International Trade: Significant Challenges Remain in Deterring  
Trade in Conflict Diamonds (13-FEB-02, GAO-02-425T).		 
                                                                 
Easily concealed and transported, and virtually untraceable to	 
their original source, diamonds are often used in lieu of	 
currency in arms deals, money laundering, and other criminal	 
activity. U.S. controls over diamond imports only require	 
certification from the country of last import--and thus cannot	 
identify diamonds from conflict sources. Although the United	 
States bans diamonds documented as coming from the National Union
for the Total Independence of Angola, the Revolutionary United	 
Front in Sierra Leone, and Liberia--all of which are subject to  
U.N. sanctions--this does not prevent such diamonds from being	 
shipped to a second country and mixed into parcels destined for  
the United States. GAO found that the Kimberley Process's	 
proposal for international diamond certification incorporated	 
some elements of accountability. However, it is not based on a	 
risk assessment, and some high-risk activities are subject only  
to "recommended" controls. Also, from the time when rough	 
diamonds enter the first foreign port until the final point of	 
sale, there exists only a voluntary industry participation and	 
self-regulated monitoring and enforcement system. These and other
shortcomings significantly undermine efforts to deter trade in	 
questionable diamonds.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-425T					        
    ACCNO:   A02758						        
  TITLE:     International Trade: Significant Challenges Remain in    
Deterring Trade in Conflict Diamonds				 
     DATE:   02/13/2002 
  SUBJECT:   Accountability					 
	     International economic relations			 
	     International organizations			 
	     International trade restriction			 
	     Risk management					 
	     Foreign trade agreements				 
	     Precious stones					 
	     Kimberley Process					 


******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-02-425T
     
What GAO Found

What GAO Found

The nature of diamonds and the international diamond industry?s operations
create opportunities for illicit trade, including trade in conflict
diamonds. Diamonds are a high- value commodity easily concealed and

transported, are mined in remote areas worldwide, and are virtually
untraceable to their original source. These factors allow diamonds to be
used in lieu of currency in arms deals, money laundering, and other

crime. Further, the diamond industry lacks transparency, which limits
information about diamond transactions. U. S. controls over diamond imports
generally do not require certification from the country of extraction- just
from the country of last import- and thus are not very effective in
identifying diamonds from conflict sources. While the United States bans
diamonds documented as coming from the National Union for the Total
Independence of Angola, the Revolutionary United Front in Sierra Leone, and
Liberia- all of which are subject to U. N. sanctions- this does not prevent
conflict diamonds shipped to a second country from being mixed into U. S.-
destined parcels.

GAO?s assessment of the Kimberley Process?s proposal for an international
diamond certification scheme found it incorporated some elements of
accountability. However, the scheme is not based on a risk

assessment, and some activities experts deem high risk are subject only to
?recommended? controls. Also, the period after rough diamonds enter the
first foreign port until the final point of sale is covered by a system of
voluntary industry participation and self- regulated monitoring and
enforcement. These and other shortcomings provide significant challenges in
creating an effective scheme to deter trade in conflict diamonds. Main
Countries Associated With Conflict Diamonds

INTERNATIONAL TRADE

Significant Challenges Remain in Deterring Trade in Conflict Diamonds
Statement of Loren Yager, Director, International Affairs and Trade United
States General Accounting Office GAO Testimony Before the Subcommittee on
Oversight of Government

Management, Restructuring and the District of Columbia, Committee on
Governmental Affairs, U. S. Senate

For Release on Delivery Expected at 9: 30 a. m., EST Wednesday, February 13,
2002 GAO- 02- 425T

Why GAO Did This Study Conflict diamonds are used by rebel movements to
finance their military activities, including attempts to undermine or
overthrow legitimate

governments. These conflicts have created severe humanitarian crises in
countries

such as Sierra Leone, Angola, and the Democratic Republic of the Congo. An
international effort called the Kimberley Process

aims to develop a diamond certification scheme to prevent the flow of
conflict diamonds. Legislation is also being developed to address U. S.
consistency with the Kimberley

Process. GAO was asked to assess the challenges associated with deterring
trade in conflict diamonds.

INTERNATIONAL TRADE Significant Challenges Remain in Deterring Trade in
Conflict Diamonds

This is a test for developing highlights for a GAO report. For additional
information about the report, contact Loren Yager at 202- 512- 4128. To
provide comments on this test highlights, contact Keith Fultz (202- 512-
3200) or email HighlightsTest@ gao. gov.

