De Beers faces a multibillion-rand tax claim over a massive stockpile of diamonds it exported just ahead of South Africa’s first democratic election in 1994, the Mail & Guardian learnt recently. Subsequent exports are also under scrutiny.
De Beers shipped 19-million carats — about three and a half tonnes of unpolished stones — to London ahead of the April elections, and avoided paying a 15% export duty on the basis of a deal purportedly struck with the South African Diamond Board.
The move has always galled the government, which saw it as a vote of no confidence in South Africa’s future.
But according to sources familiar with a series of investigations into the agreements, the authorities are growing increasingly confident that they have the basis for a huge claim against the world’s dominant diamond marketer — perhaps as much as R1-billion for the 1994 shipment alone.
And Parliament’s public accounts committee (Scopa) is to recommend that the government take legal action.
De Beers has for more than a decade moved stones out of the country duty-free, relying on “section 59 agreements” struck in terms of the 1986 Diamond Act. It is the validity of those deals, and whether the levies can be clawed back, that is now at issue.
According to the Act, the export of rough diamonds is subject to a 15% duty, levied by the South African Diamond Board.
“An unpolished diamond shall be exempt from duty if it has been offered to a cutter … or for sale at a diamond exchange.” The board can grant exemptions if it is satisfied that these conditions have been met.
And it appears to have done so for De Beers in 1992. Sources in government and Parliament say De Beers figures suggest it manipulated its stocks in anticipation of a favourable deal on exports.
Duties paid to the Diamond Board, ranged between R19-million and R56-million per year in the preceding decade, plummeted to a derisory R15 000 in 1991.
They have never recovered.
Questions are now being asked about whether the agreement was valid, and whether De Beers had in fact offered the stones to local cutters or diamond traders. The board is supposed to keep track of this, but it appears to have been less than rigorous.
To complicate the issue further, the board, which has long struggled with governance weaknesses, cannot find its copy of that agreement.
Diamond Board chief executive Louis Selekane confirmed it was missing, but declined to comment further, saying the issue was being dealt with by the South African Revenue Service (Sars), National Treasury and the Department of Minerals and Energy.
Government officials confirmed that Sars has given advice on the levies, but revenue s ervice spokesperson Adrian Lackay stressed that it is not empowered by the Diamonds Act to raise a tax assesment or launch a formal investigation into the exports.
“It is the function of the board or the department of minerals and energy. They entered into these agreements,” he said.
Despite confusion over who is driving the process, Scopa officials say they are determined to see it taken futher.
Details of moves taking place behind the scenes first began emerging in May, when Auditor General Shauket Fakie reported to Scopa on the 2004 financial statements of the Diamond Board. The board is supposed to derive most of its income from the levies, and Fakie qualified his opinion on its annual financial results largely on the basis of confusion over the validity of the exemption.
All exemptions since granted to the company are effectively based on the 1992 agreement, Fakie said at the time.
A draft recommendation formulated by Scopa states: “The relevant state institutions [should] initiate legal proceedings with a view towards resolving the section 59 exemption in question — a special meeting should be convened by the auditor general for this purpose within 30 days after the receipt of the resolution.”
The political climate is ripe for a battle over gemstones. The Diamonds Ammendment Bill, currently under consideration in Parliament, has as its primary aim the creation of more substantial local jewellery and diamond cutting industries.
It aims to achieve that by closing the apparent loopholes in the 1986 Diamonds Act that enabled De Beers to win exemptions.
It also proposes the creation of a state Diamond Export and Exchange Centre, which would buy and aggregate a proportion of all South African production for sale to local cutters.
Just what proportion of production would be affected is not clear.
This poses a direct challenge to De Beers’s business model, which entails close control of rough diamond sales through the London-based Diamond Trading Company.
De Beers said it was not able to comment on the question of exemptions, as the relevant executives were travelling and out of contact. And its official line on the new legislation remains cautious.
“It is our understanding that the Bill will proceed to a public hearing stage … De Beers trusts that the constructive submissions presented in the process of formulating this Bill will be considered on their merits,” the company said.