KPCS requirements, but the limited capacity and resources of both countries—and the need to harmonize diamond policies among these countries and other countries in the region—has presented a major challenge to U.S. assistance efforts and the countries’ ability to control their trade in rough diamonds and monitor large mining areas and highly porous borders. To enhance the impact of its diamond-related assistance and further curtail illicit rough diamond trading, the United States, other donors, and diamond producers are considering using a regional approach for providing some diamond-related assistance, which would help to address diamond issues of a regional nature. To help the United States ensure that it has a more effective system for preventing the importation or exportation of conflict diamonds, we are making seven recommendations. To improve the accuracy of U.S. rough diamond trade data—if U.S. rough diamond exports continue to exceed imports—-we recommend the following: The Secretaries of State and the Treasury direct the U.S. Kimberley Process Implementation Coordinating Committee to perform such analysis as is necessary to determine what constitutes a normal excess of exports over imports based on a variety of factors, including market factors such as rough diamond stockpiles and domestic diamond cutting and polishing capacities. To enhance the U.S. process for inspecting rough diamond imports and exports, we recommend the following: The Secretary of Homeland Security direct the Commissioner of CBP to develop and implement a plan for conducting physical inspections of both imports and exports of rough diamonds periodically or regularly, including inspecting the quality of U.S. Kimberley Process certificates. To enhance the U.S. process for confirming the receipt of U.S. imports with foreign exporting authorities, we recommend the following: The Secretaries of State and Homeland Security develop and implement a plan for confirming the receipt of imports—currently the responsibility of individual importers—and for tracking these confirmations. The system for tracking import confirmation receipts would help enhance Census’ data on rough diamond imports and exports. The Director of OFAC revise the pertinent rough diamond trade regulations to reflect the above change. To enhance the U.S. process for reviewing the activities of USKPA and its licensees who issue Kimberley Process certificates, we recommend the following: The Secretary of State direct the Assistant Secretary, Bureau of Economic and Business Affairs, to implement a plan for reviewing the activities of USKPA and its licensees. The Secretary of State direct the Directors of USKPA to develop and implement a plan for reviewing the activities of its licensees. Finally, to enhance the impact of U.S. diamond-related technical assistance and further curtail illicit rough diamond trading, we recommend the following: The Secretary of State direct the Assistant Secretary, Bureau of African Affairs, to develop and implement a plan for providing some of the diamond-related assistance using a regional approach so that countries within a region can harmonize aspects of their systems for controlling the rough diamond trade across porous borders. We provided a draft of this report to State, the Treasury, Homeland Security, Commerce, Interior, USAID, and USTR. We obtained written comments from State, the Treasury, Homeland Security, Commerce, and Interior (see apps. VI, VII, VIII, IX, and X). They concurred with our recommendations. We also received technical comments on this draft from State, the Treasury, USAID, and USTR, which we have incorporated where appropriate. We are sending copies of this report to interested congressional committees, State, the Treasury, Homeland Security, Commerce, Interior, USAID, and USTR. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you and your staff have any questions about this report, please contact me at (202) 512-4347. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix XI. As mandated by the Clean Diamond Trade Act (CDTA), this report focused on (1) describing the institutional framework the U.S. government has created to implement CDTA, (2) examining how the United States has implemented the provisions of CDTA domestically and what principal challenges it faces, and (3) examining how the United States has helped to strengthen the Kimberley Process Certification Scheme (KPCS) and what principal challenges it faces. To address all of these objectives, we interviewed key officials from multiple U.S. agencies and the U.S. Kimberley Process Authority (USKPA). The agencies we interviewed included: the Department of State (Bureau of Economic Affairs and United States Mission to the United Nations), the Department of the Treasury (Office of Foreign Assets Control), the Department of Homeland Security (Bureau of Customs and Border Protection and Bureau of Immigration and Customs Enforcement), the Department of Commerce (Bureau of the Census), the Department of Interior (U.S. Geological Survey), the U.S. Agency for International Development, and the Office of the U.S. Trade Representative. To address our first objective of describing the institutional framework the U.S. government has used to implement CDTA and our second objective of examining how the United States has implemented the provisions of CDTA domestically and what principal challenges it faces, we reviewed documents from the U.S. government and USKPA, including relevant laws, regulations, reports, and briefing documents. Also, we interviewed representatives and collected documentation from diamond industry organizations and non-governmental groups that have been involved in the implementation of CDTA. In addition, we interviewed representatives from private organizations that have been involved in trading rough diamonds to and from the United States. We analyzed Census’ rough diamond import and export