Corruption in the chain artificially raises prices, plumping the pockets of the already rich.
It is said in the diamond business that each rough stone crosses at least three borders before anyone cuts and polishes it. In 2012, total world production of mined diamonds stood at about 128-million carats valued at $12.6-billion. But the total imports of diamonds by the countries aligned to the Kimberley Process, which exists to stem the flow of "conflict diamonds", were three times this figure – 406-million carats valued at about $51-billion.
So, without cutting, and because of the diamonds being repeatedly retraded between countries, their value had risen from about $98 a carat to about $125.
The first time a rough diamond crosses a border it is from the country of production – in Africa, Canada or Russia – to where it is aggregated.
Under the 2011 marketing agreement between Botswana and De Beers, the aggregation of most of De Beers's diamonds is now returning to their geological home in Africa, that is, Botswana, so diamonds produced by De Beers in Canada, Namibia and South Africa go to Botswana rather than to De Beers's office in London, the former capital of diamond aggregation.
The second time a rough diamond crosses a border it is often being traded for "cleaning" – to clear it of any possibility that the owner will have to pay income taxes in another jurisdiction, gain any other commercial benefits from it or use it to launder money from other businesses or fund criminal activities.
Easy to smuggle
The beauty of diamonds lies not just in their appearance but also in their high value to weight. This has made them easy to smuggle and, because of their natural scarcity and the De Beers cartel in the 20th century, they were a good hedge against inflation and economic and political crises.
But, increasingly, organisations such as the Organisation for Economic Co-operation and Development (OECD) are taking a keen interest in diamonds and their use to launder money and fund terrorism. A major publication by the OECD on diamonds and money laundering is expected in the coming months.
The third time a rough diamond crosses a border it is to be cut – and that usually is in India, which, despite the pretensions of the Southern African countries such as Botswana, South Africa and Namibia, is basically where 80% to 90% of the world's diamonds were cut in 2012. India regularly boasts that 14 out of every 15 diamonds set in jewellery in the world were processed in India.
Diamonds are among India's biggest export sectors and were responsible for exports of $43-billion (14% of its total exports) in the financial year 2011-2012. Diamond production is one of its leading growth sectors and employs an estimated one million people.
About half of the world's production of rough diamonds passed through the Dubai Diamond Exchange in 2012 and, in the 21st century, it is rapidly replacing Antwerp and Tel Aviv as the trading centre of choice. In 2012, Dubai imported about 60-million carats of rough diamonds and exported nearly the same volume.
So what are the diamonds doing in Dubai? The short answer is they are increasing in value. The average price of the 60-million carats of rough diamonds entering Dubai in 2012 was $78 a carat and, when the same volume of rough left, it was $112 a carat, an almost 45% increase, which is what you would expect from trade with a country that offers businesses a 50-year tax holiday.
Make your profits in a tax haven and you avoid the issues you find in those very few countries that are still taxing diamantaires on what they say their income and profits are.
Because diamond traders are notoriously economical with the truth when it comes to the real price of diamonds, most diamond jurisdictions, such as Belgium and Israel, long ago dispensed with the nicety of even asking diamantaires what their incomes are and have moved to presumptive taxes based largely on turnover.
But evading income tax in the diamond industry, in which there are potentially thousands of different grades of diamond that can make the appearance of low or zero profits almost pro forma, predates the ease and simplicity of evasion that tax havens such as Dubai and Switzerland have created.
One the most important commercial benefits of these havens lies in the secrecy they permit when it comes to the corrupt trade in diamonds.
Let us say you are a corrupt official of a diamond-exporting country. Assume that you have a shipment of diamonds worth $100-million but you value it at $50-million. This allows you to avoid the payment of export taxes or royalties on half the value and to split some of the benefits with the corrupt official.
This is among the more profitable of rough diamond transactions but you still need a place where secrecy is respected and where you can realise the full $100-million value of the transaction by trading with a related company.
Dubai's imports of rough diamonds in 2012 came from several conflict-prone producing countries in Africa, including the Democratic Republic of Congo (DRC), Zimbabwe and Angola.
Not one of these countries has had a happy history with diamonds and Zimbabwe and the DRC have had their share of problems with the Kimberley Process itself.
According to Kimberley statistics, three-quarters of Zimbabwe's 12-million carats of diamond exports in 2012 went straight to Dubai.
Almost half of Angola's production and a quarter of the DRC's production were exported to Dubai but that is by no means where the bulk of Dubai's trade is coming from. It is small stuff when compared with the two biggest users of the tax-free trading environment – the European Union and India.
India imported roughly a quarter of its rough diamonds from Dubai and the rest from Europe. In 2012, approximately half of Dubai's exports of rough diamonds were to India, which makes Dubai an important entrepôt for the trade from Africa to India.
The EU has been one of the main destinations for exports. It is by no means simply Africans and Indians using Dubai as a laundry service of choice.
Dubai also has a thriving polished diamond market. Its tax-free environment has led to massive growth and the country becoming one of the world's major diamond centres.
But there is another reason for this burgeoning trade in rough and polished diamonds. Until early this year, India allowed polished diamonds to be imported duty-free while simultaneously providing subsidies to stimulate the country's largest export.
The ever-industrious Indian diamantaires developed a technique of ripping off their national diamond trading system called "round tripping". These subsidies were very lucrative but were dependent on the export of cut diamonds. So some of the Indian traders would ship the same consignment of cut and polished diamonds five or six times across the Indian Ocean to Dubai, claiming export credits each time.
Very rough trade
But this illicit trade went full circle because the Indian authorities also required the Indian cutters to show that they had processed the rough diamonds and so they would have to "round trip" rough diamonds as well as cut and polished diamonds and so volumes in this very rough trade also increased massively – until the Indian government finally imposed a 2% import duty in 2013 on imported cut diamonds.
Because there remain several commercial reasons for round tripping, not just skimming for export credits, this may decrease the trade significantly across the Indian Ocean but not eliminate it altogether.
Dubai is by no means the only country that plays the role of entrepôt for the freewheeling trade in rough diamonds but it is now by far the biggest. Its importance is also a reflection of the shift in international trade patterns that increasingly excludes Europe and brings Africa and Asia closer together.
Now Dubai and several provinces in China are starting to swamp the traditional tax havens and gaining an important place in the global diamond market.
And, all the while, the world's diamantaires will continue to claim that they make no profits from diamonds that are in the pipeline – and the schools and hospitals so desperately needed in Africa and India will not be built.
These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed