Financial News

DE BEERS CAUGHT SCAMMING BOTSWANA

De Beers Diamond Trading (DBDT) is suspicious of strangers asking questions about its diamond cleaning operation. The diamond mining giant is especially wary when the strangers happen to be journalists.

“DBDT does not have a cleaning plant and therefore does not administer cleaning to the diamonds, as that would have been done by Diamond Trading Company Botswana (DTCB)”, De Beers lied in its response to queries from the Sunday Standard.

The De Beers’ subterfuge is hardly surprising. The small scale hydrofluoric acid and per chloric acid diamond cleaning operation is one of the mining giant’s best kept secrets.

Housed inside the De Beers state of the art complex in Gaborone, the miniature cleaning plant is the mining company’s “dirty tricks” department that has enabled it to rig its partnership with the government of Botswana by concealing the true value of Botswana diamonds and gaming the tax man through transfer pricing.

While the devious scheme walks the thin line between fraudulent and shrewd, illegal tax evasion and legal avoidance, what makes it remarkable is its utter simplicity.

De Beers has for years been taking advantage of Botswana government’s naivety to fatten its own bottom line. The company buys Debswana rough diamonds from DTCB at bargain basement prices and then dip them first in hydrofluoric acid and then per chloric acid to release their sparkle and true value.

An analysis of confidential collated data availed to the Sunday Standard shows that after being bought by De Beers from DTCB, the value of these gemstones shoot up by an average 77, 6 percent once they leave Botswana and arrive in a foreign country — before any cutting or polishing takes place.

The De Beers “secret” cleaning operation offers the best explanation so far, why Botswana diamonds’value miraculously increases when they are traded between different countries after escaping Botswana’s national borders – and tax brackets.

The Sunday Standard investigation desk joined the dots and a sinister outline emerged: That De Beers has long crossed the line between illegal tax evasion and legal avoidance. Indications are that  the 77.6% increase in the value of Botswana diamonds is actually realised in Botswana between the DTCB plant in Gaborone where the gemstones are salt bathed overnight and the neighboring De Beers complex where they are cleaned further by dipping them in hydrofluoric acid and then per  chloric acid. The company however exports the diamonds at DTCB throw away prices, shifting its profits out of Botswana to low-tax jurisdictions.

Asked by Sunday Standard if dipping diamonds in hydrofluoric acid enhanced their value, the De Beers public relations machine switched to fancy footwork mode: “Maximum value is sought from every stone for the benefit of all stakeholders. Our goal is to achieve this in an effective and intelligent manner, while making safety a top priority”.

The ‘making safety a top priority” bit is a De Beers tried and tested refrain which has been used to good advantage to stop  Diamond Trading Company Botswana (DTCB) from using hydrofluoric acid at its diamond cleaning plant, thus ensuring that De Beers continue to buy Botswana gemstones at throw away prices.

De Beers which is a 50 % partner in both Debswana and DTCB is currently resisting plans by Botswana government partners to start cleaning its diamonds with hydrofluoric acid.

Asked if they have a problem with DTCB using hydrofluoric acid at its cleaning plant, the mining giant went cryptic: “Whilst recognizing the potential of hydrofluoric acid, De beers group is committed to continuously explore available options for our systems and processes, to ensure that throughout the pipeline we keep the safety of our employees and that of the environment we work in a top priority. We continue to work collaborately to explore all available options essential for the business we are in to ensure sustainability in everything we do.”

Curiously, De Beers uses hydrofluoric acid to clean diamonds at its other mines. Quizzed on this, De Beers again resorted to its fancy footwork: “The process used for Botswana diamonds are in line with those for diamonds from other mining locations in the Group”.

Figuring out exactly how much De Beers has funneled out of Botswana in tax evasion is made difficult by the company’s culture of secrecy, but the amount runs into billions of Pula. The figure however is reduced to pocket change when compared to billions that leak through the revenue rort pathway opened by the highly secretive sales agreement between De Beers and Botswana Government.