flows in conjunction with data collection improvements to determine the factors contributing to excess exports. These data have limitations, as discussed in the report. We assessed the quality of data the Census, the UN, and the KPCS used to describe international trade in diamonds, and determined that they were sufficiently reliable for our purposes. Finally, we used data provided to us by foreign governments to analyze U.S. import receipt confirmations. Based on interviews with foreign government officials we determined that these data were sufficiently reliable to support our findings. To address our third objective of examining how the United States has helped to strengthen KPCS and what principal challenges it faces, we reviewed UN, KPCS, and U.S. and foreign government documents, including relevant legislation, reports, and briefing documents. Also, we interviewed officials and collected documentation from the UN and other international organizations, KPCS, diamond industry organizations, non- governmental groups, and the U.S. and foreign governments involved in the development and implementation of KPCS. In addition, to identify, describe, and assess U.S. diamond-related assistance efforts, we interviewed U.S., UN, and foreign government officials and non- governmental groups and private organizations representatives involved in the development and implementation of the diamond-related assistance the United States has provided to Sierra Leone and Liberia. We did not independently verify the U.S. assistance data. We conducted our work in Washington, D.C.; New York, New York; Moscow, Russia; Ottawa, Canada; Brussels and Antwerp, Belgium; Catania, Italy; Freetown and Koidu, Sierra Leone; and Monrovia, Liberia. We conducted our work from September 2005 through September 2006 in accordance with generally accepted government auditing standards. Tables 5 to 8 show information related to the U.S. and global trade in rough diamonds, including the top destinations for U.S. rough diamond exports, top sources of U.S. rough diamond imports, top (non-mining) rough diamond exporting KPCS participants, and the economic importance of diamond mining for selected countries. We assessed the quality of data from the Census, the UN, and the KPCS, and, despite limitations, we determined that they were sufficiently reliable for our purposes. Figures 7 and 8 depict the top polished diamond exporting countries and the top diamond mining countries. December UN Generl Assemly issu Reoltion 55/56 supporting KPCS (plnned) May KPCSin 4-yer WTO wiver. July Preident ign Exective Order #112 implementing CDTA -yer review of the KPCS (plnned) AuThe U.S. Treasury issu Rogh Dimond Control Regtionextenion (plnned) Zina Merritt served as Assistant Director responsible for this report, and Juan Tapia-Videla was the Analyst-in-Charge. In addition to those named above, the following individuals made significant contributions to this report: Kate Blumenreich, Leah DeWolf, David Dornisch, Mark Dowling, and Michael Hoffman. The team benefited from the expert advice and assistance of Joe Carney, Randall Cole, Karen Deans, Etana Finkler, Chanetta Reed, Kendall Schaefer, Jena Sinkfield, and Mark Speight.

Summary: In 2003, the United States and other countries began implementing the Kimberley Process Certification Scheme (KPCS) to curtail the trade of rough diamonds that had fueled severe conflicts in Africa, known as conflict diamonds. CDTA provides the statutory framework for U.S. implementation of the KPCS. As mandated in CDTA, this report (1) describes the institutional framework established to implement the act, (2) examines implementation of the domestic provisions of the act and challenges it faces, and (3) examines how the United States has helped to strengthen the KPCS and challenges it faces. The United States has used multiple U.S. agencies and a private, not-for-profit entity to implement the domestic and international provisions of the Clean Diamond Trade Act (CDTA). The Departments of State and the Treasury have led U.S. efforts to implement the domestic provisions of the act; State has led the U.S. efforts to curtail trade in conflict diamonds abroad. Domestically, the Departments of State, the Treasury, Homeland Security, and Commerce, and the private entity, called the U.S. Kimberley Process Authority (USKPA), have been responsible for controlling U.S. imports and exports of rough diamonds. Internationally, State, the U.S. Agency for International Development (USAID), and the U.S. Geological Survey have helped to strengthen KPCS. Domestically, the U.S. systems for reporting rough diamond statistics and for controlling imports and exports of these diamonds are vulnerable to illicit trade. The United States has enhanced the quality of its rough diamond trade data by improving its collection processes, but work remains to be done. Also, the United States does not periodically inspect rough diamond imports or exports to ensure that the contents of the rough diamond parcels match the Kimberley Process certificates. In addition, the United States lacks an effective system for confirming receipt of imports--a Kimberley Process requirement for avoiding possible diversions of rough diamond imports. Finally, the United States has not had a plan for monitoring USKPA, but is developing and testing one. Internationally, the United States has helped to strengthen KPCS by participating in KPCS activities and providing assistance to Sierra Leone and Liberia in their efforts to comply with KPCS, but donor assistance to these countries faces challenges. Donors and diamond producing countries are considering a regional approach to help enhance the effectiveness of donor diamond-related assistance because this assistance is constrained by the limited capacity and resources of these countries and the need to harmonize diamond policies among countries vulnerable to illicit cross border diamond trading.