Legal Challenges in Money Laundering through Raw Diamonds

This publication "Money Laundering through Raw Diamonds" by Fabian Maximilian Johannes Teichmann and Marie-Christin Falker addresses the legal complexities of money laundering through raw diamonds in European German-speaking countries. t delves into the legal complexities and challenges of combating this form of money laundering, emphasizing the need for robust legal frameworks and enforcement mechanisms.

Money laundering usually is done with 3 steps: placement, layering, and integration. Raw diamonds are particularly suitable for all these stages due to their high value, ease of transport, and lack of traceability. The initial step where illicit funds are introduced into the financial system. Raw diamonds can be purchased with cash, effectively converting the illicit money into a valuable, tangible asset. The high value-to-weight ratio of diamonds makes them ideal for transporting large amounts of value discreetly. The second step’s goal is to obscure the origins of the illicit funds. This is achieved through a series of complex transactions designed to confuse the money trail. Techniques include multiple transfers, using intermediaries, and combining legal and illegal funds. The lack of serial numbers on raw diamonds makes tracing their history nearly impossible, complicating detection efforts. This final stage involves reintroducing the laundered funds into the legitimate economy. Diamonds can be sold to reputable vendors or converted into other assets, completing the laundering cycle. Cutting and polishing raw diamonds increase their value and further obscure their origins, making them appear as legitimate gains.

The authors also cover, the legal challenges, implementation of legal measures

Legal and Regulatory Challenges

• Regulatory Gaps: The diamond trade is less regulated than other sectors, providing a loophole for money launderers. Unlike financial institutions, which are subject to stringent anti-money laundering (AML) regulations, the diamond industry lacks comprehensive oversight. This regulatory gap allows money launderers to exploit the sector with relative ease.
• Document Forgery: Money launderers often use forged documents to legitimize their transactions. This includes fake Kimberley Process Certificates, intended to certify diamonds as conflict-free. The prevalence of such forgeries highlights the need for stronger verification processes and legal measures to combat document fraud.
• Intermediaries and Straw People: Launderers frequently employ intermediaries or straw people to conduct transactions, further complicating detection. Legal frameworks must be adapted to address these tactics, ensuring that all parties involved in the transaction are scrutinized and held accountable.
• International Cooperation: Money laundering involving raw diamonds often spans multiple jurisdictions, requiring coordinated international efforts. Legal frameworks should facilitate cross-border cooperation and information sharing to effectively track and prevent such activities.

Practical Implementation of Legal Measures

• Enhanced Due Diligence (EDD): Legal requirements for financial institutions and diamond traders should include stringent due diligence processes. This involves thorough background checks on clients, verification of transaction legitimacy, and continuous monitoring of high-risk activities.
• Advanced Technology: Legal frameworks should encourage the use of advanced technologies, such as artificial intelligence and machine learning, to detect unusual transaction patterns and identify potential money laundering activities. These technologies can enhance the ability of compliance officers to spot suspicious activities that might be missed by traditional methods.
• Regular Training: Continuous legal training for compliance officers is essential. This training should focus on the latest money laundering techniques, legal requirements, and best practices for detection and prevention. Ensuring that compliance officers are well-informed and vigilant is crucial for effective enforcement.
• Legislation Updates: Legal frameworks must be regularly updated to address emerging threats and techniques used by money launderers. This includes adapting laws to cover new technologies and methods, such as cryptocurrencies and online transactions, which are increasingly used in money laundering schemes.

The paper also showed a study with empirical research that involved 60 semi-standardized interviews with criminals and prevention experts, and a survey of 200 compliance officers. Their key findings include:

• Suitability of Raw Diamonds: Raw diamonds are highly suitable for money laundering across all stages. Their portability, high value, and the non-transparent nature of the trade make them ideal for laundering activities.
• Detection Challenges: Compliance officers often struggle to detect money laundering involving raw diamonds due to the lack of regulatory oversight and the sophisticated methods used by launderers. The study highlights the need for enhanced legal measures and better training for compliance officers.
• Prevalence of Money Laundering Cases: Despite regulatory efforts, a significant number of compliance officers reported encountering money laundering cases involving raw diamonds. This underscores the effectiveness of the current legal frameworks and the need for continuous improvement.

You can find more on this topic here: Fabian Teichmann, Marie-Christin Falker (2020). https://www.emerald.com/insight/content/doi/10.1108/JMLC-07-2019-0057/full/html