Antwerp Facets Special Report

Is it possible to connect the passage of a piece of U.S. legislation aimed at preventing trade in gold from fuelling conflict, and pre-emptive moves by the coloured gemstone industry to ensure that tanzanite is not seen as being smuggled and used to finance terrorism, with the Kimberley Process?

 

Although it may still be too early to draw a direct line between them, there is an uncanny resemblance between the recent moves and the motives for setting up the KP a decade ago, which was to stamp out trading in rough diamonds which were fuelling internecine conflicts in some African states.

 

The new American law, the Dodd-Frank Wall Street Reform and Consumer Protection Act targets the regulation of the U.S. financial services sector and is a direct outcome of the financial crisis of 2008. Following finalization, it is scheduled to be implemented between August and December this year.

 

Why Dodd-Frank matters to the jewellery sector is that includes a provision on conflict gold and tungsten. Contained in Section 1502, it was added into the act against the background of the conflict over resources in African countries, particularly the Democratic Republic of Congo (DRC), and the violence taking place in countries close to the east of the DRC which is fuelled by the natural resources.

 

It is set to influence the work of the American jewellery industry since it requires manufacturers to supply reports on the gold and any tungsten used in jewellery making. It also demands that reports be checked by an independent auditor in order to be in line with the law. Jewellery makers that are publicly traded or that file financial reports with the U.S. Securities Exchange Commission, will have to provide a conflict mineral report providing data on steps taken to guarantee they are aware of the origin of the materials used in manufacturing goods.

 

The U.S. Jewelers Vigilance Committee President and CEO Cecilia Gardner has made it clear that jewellery manufacturers will ignore the new law at their own peril. Theoretically, manufacturers can file reports saying they do not have information relating to the origin of the gold content in their jewellery products, Gardner said, but it is fairly certain that such replies will be regarded as wholly unacceptable by the authorities. And they could open up such firms to questioning by shareholders and human rights groups.

 

"They will say, 'You are a publicly traded company, you have an obligation to know if your gold comes from the bad guys,'" she told a seminar on the issue at the JCK Las Vegas show on June 2, entitled “Conflict minerals: gold, tungsten and the SEC.” The U.S. State Department's conflict diamond negotiator Brad Brooks-Rubin backed up Gardner's comments, but added there could be some sort of leeway regarding the first conflict minerals reports until the process of getting companies up to speed is completed.

 

"We at the State Department have said in our reports that this is going to take time," he told the seminar, noting that the problems relating to gold and tungsten are more complex than those concerning diamonds and the Kimberley Process which deals with ensuring that trading in conflict diamonds is stamped out. “With conflict diamonds, the entire industry got together and said: 'Let’s deal with this',” he said. “That is not how this has evolved. This will be an interesting experiment to see if the public cares or not. Will they pay extra to buy something that is conflict-free? I think we ended up with the Dodd-Frank Act because of a feeling that what we were doing wasn’t enough and wasn’t developing quickly enough.”

 

Gardner pointed out that the process might be unclear due to complicating factors related to the gold trade, such as the large percentage of recycled gold that is used in the manufacture of jewellery – with some industry estimates suggesting it could be around 40 percent. She said she believed the final rules to be determined by the SEC would take the issue of recycled gold into account, thus not forcing the requirement for a conflict mineral report.

 

It is also possible that the new U.S. act could have an impact on foreign jewellery manufacturers who could decide to avoid the expense and time resources required in providing reports related to gold content by simply not sending their goods to the United States. Gardner said that the JVC, other jewellery trade groups and non-governmental bodies are working with the SEC to enable clarification for industry members before the legislation is finalized in the final five months of this year.

 

For its part the European Commission appears to be taking a wait and see approach, intending to study the effects of the Dodd-Frank Act in practice before coming up with an initiative on its own. Keeping a close eye on the process is Kimberly Van Bockstael, a Belgian legal researcher. “The Commission is now looking into the possibility of a European legislative act similar to the Dodd-Frank Act. The focus of this legislation would be on transparency, rather than on the origin of the raw materials,” she wrote.

