Smugglers of illegal goods succeed by avoiding physical detection of their products. Hence cocaine traders hide their wares inside ping pong balls or even humans. But for legal products, such as cigarettes or alcohol which are smuggled to evade tax, the key to success is openly hiding smuggled goods, with fake paperwork.
A well-faked provenance is especially essential for certain high value products, where buyers may already be alert to concerns about legitimacy, such as wine, antiques, art and also diamonds. Unlike the former products, diamonds are impossible to fake to a moderately trained eye. But it is much harder to detect where a diamond is from, even with scientific analysis, than whether a colorless stone is a diamond. And because diamonds are often found in places run by dictators and despots, there is a business in faking a "blood" diamond's provenance to pretend it was mined elsewhere.
The Kimberley Process is named after the famous diamond mining areas of South Africa where negotiations first took place designed to approve locations which follow good practices. The 75 nations signatory to the Kimberley Process endeavor to outlaw blood or conflict diamonds, and ensure they don't make it to lucrative markets. But while the Process is a valuable exercise, many blood diamonds slip through. In India's main Heera diamond market, local sources tell me that blood diamonds sell for at least 30% less than those with Kimberley Process certification. So given the millions of carats of diamonds that pass through this market every week, faking certificates is a high value business.
Some of those receiving fake certification come from mines controlled by the despotic leadership of Robert Mugabe, President of Zimbabwe. Although Mugabe's ZANU PF party is in an uneasy coalition with the far more democratic MDC party run by Morgan Tsvangirai, the MDC has no control over the military and it is the military that control the diamonds.
When I visited the Marange diamond field in Zimbabwe in 2007, I was one of a rare group of white visitors. Most of the others were invited – a couple of specially-selected and friendly journalists and some Israeli diamond traders – but I wasn't, which made it dangerous for me to stay long and dangerous for any black Zimbabwean to talk to me.
The field was controlled by Zimbabwe's military, which according to many local sources used violence and intimidation to prevent workers talking to any unauthorized foreign writers. These scared workers had to dig out the diamonds and were paid a pittance for doing so. Some locals said workers trying to escape were even shot by gunmen in helicopters. From the little I was able to actually see, their living conditions were very poor.
Unsurprisingly, the EU and US have sanctions in place against the ZANU PF elite in Zimbabwe and diamonds from Marange are not allowed to be sold in these nations. But there was disagreement among some of the 75 signatories to the Kimberley Process as to whether Marange diamonds should be approved. The power sharing deal struck between Zanu PF and MDC gave hope that democracy would return to Zimbabwe, and hence legitimacy to Marange's diamonds. As a result, for several months in 2010, trade restrictions were lifted. It soon became obvious that Mugabe's henchmen were the only ones profiting from Marange's diamonds. But over one million carats of diamonds from the field at a value of $62 million were sold in Dubai, before restrictions were reinstated later in the year.
This trade window means that there are legal Marange stones on the market, but far more than $62 million dollars worth have probably been traded. At the Heera market, which is one of the main uncut diamond trading locations in the world, vast numbers of diamonds are traded every day. And according to a report in the UK's Sunday Times newspaper, undercover reporters were offered fake provenance documents, which make it much easier to export such products into the richest markets of US and Europe.
When I spoke with India's fake product investigators recently, they all said how important the paper trail is to ensuring a product's clean passage past customs officials. The ability of Heera's traders to provide fake provenance documents as well as fake Indian authenticity documents of the diamonds' cut, color, carat and clarity, means they can increase value enormously, and evade detection.
India's Federal authorities have acted; after all, they apparently lose a lot of tax revenue from the $30 billion Indian diamond industry. In May, two Indian traders were arrested for smuggling a cache of illegal Marange diamonds, which came via Nigeria and with a market value of about $1.5m. In 2010 in a previous case, two diamond traders were sentenced to four years each for their role in selling $880,000 of illegal Marange diamonds. Such successes are rare and an exception since most investigators think that because of clever fake provenance documents, millions of carats of Marange diamonds have hit the market, and more broadly a substantial minority of the world's diamonds, perhaps even a few engagement rings in America, are from diamonds mined under slave labor. And while that is bad enough, worst still is that the revenue generated helps keep odious leaders like Zimbabwe's Robert Mugabe, from seeking real power sharing and democratic reform.
Roger Bate is the Legatum Fellow in Global Prosperity at AEI.