Marange diamonds cast light on Kimberley Process shortcomings

In only a few years, Zimbabwe’s Marange diamond fields have transformed from a free-for-all of thousands of diamond  prospectors sifting through dirt to a modernized, fenced-in area run by a select few companies.

The transition has been harsh, with reports of beatings and the killing of hundreds as the Zimbabwean government forcibly  cleared the fields full of artisanal miners to make room for the deep-pocketed companies chosen to replace them. The violent repression caused the European Union and the United States to issue sanctions and the Kimberley Process (KP) to restrict the  sale of diamonds from the Marange fields.

The modernization of the diamond fields included the introduction of security measures, the disclosure of mine level data, the establishment of measures to allow the traceability of rough diamonds, and opening up the area to some independent  monitoring. That was enough to satisfy the KP, which declared in November 2011 that some rough diamonds from Marange  were fit for export.

The Zimbabwe government, desperate for cash, has welcomed the decision. The government expects to fill $600 million of its  $4-billion annual budget from diamond revenues this year, with estimated revenue up sharply thanks to the expected boost from the lifting of the KP restrictions. In contrast, by November of last year, the government had received $80.6 million in new sales  revenue, and $174 million the year before, according to the diamond trading network Rapaport.

And the four companies now producing diamonds in the Marange fields are also expected to reap significant benefits. Anjin Investments, a joint venture between a Chinese firm and an obscure Zimbabwe company called Matt Bronze, had stockpiled 2 million carats by the time the KP restrictions were lifted, while the company was quoted in local media as saying it was recently producing at upwards of 10,000 carats a day. However, with none of the companies publicly traded nor especially transparent, reliable details on production are slim.

Regardless of current production levels, the companies operating on the Marange fields are sitting on unquestionably large diamond deposits. A lack of proper exploration means any estimates are rough, but the fields are estimated to contain between 25-30% of the world’s known diamond deposits. The stones are generally of lower, more industrial quality, but still present a market-altering new source of diamonds. About 15% of the diamonds are gem-quality, according to Chaim Evan-Zohar of diamond consultancy Tacy.

But while the companies and Zimbabwe’s government are positioned for a potential windfall, observers have cried foul over the  KP’s decision to allow the export of diamonds from the Marange fields. Global Witness, an advocacy group that was  instrumental in the creation of the KP almost a decade ago, has been especially vocal and left the KP in protest after the  Marange decision was announced.

Nick Donovan, a senior campaigner at Global Witness, said in a phone interview that while on-the-ground optics might have  improved, the situation is still far from healthy.

“Instead of very open, in-your-face helicopter gunships, the story’s changed into a story about white-collar wrongdoing, possibly tax avoidance, possibly corruption, possibly off-budget financing,” Donovan says. “You can’t see that on a site visit.”

Global Witness put out a report in February that tried to delve into the opaque structure of Anjin, as well as Mbada, another company operating in Marange. The report showed numerous questionable practices, including having military personnel on  boards, little transparency as to how the companies secured mineral rights or how much they pay funds back to the  government, off-shore subsidiaries in tax havens to siphon off revenues, and associates of the Mugabe government closely  linked to the companies.

Anjin’s Zimbabwean board of directors includes several senior current and former security officials. Mbada, a joint venture  between state-owned Zimbabwe Mining Development Corp. (ZMDC) and a South African company, transferred 25% of the  company to a third company linked to former Air Vice Marshal Robert Mhlanga, who is also the chair of Mbada.

“At this point in time, it’s more accurate to refer to militarized diamonds,” Donovan says. “There are strong fears that it’s a  source of off-budget financing for the military and secret police.”

The other two operating companies, Marange Resources, owned wholly by the ZMDC, and the Diamonds Mining Co., jointly  controlled by the ZMDC and Pure Diamonds, show little more openness.

The lack of transparency behind the companies operating in the Marange fields, questions about where revenues are going,  and how the companies secured concessions, are just a few of the concerns raised by those critical of the KP’s decision to  allow exports. Martin Rapaport, the founder of the Rapaport Group diamond trading network, was involved in the establishment  of the KP. But he has roundly condemned the KP’s decision and thinks it shows the obvious flaws in the current system.

“The Kimberley Process is some kind of confusion fig leaf that allows dictators to say that their pork is kosher, that their diamonds are OK,” Rapaport says. “So the Kimberley Process, in this instance, is evil.”

In response to the failings of the KP, Rapaport has committed to exclude diamonds from the Marange area from trade through Rapaport’s extensive network, and has started the long and complicated process of establishing a system of diamond tracing  and certification to make that possible.

For Rapaport, Zimbabwe’s continued human rights violations, especially in the Marange area, makes trading diamonds from  that area unethical. The continued sanctions imposed on diamonds from the area by the United Kingdom, the U.S. and the  European Union add legal clout to his refusal to deal with Marange diamonds. And what makes his proposal tenable is he thinks  that more money can be made by not dealing with Marange diamonds.

“First of all it’s wrong. Second, you’re violating government rules in some instances; it’s illegal. And third, there’s a new market  opportunity over here. We can create better products.” Rapaport envisions creating a premium market for diamonds not tainted  with human rights abuses, much like the Kimberley Process was originally designed to do. And while the KP, along with the  2006 Hollywood movie Blood Diamond, starring Leonardo DiCaprio, was successful in bringing the idea of blood diamonds to  the fore and cracking down on profits going to rebel groups, its limited mandate means the structure is becoming less and less  relevant.

“The KP is a very narrow, specific international agreement. It relates to rebel movements trying to knock out governments, period,” Rapaport says. For the Marange diamond fields, the issue is an abusive government, not rebels.

Recently appointed KP chair Gillian A. Milovanovic, in a speech at South Africa’s Mining Indaba in February, outlined possible  changes to the system.

“In our view, the KP must meet the current challenges if its mandate is to remain relevant. When founded, the KP focused on  rebel movements seeking to use diamonds to fund their efforts to overthrow legitimate governments. Today, we see diamonds  emerging from conflicts that do not involve the same types of rebel movements, but from broader contexts of conflict, and we  believe the KP should carefully consider how best to address this.”

But with the KP built on a consensus model, and counting numerous questionable governments among its members, there  looks to be little chance of progress.

“The KP will never change its definition of conflict diamonds because the governments that created the KP do not want other governments deciding whether or not they’re violating human rights,” Rapaport says.

Rapaport says he’s already been criticized by some Indian traders after he started restricting known Marange traders from his network. Unlike Europe and the U.S., India and China have no trade sanctions on diamonds from Zimbabwe.

For all the talk of a flood of riches, however, government revenues from Marange have so far come up short. Of the $77.5 million the government initially expected in the first two months of 2012, it only received $19.5 million. Whether this is the result of ongoing sanctions, questionable revenue accounting on the part of companies, or lower than expected demand is unclear. It is still early days in the new reality of the Marange fields, with much more to be seen.
— The author is a staff writer with The Northern Miner.