 

Keeping tabs on  the legislative process in the United States has been the European Parliament, which, Van Bockstael pointed out in a recent study, had for some time expressed its concern about minerals fuelling the crisis in the Eastern provinces of the DRC. Already on October 7, 2010, the European Parliament already asked the European Commission and Council to examine legislative initiatives similar those being taken in the United States. On December 15, 2010, following the third EU-Africa Summit, the European passed a “non-legislative resolution” call for the creation of new law to combat “illegal exploitation of minerals in Africa, which fuel civil wars and conflicts.”

 

As Ms. Van Bockstael pointed out, the reaction of the European Commission to the appeals of the parliament in Strasbourg have thus far been muted. “ It seems the Commission would rather wait to see the effects of the Dodd-Frank Act in practice, before coming up with an initiative on its own. This could be qualified as a smart move, as EU companies will also have to comply to the rules of the Dodd-Frank Act if they are trading with U.S. stock-listed companies,” she wrote.

 

As an official response to the calls of the European Parliament, the Commission issued a Communication on Raw Materials on February 2, 2011, where it stated that it would “examine ways to improve transparency throughout the supply chain and tackle situations where revenues from extractive industries are used to fund wars or internal conflicts. But as Ms. Van Bockstael noted, one thing that should be kept in mind “is the fact that the primary goal of the Raw Materials Initiative, is to make sure the European Union has sufficient access and supply to natural resources of which the EU depends,”  

 

At the same time, the EU’s Commissioner for Trade Karel De Gucht, who previously served as Belgium’s foreign minister, stated that “the EU, as the world’s largest importer of raw materials, should not hesitate to live up to its own responsibilities in this, including those of our own companies.”

 

"The question now remains whether we can see an influence of the Kimberley Process and the Kimberley Process Certification Scheme on these recent developments," Ms. Van Bockstael wrote.

 

In the coloured gemstone sector, the footprint of the Kimberley Process is clearly visible, and particularly in the mining and marketing of tanzanite, which has come under scrutiny in 2002, following reports of a link between tanzanite smuggling and terrorism. Tanzanite is a blue gemstone found only in Tanzania.

 

The reports were never really substantiated, but the fallout from the incident, especially because they took place in the aftermath of the 9/11 terror attacks in the United States, led to the formulation of the Tucson Tanzanite Protocols.

 

Using the model of the Kimberley Process, the Tucson Tanzanite Protocols were formulated by a coalition that included representatives of all the leading U.S. and international stakeholders involved in the tanzanite industry, including miners, gemstone dealers, manufacturers, suppliers and retail jewellers, as well as representatives of the governments of Tanzania and the United States.

 

The Tanzanite Task Force is led by a steering committee chaired by Douglas Hucker, executive director of the American Gem Trade Association (AGTA). The Tanzanite Task Force includes several working groups and brings to mind the work of the KP since it has similarly named panels, including the Technical Working Group to develop and coordinate an export certificate, statement of warranty, and a monitoring system. There is also a Tanzanian Working Group to develop, implement, and monitor a system of in-country controls and develop and implement value-added activities, and an International Working Group to deal with warranties from the mine to the retailers.

 

Bringing to mind similar comments made by members of the diamond business, Hucker said: "Our responsibility is to take practical steps to ensure that the tanzanite trade is safeguarded from those who could abuse it. These measures will protect the interests of consumers and the integrity of our industry."

 

But tanzanite represents only part of the challenge faced by the coloured gemstone sector, and a more simple one inasmuch it is sourced entirely in one region of Tanzania. In the past the coloured gemstone industry has been dogged by reports of its other gemstones being used in unsavoury circumstances, such as emeralds helping launder the cocaine cartel’s transaction in Colombia and the proceeds of ruby sales in Myanmar being pocketed by the country’s military regime.

 

In a speech to the International Coloured Gemstone Association's 2011 Congress in Brazil this past May, World Diamond Council President Eli Izhakoff spoke of the relevance of the Kimberley Process to the coloured gemstone industry and trade. "Could our model work for the coloured gemstone industry and trade?” he asked. “Let us go one step further: would it be possible for the coloured gemstone and diamond industries to create a system that would protect the integrity of the entire gemstone pipeline,” he said.

 

"I have my doubts whether such a comprehensive mechanism is viable, but in theory it could be possible to establish KP-clones that protect the viability of the pipelines for different gemstones,” Izhakoff stated. “But an absolute prerequisite would be getting the general agreement from all the stakeholders that such systems are necessary."