The company’s appointment of a state watchdog as a sightholder has created a conflict of interest
Mungo Soggot
The man appointed by the state to advise on whether diamond producers should be exempted from paying export tax has been made a sightholder by the diamond giant De Beers.
Being a sightholder means that MacDonald Temane, a member of the state’s Diamond Board, becomes one of De Beers’s privileged clients a position that exposes him to a conflict of interest where the exercise of his duties to the state is concerned. Sightholders are the only diamond companies that receive goods directly from De Beers.
Temane, who this week flew to Kimberley on a De Beers airplane, chairs a special committee of the Diamond Board that effectively decides whether De Beers and other diamond producers can be exempted from paying tax on their exports. According to the Diamond Act, the deal is that producers can be exempt from export tax if they make available to the South African cutting industry the diamonds they want to cut and polish.
The chair of the Diamond Board, Abe Chikane, said he was aware that Temane’s diamond company had become a sightholder, adding that he would urgently be convening a meeting to discuss the matter. Chikane said the meeting would also address “more general issues with Section 59”, the export duty exemption system governed by Section 59 of the Diamond Act.
Temane chairs what is known as the “Section 59 committee”. Other members of the committee are also sightholders, including Transnet chair Louise Tager, who has little experience in the diamond industry. The presence of Tager and other sightholders on the committee irks many diamond cutters, one of whom said this week: “All she knows about diamonds is what she sees in Hyde Park [the upmarket Johannesburg shopping centre].”
Temane is a director of Fabrikant Salant Masingita Diamond manufacturers (FSM), the South African arm of Fabrikant, a leading trader of polished diamonds. FSM became a sightholder in January this year. Tager is a director and shareholder of ABT Diamond Cutting Works, which is also a sightholder.
Tager said she was appointed to the Diamond Board in April 1999, and has been on the Section 59 committee for just less than a year. She says she has been a director and shareholder of ABT Diamonds since the company’s inception in November 1997, and that the company became a sightholder in January last year. Tager says she goes in and out of the company when she has the time, refusing to provide an estimate for how much time she gives the company. She says that since joining the company she has participated in in-house training at ABT. Tager denied the existence of any conflict of interest between her positions at ABT and on the Diamond Board, saying conflicts of interest only arise when there is not disclosure.
Temane denies his becoming a sightholder has created a conflict of interest: “I think the Section 59 is a whole committee, and if you understand the workings of the board the whole committee comments to the board and the board takes a decision. I mean, it is not like you have me saying this is what should happen.”
Temane said it was better if members of the committee were knowledgeable about the diamond industry. Asked to comment about Tager’s qualifications, he said: “What do you want me to do? Throw her off?”
The tax exemption is not permanent. It is granted to De Beers in terms of an annual agreement with the government that is part of the complicated regulations governing the local diamond industry.
The export duty exemption agreement is up for renewal at the moment. The agreement obliges De Beers to give local diamond cutters first choice on diamonds suitable for the local industry before they are exported. In return De Beers gets its export tax exemption.
The Section 59 committee is supposed to advise the board on the renewal, and monitor whether producers, such as De Beers, are complying with their agreement to look after the local cutting industry.
The renewal of the Section 59 agreement is crucial for De Beers, as it allows it to avoid a 15% tax on exported rough diamonds, which could potentially run into hundreds of millions of rands.
Representatives of the South African diamond industry are supposed to select the goods they want at De Beers’s “layout”. The Section 59 committee presides over which representatives of the diamond industry both sightholders and non-sightholders attend the layout, which took place in Kimberley this week. These businesses select which diamonds they want to cut in South Africa. The Section 59 committee then advises De Beers what stones from the layout can be viably cut in South Africa.
According to the agreement, De Beers then takes the diamonds out the country and guarantees to supply to the South African cutters, carat for carat, the diamonds of equivalent size and quality they want from its worldwide stockpile.
De Beers’s argument is that South African cutters get access to the full range of its worldwide stock.
The Section 59 committee is supposed to monitor De Beers’s compliance with this agreement. One analyst says the problem is that when the diamonds come back from London they are parcelled together with foreign diamonds, making it difficult to monitor whether the same categories have been or have not been included.
One diamond industry analyst says the key to De Beers’s success is the discretionary power of its marketing arm in London; the more it sells before goods get to London, the less control it can exercise to set prices and maintain its monopoly.
Some analysts believe the real reason De Beers encourages local cutters to take foreign gems as well is that the company does not want to be in a position where it has to give local cutters only South African gems. If a precedent were to be set in South Africa, the company could be pressured into a similar deal in Botswana, the key to its diamond empire. However, an advantage for countries like South Africa and Canada in receiving only goods from their own country is that they can legitimately call them “conflict-free” diamonds.
De Beers has often said that it should not pay any export duty on the grounds that diamonds are the only mineral exports from South Africa that are subject to such a duty.
The logic behind the duty is to encourage the development of a local cutting industry, many players in which believe they have been given a raw deal. The difference with diamonds is that De Beers’s South African operation is part of its sprawling international empire through which it has regulated and controlled the world diamond market.
Temane confirms that he flew down to the De Beers layout this week on one of the company’s airplanes.
De Beers representative Tracey Peterson denied there was a conflict of interest. She said the entire committee, as opposed to just the chair, ruled on Section 59 agreements, and that the committee and the whole diamond board was representative of the diamond industry. Peterson said the board did not only regulate De Beers, but other diamond producers as well. De Beers accounts for 93% of South African diamonds. She confirmed there were other sightholders on the committee, but said it was unavoidable that key people in the South African diamond industry were sightholders.
She said the Section 59 committee each year indicated to the industry which stones could be viably cut in South Africa, after which De Beers brought back a spread of these stones from its global stockpile in the sight boxes it prepared for its clients. There is an auditable paper trail that provides the make-up for each box.
Peterson said more than half of South Africa’s diamonds were beneficiated in South Africa, and that local production could not alone satisfy the needs of local cutters.
Independent local diamond cutters have long expressed disquiet about the way in which Section 59 is handled. There have been many complaints about the fact that there has been insufficient job creation in the industry. Although De Beers says half South African diamonds are cut locally, this is by value and not by weight, which is where jobs can be created. There are about 400 licensed cutters in South Africa, and 17 sightholders.
The Independent Diamond Manufacturers Association of South Africa said last year: “The way that some members of the industry have interpreted, and possibly misused, the Act in self-interest, makes the present system of implementation a farce.” The association said there were many goods at De Beers’s layout last year that “could be of interest to non-sightholders. However, it was difficult to evaluate the goods properly at the layout as the inspection is more in the line of a road show.”
Additional reporting by David Le Page