The Sunday Standard investigations have turned up a revenue bolthole in the sales agreement between De Beers and Botswana which has allowed De Beers to make billions of pula by undervaluing Debswana’s “special stones”, “exceptional stones” and “very exceptional stones” on export and adjusting their value once they have left Botswana. And the whole scheme rides on the De Beers’ “secret” diamond cleaning operation.

The Sales Agreement entered into between Botswana and De Beers on 16th September 2011 has what is called the “40 Day Adjustment” clause under which De Beers pays Diamond Trading Company Botswana (DTCB) within 40 days 95% of the balance between the undervalued price and the price realised outside the country.

DTCB on the other hand pays Debswana 90% of the adjusted price.

The clause however excludes big stones classified under the agreement  as “special stones”, “exceptional stones” and “very exceptional stones” and only covers  small stones referred to as “Serie diamonds.”

An industry source told the Sunday Standard that the “special stones”, “exceptional stones” and “very exceptional stones” are the holy grail of the diamond mining industry and profits from one is often enough to change the fortunes of a mine from loss making to profitable.

For example, the blue diamond discovered by Debswana recently had an estimated value of US $200 million (about P2 billion) which would account for more than 15% of the Debswana 2018 total revenue of US$ 1, 25 billion.

Sources inside the diamond industry have revealed that Debswana discovers “special stones”, “exceptional stones” and “very exceptional stones” almost every week, however, unlike most miners, the lucky strike is never publicized.

This revenue leakage from undervaluing special stones is over and above the billions of Pula haemorrhaging from Botswana’s treasury through De Beers’ base erosion and profit shifting.

Although De Beers through the 40 day adjustment clause refunds government the money it lost as a result of undervaluing the Serie diamonds, this does not include the tax on the additional amount because it accrues outside Botswana’s tax regime.

Over and above the tax revenue leakage, De Beers cheats Botswana out of billions of Pula every year when Debswana special stones are undervalued on export only to assume a higher value abroad. And this is where the De Beers “secret” diamond cleaning operation comes in especially handy.

The value of the gems varies greatly depending on which country imports them from Botswana. For example, Switzerland which is a tax haven shows a pattern of importing gemstones before exporting them at much higher values, without having added value to the stones by cutting or polishing them.

Between 2003 and 2016, confidential data shows the value of diamonds originating in Botswana and traded between Switzerland and other countries totalled $67,4bn. This figure includes rough diamonds directly exported from Botswana by Debswana.

Records show that these companies pay an average of $519/ carat for rough stones that are then re-exported at $1 644/carat — a 216 percent increase in value.

Sometimes the run-up is even bigger. In 2016 about 269 rough gem carats originating from Botswana were re-exported from Switzerland to Laos at $16, 5 million, or more than $61 000/carat. In 2016, Swiss freeports exported parcels worth $118m to the US, averaging $84 000/carat.

An analysis of this official inter-government data shows that by the time the rough diamonds left Switzerland for other countries, they had increased in value by $27.8bn.

At least half of this multi- billion “re-export” trade in rough diamonds appears to be the same stones in different packages: Subsidiaries of companies received and repackaged diamonds into new parcels with new invoices. The data shows that the rough diamonds were re-imported and re-exported between different jurisdictions, particularly tax havens, at increasingly higher values.

Data analysis identified 17.1m carats of rough diamonds originating from Botswana from 2003 to 2012. When the stones left Botswana, they were valued at an average of $125.9/carat. When they were re-exported from foreign countries, they were valued at an average of $223.8/carat, for a total of more than $3.8bn over the period – a 77.6 percent increase in value.

Switzerland remains high atop the list of preferred tax havens due to its low taxation of foreign corporations and individuals. Although Switzerland is no longer a place to “hide” money due to pressure from the United States and the European Union (EU), it still offers the wealthy some benefits for living and keeping their money there. Recent studies show that as much as $2.5 trillion in wealth is held within Switzerland’s borders.

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