Lebanon has never had a stellar reputation in the international diamond trade. Now a report released by industry consultants Tacy Ltd, entitled “Lebanon-Guinea Axis Emerges as a Major Diamond Laundering Route,” gives figures that suggest the country is involved in tax evasion and may even by handling conflict diamonds from the Ivory Coast.

Detailed statistics compiled by the Kimberly Process, the industry’s regulatory body established to monitor the trading of conflict diamonds, are not generally released to the public. However, Ian Smillie – one of the authors of the Kimberly Process Certification Scheme and research coordinator for Partnership Africa Canada, specializing in conflict diamonds – confirmed that Tacy’s figures were accurate.

The controls issued by the Kimberly Process have had only limited success in curbing the illicit trade of diamonds. In fact, Smillie  announced he would be stepping down from his position at Partnership Africa Canada at the end of 2009 due to his disillusionment with the Kimberly Process, the failings of which are perhaps best exemplified by Lebanon’s irregular trade statistics and the lack of controls and monitoring in Guinea, Lebanon’s new best friend in the diamond trade.

“Guinea’s internal controls are so bad, its diamonds could come from anywhere and they would not know,” the renowned conflict-diamond expert said.

Indeed, Guinea’s diamond trade statistics are suspicious at best. According to Smillie, the country has reported a 600% increase in diamond production in the past two years, while the Tacy report finds that Guinea’s trade with Lebanon has spiked simultaneously. From no reported exports to the country in 2006, by the third quarter of  2008 the country was providing 85% of Lebanon’s diamond imports.

While Guinea has attributed the spike in diamond production to the discovery of new mines, this has not been verified, and the Kimberley Process team sent to examine the situation last August is only just finalizing its report.

The rapid growth of the country’s diamond production may be connected to its neighbor Cote d’Ivoire, where conflict diamonds from the north of the country continue to be produced, extracted and smuggled out of the country, reaching international markets, according to Annie Dunnebacke of Global Witness, a London-based organization largely involved in pushing for reform against the exploitation of natural resources.

“Any increase in diamonds, any increase in exports in countries neighboring Cote d’Ivoire should be looked at very carefully… Guinea is the only one with a marked increase. The increase is so huge it couldn’t be accounted for only by diamonds from Cote d’Ivoire, but they could certainly be hidden in those numbers very easily,” said Smillie.

Given that 73% of Guinea’s total diamond exports as of the third quarter of 2008 were destined for Lebanon, it is likely that some conflict diamonds are coming into Beirut.

Another worrisome aspect of the Lebanon-Guinea diamond trade is found in Lebanon’s import/export statistics.  As of the third quarter of 2008, Lebanon had exported 272,612.80 more carats of gem-quality diamonds than it imported, an improbable statistic given that Lebanon has no diamond mines. According to the Tacy report, roughly 85% of those diamonds that entered the country came from Guinea.

Diamonds are traded internationally in two main categories: non-industrial (or “gem quality”) and industrial. The former can be cut into jewels while the latter are of a lower carat grade and are thus generally much cheaper. Industrial diamonds are used for cutting, to make drills and other tools.

While Lebanon exports around 70% more gem-quality diamonds than it imports, the same is not true for industrial diamonds: the country imports significantly more industrial diamonds than it exports.

As the total import and export numbers seem to match up, the surplus in gem-grade diamonds and deficit in industrial diamonds appears to be the result of a large-scale misclassification. Essentially, gem-quality diamonds enter Lebanon severely marked down as industrial grade.

“Somehow [Lebanon] seems to be turning industrial diamonds, imported at very low prices, into gem-quality diamonds at 35% greater value,” said Smillie.

According to Dunnebacke, occasional misclassifications on small shipments are common, but not on a scale as large as in Lebanon. One of the more-likely explanations for this misclassification is tax evasion.

 “The lower the value of the diamonds, the lower the taxes, so sending them out as industrial would obviously save somebody a lot of money,” said Smillie.

Jean Tabet, a lawyer for the Lebanese Syndicate of Professional Goldsmiths and Jewelers, says there is no import tax on any type of diamond entering the country. There are, however, export taxes on diamonds leaving Guinea, Lebanon’s primary diamond trading party.

Interestingly, the value of both industrial and non-industrial diamonds imported from Guinea are traded at a far lower price per carat to Lebanon than they are to other countries, indicating further fraud in the valuation of the diamonds entering Lebanon.

The Tacy report notes that Guinean industrial diamonds exported to Lebanon had an average price of $1.99 per carat, while the average price per carat for the rest of Guinea’s exported industrial diamonds was $25.07.

“The value varies widely,” Dunnebacke said before adding, “It’s not just that it varies widely, it’s that the value is incredibly low... There’s a lot of tax evasion and tax avoidance that goes on in the diamond world.”

While the large-scale irregularity and probable tax-evasion scheme begin in Guinea, where diamond exports appear to be mislabeled, Lebanon is nonetheless implicated and, not for the first time, the country appears to be disregarding the standards set forth by Kimberly Process. (In June of 2004 the country was suspended from the Kimberley Process Certification Scheme for its failure to abide by its rules and was not readmitted till September of 2005.)

The Kimberly Process is meant to ensure that all diamonds in signatory countries receive a certificate denoting their carat value prior to export. The contents of diamond shipments are supposed to be checked against this certificate upon arrival to a trading partner’s import site. Given that Lebanon’s diamond imports vary wildly from its subsequent exports, it would seem that these checks are not being conducted properly.

Lebanese authorities have yet to explain the irregularities in their diamond trade balance. “The Kimberley Process has asked Lebanon for an explanation regarding its odd statistics. As far as I know, there has been no satisfactory answer,” said Smillie.