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Integrated Diamond Management (IDM)

 

Overview

More Detailed Description of IDM:

¨          Simultaneity: the chicken and the egg

¨          Establishing Competent Cooperatives

¨          The Buying Scheme

¨          The Credit Scheme

¨          The Earth to Export Scheme

¨          “Peace” or “Development” Diamonds: Developing a Fair Trade Diamond

 

Overview

The basic tenet of IDM is that the incentive structure must be changed if we are to ever hope to curb diamond smuggling that can support conflict and money laundering.  The “stick” of external regulation and enforcement in the artisanal diamond sector in countries with severely limited government resources, such as Sierra Leone, simply cannot succeed without strong community and investor commitment to responsible diamond management.  Conversely, by empowering locals to control many of the key diamond management decisions, and by dramatically increasing the economic benefits that accrue to local communities from “clean” mining and marketing, we create the incentives necessary to stem the flow of smuggled diamond value. 

 

The basic approach.  IDM eschews incremental changes in favor of a comprehensive recasting, which addresses fundamental, and interrelated, constraints simultaneously.  While retaining the traditional labor-intensive artisanal mining technologies, it alters basic components of the marketplace and the way resources are managed.  It integrates, a new system of resource management (mining cooperatives), a system to track diamonds from Earth to Export, better information to miners through training in the value of diamonds and collective winnings, improved environmental management, introduction of higher prices at the site of production (anchored in values set by government valuators), and marketing of a fair trade product consistent with the notions of a “development diamond”.  Think of it as the “final mile” of the Kimberly Process.  All financial flows are channeled through the banking system, consistent with the demands of the U.S. Patriot Act.  By having the Peace Diamond Alliance (PDA) provide credit to mining cooperatives, IDM is addressing the basic fuel driving current inequities: opaque and exploitive credit extended to individual miners, which has traditionally led to a system that has been described as “debt bondage.”  

 

The Product.  Firms that choose to invest in the PDA credit scheme will gain access to rough diamonds of unique quality.  Obviously, the production will come from fields renowned for extremely high value rough – Kono and Tongo Fields.  But, what is unique is that the PDA will be able to declare that these diamonds constitute a “Development Diamond”, or “Peace Diamond”, produced for the long-term benefit of the local population and 100% traceable to a particular cooperative and mine.  In addition, systems installed will make it possible to assure compliance with the Anti-money-laundering requirements of the U.S. Patriot Act and Sierra Leone’s new anti-money laundering laws.

 

Oversight.  Loans to cooperatives will be made by the Peace Diamond Alliance, a Sierra Leone NGO.  Under its agreement with USAID, Management Systems International (MSI) will provide technical assistance and oversight to the Alliance to ensure accountability and enhance its sustainability.  In addition, the British advocacy NGO, Global Witness, will independently monitor the program to ensure that it meets the highest standards of accountability and local beneficiation. 

 

Investors.  Investors in this first “pilot” season (2005) are The Rapaport Group and Kono’s Hope, supporting a total of five cooperatives.  Our intention is to scale up the number of cooperatives included in subsequent years.  Firms interested in participating should contact the program ([email protected]).

 

More Detailed Description of

Integrated Diamond Management (IDM)

 

Simultaneity:  the chicken and the egg

Fundamental to ensuring that diamonds do not slip into the black market and become the medium for arms merchants, revolutionaries, and money launderers is to develop a rigorous paper trail.  While the Kimberley Process is a positive step in that direction, it is too far “downstream” in the diamond marketing chain to be effective on its own in the case of artisanally produced diamonds.  The first steps of the paper trail – with incentives to follow that trail – must begin when the stones are initially identified in the washing process.  We must maintain a tight chain of custody, entwined with that paper trail, until the product is exported under the Kimberley Process.  We call this the Earth to Export tracking scheme.  But, the opaque diamond industry will not willingly adopt a system based on transparency unless it is in individual actors’ interest to do so, as follows:

¨          Local residents want the higher prices that the Buying Scheme could provide, but are “debt bound” though the existing support arrangements. 

¨          The Credit Scheme provided by the PDA would permit locals to sell their production through the Buying Scheme.

¨          Participation by locals in the Credit Scheme is dependent on cooperatives complying with the PDA Code of Conduct, on rigidly following Earth to Export rules for tracking their production, on following standards for equitable distribution of earnings within the cooperative and on responsible environmental management.

¨          By meeting those standards, the coops will produce stones capable of achieving fair trade status, making them more attractive to Buyers;

¨          Buyers will be able to purchase those valuable stones if they invest in PDA’s credit scheme and use the banks for the flow of funds.

 

A virtuous cycle will replace a previously vicious one – to the benefit of responsible businesses, local workers, community prosperity, and national, regional, and international peace.

 

Establishing Competent Artisanal Mining Cooperatives

The Civil War left most residents of diamond areas poor and ruined many local institutions.  Individually, it is very difficult to change things, and post-conflict mistrust constrains collective action.  Artisanal mining cooperatives are a practical approach to addressing this challenge.

 

In close cooperation with government – and at President’s Kabbah’s urging – MSI staff, Alliance members, Ministry of Trade and Industry (MT&I), and Ministry of Mineral Resources staffs held a series of workshops, throughout Kono district in 2004 to raise awareness among diggers and miners of the potential of cooperative labor to transform mining in Sierra Leone.  Follow-up by those organizations, coupled with commitment from hundreds of Sierra Leoneans in the mining industry, has led to the registration of over 25 cooperatives, headed by experienced miners, with elected officers, and typically consisting of fifty members.  Many of these have already received training from MSI and MT&I.  Naturally, some cooperatives are more competent than others.   MSI, in partnership with the MT&I and the PDA, will continue to work with registered cooperatives to help them achieve the kind of competence that warrants international investment.  MT&I helped community members establish a Union of Artisanal Mining Cooperatives of Kono District, which can further strengthen the cooperatives over time.

 

The Buying Scheme

Problems in the diamond industry in Sierra Leone revolve chiefly around greed.  The best way to shape behavior of miners, diggers, buyers, supporters, and exporters is by working with their desire to make lots of money, quickly.  We need to make legal trade more profitable to miners, diggers, and buyers than smuggling.  The most obvious way to accomplish that is to increase the price for production at the first point of sale.  Right now, there are many tiers of “middlemen” – brokers, agents, dealers and coaxers – operating between the person who produces the stone and the exporter who is the final purchaser in Sierra Leone.  But, even with all these intermediate transactions, there appears to be a buyers’ cartel that holds the mining pit price down far below world prices.  Accordingly, our approach is to develop a buying scheme where miners can sell their production directly overseas at a transparent price, or to local exporters in a competitive market.

 

Other alternatives could be pursued, but currently buyers can only access IDM production by investing in the Credit Scheme with the PDA.  Potential Buyers are matched with interested cooperatives.   Once a deal is struck the buyer invest funds with the PDA to finance production by the cooperative.  All diamonds produced by that cooperative under that funding must be sold to the Buyer.  As the diamonds are discovered, they are valued by a government valuer at the “reserve price” that would be applied to a tender process for the stones, and are stored according to the Earth to Export rules.  The Buyer transfers 50% of the reserve price to the cooperative via the banking system.  The diamonds are then transferred to the Buyer, consistent with the Kimberley process and Sierra Leonean law.  The Buyer is required to communicate with the cooperative the price it receives for the production, preferably via transparent tender.  The buyer is expected to retain 10% of the after-cost profit, remitting the remaining 90% to the cooperative via the formal banking system. 

 

The Credit Scheme

Few indigenous Sierra Leoneans possess adequate capital to finance artisanal mining.  Thus, they often must be “supported” by local business people.   Accounting for the loan is often in the hands of the Supporter.  The miner must sell the stone to the Supporter; the Supporter dominates prices negotiations.  It is often difficult for miners to gain a profit in this arrangement.  The Credit Scheme intends to provide an alternative to that scenario that features transparent credit, transparent pricing, and a possibility of profit.

 

To participate, artisanal mining cooperatives must be legally registered with the government.  MSI, in collaboration with government and the PDA, will select those cooperatives that are  most competent and likely to succeed from among those that are keen to participate in IDM.  Selection will be based on:

¨          Character references

¨          The quality of the business plan, developed with technical assistance from MSI

¨          The perceived productivity of the land to be mined

¨          The cohesiveness of the cooperative

 

Buyers interested in participating in the program will be assigned the highest-ranking cooperatives available.  Buyers will then deposit with the PDA funds to pay for the operating costs of the cooperative(s) in which they will invest, based on the cooperatives’ business plans.  Loans from the PDA to the cooperative will be in the nature of an operational overdraft.  Rather than receiving all resources at the initiation of the activity, they will be drawn down as planned resources are needed.  All financial transactions related to the loan, and payment for winnings will be run through the local branch of Rokel Bank in Koidu.

 

PDA/MSI will work closely with the cooperatives and buyers.  Wherever possible, procurement will be made directly by PDA, limiting the amount of cash in the hands of the cooperatives, to limit the possibility of leakage, until the cooperatives become more competent to manage the funds directly.  Bi-weekly reports, jointly prepared by the coop and the PDA/MSI will be sent to the investors to report on progress, note any constraints, and describe in detail any winnings.  All mining sites will be monitored by PDA and government Mines Monitors as the gravel is washed.  All winnings will be jointly identified as they are found by the coop, government, and PDA, and then tracked pursuant to the Earth to Export Scheme.

 

Winnings must be sold to the Buyer, as described in the Buying Scheme.  When the Buyer subsequently sells the production it receives, it will first recoup its loan amount, any advances to the coops made to the coops on discovery based on the government valuation, and any direct costs related to marketing the goods.  Any excess earnings will be shared with the cooperative pursuant to the Buying Scheme.

 

The Earth to Export Scheme

The Earth to Export scheme is pivotal to the integrity of the system.  Buyers must be sure that all stones produced under their investments are retuned to them.  Similarly, to enhance security, to support the fair trade qualities of the production, and to reinforce the integrity of the Kimberley Process, we must ensure that only stones from that mining pit are sold to the Buyer.

 

The process begins when the diamonds are discovered at the time of washing, where    representatives of the coop, the PDA, and government will be present.  At the end of each day’s washing – and in the presence of the three parties – all winnings are photographed, weighed, sealed and placed in a tamper-proof bag inside the cooperative’s safe deposit box.  Identification information (cooperative, date, witnesses, mining site, weight, number of stones) will be affixed to the bag.   If the stones are to be valued by the government valuator, that process will occur inside the bank, in the presence of all three parties, and the production will be properly bagged again and replaced in the safe deposit box before all three parties.  Stones deposited will remain in the box until the date they will be transferred to Freetown for export.  No one will be able to open the safe deposit box unless all three parties are present.

 

The diamonds will remain in their bags as the diamonds are transported to Freetown for export and will be jointly escorted by PDA and coop staff.  They will be safely kept in a safe deposit box in Freetown while awaiting export and will only be handed to the buyer’s shipping agent when both coop and PDA staff are present.  All exports will be in strict compliance with Sierra Leonean law and the Kimberley Process.

 

Developing a Fair Trade Diamond

Several investors have expressed an interest in developing a fair trade diamond.  This could increase the re-sale value to the buyer while providing positive incentives for ethical business practices.

 

The program will work with Global Witness to ensure the integrity of the system, and consider developing a fair trade product.  During the 2005 season Global Witness will provide external review the IDM processes to ensure that they are adequately rigorous.  Where appropriate they will recommend improvements and will provide an independent report on the overall integrity of the program.  Their reports will be made available to investors.  During the 2005 season Global Witness will also help the program assess the feasibility of developing a fair trade product, consider the steps necessary, and link the program with organizations that could work with the program to achieve fair trade status.