Highlights of GAO- 02- 425T, testimony before the Subcommittee on Oversight
of Government Management, Restructuring and the District of Columbia,
Committee on Governmental Affairs, U. S. Senate United States General
Accounting Office

G A O Accountability Integrity Reliability

Highlights

Page 1 GAO- 02- 425T Mr. Chairman and Members of the Subcommittee: I am
pleased to be here today to discuss our observations on the conflict diamond
trade

and U. S. and international efforts to deter this trade. The United Nations
General Assembly defines conflict diamonds as rough diamonds used by rebel
movements to finance their military activities, including attempts to
undermine or overthrow legitimate governments. These conflicts have created
severe humanitarian crises in countries such

as Sierra Leone, Angola, and the Democratic Republic of the Congo. The
United States and much of the international community are trying to sever
the link between conflict and diamonds while ensuring that no harm is done
to the legitimate diamond industry, which is economically important in many
countries. The principal international effort to address these objectives,
known as the Kimberley Process, aims to develop and implement an
international diamond certification scheme that will deter conflict diamonds
from entering the legitimate market. The Kimberley participants, including

government, diamond industry, and nongovernmental organization officials,
have reported back to the United Nations General Assembly with a proposal
they believe provides a good basis for the envisaged scheme. 1 Consistent
with the Kimberley Process, the U. S. Congress has legislation pending that
would require countries exporting diamonds to the United States to have a
system of controls to keep conflict

diamonds from entering their stream of commerce. Today I will discuss (1)
how the nature of diamonds and industry operations are conducive to illicit
trade; (2) U. S. government controls over diamond imports; and (3) the
extent to which the Kimberley Process international diamond certification
scheme, in its current form, has the necessary elements to deter trade in
conflict diamonds. My observations are based on our ongoing work on conflict
diamonds. Our work was initiated by a request from Senator Judd Gregg,
ranking member of the Subcommittee on

Commerce, Justice, State & Judiciary of the Senate Appropriations Committee;
Representative Frank Wolf, chairman of the Subcommittee on Commerce,
Justice, State

1 The proposal was presented in the form of a Kimberley Process Working
Document titled Essential Elements of an International Scheme of
Certification for Rough Diamonds, With a View to Breaking the Link Between
Armed Conflict and the Trade in Rough Diamonds (Nov. 29, 2001).

GAO- 02- 425T Page 2 & Judiciary of the House Appropriations Committee;
Representative Cynthia McKinney,

ranking member of the Subcommittee on International Operations and Human
Rights of the House International Relations Committee; and Representative
Tony Hall, ranking member, Technology and the House Subcommittee of the
Rules Committee. In conducting our analysis, we met with and obtained
information from numerous U. S., U. N., and diamond industry representatives
in the United States, Belgium, and at various meetings of the Kimberley
Process. Before I get into the specifics of these topics, let me provide a
brief summary.

Summary

The nature of diamonds and the operations of the international diamond
industry create opportunities for illicit trade, including trade in conflict
diamonds. Diamonds are mined in remote areas around the world and are
virtually untraceable back to their original source- two factors that make
monitoring diamond flows difficult. Diamonds are also a high- value
commodity that is easily concealed and transported. These conditions allow
diamonds to be used in lieu of currency in arms deals, money laundering, and
other crime. Lack of transparency in industry operations also facilitates
illegal activity. The movement of diamonds from mine to consumer has no set
patterns, diamonds can change hands numerous times, and industry
participants often operate on the basis of trust, with relatively limited
documentation. All of these practices reduce information

about diamond transactions. The lack of industry information is exacerbated
by poor data reporting at the country level, where import, export, and
production statistics often contain glaring inconsistencies.

U. S. control over diamond imports is based on its general control system
for most commodities. This control system requires that diamond import
documentation include the country of last export- which U. S. import
requirements consider the country of origin. Because the current import
control system does not require certification from the country of
extraction- just from the country of last export- it is not effective in
identifying diamonds that might come from conflict sources. Beginning in
1998, rough

GAO- 02- 425T Page 3 diamond imports from Angola and Sierra Leone not
bearing the official government certificate of origin as well as all rough
diamonds from Liberia were banned from the United States. 2 U. S. Customs
requires that all shipments from Angola and Sierra Leone

have a certificate of origin or other documentation that demonstrates to
Customs authorities that the diamonds were legally imported with the
approval of the exporting country governments. 3 However, without an
effective international system that can trace the original source of rough
diamonds, the United States cannot ensure that conflict diamonds do not
enter the country.

The Kimberley Process proposal for an international diamond certification
scheme lacks some key elements of accountability. We evaluated the scheme
using aspects of established criteria for accountability- control
environment, risk assessment, control activities, information and
communications, and monitoring. 4 While we do not expect the Kimberley
proposal to fully address all these elements, this examination provides
insights into its ability to deter trade in conflict diamonds. Our
assessment of the scheme showed that it incorporates some elements, such as
requiring that Kimberley Process Certificates that designate country of
origin for unmixed shipments accompany each shipment of rough diamond
exports. But some important elements are lacking, and others are listed only
as optional or recommended. For example, the scheme is not based on a risk
assessment-- an essential element. As a result, some activities that would

be deemed high- risk by industry experts as well as Kimberley participants,
such as the flow of diamonds from the mine or field to the first export, are
subject only to ?recommended? elements. Additionally, the period after rough
diamonds enter a foreign

port to a final point of sale will be covered by an industry system in which
participation 2 The United Nations Security Council has imposed
international sanctions on rough diamond imports from the National Union for
the Total Independence of Angola, the Revolutionary United Front in Sierra
Leone, and Liberia. 3 Executive Order 13213 dated May 22, 2001, banned all
rough diamond shipments from Liberia for an indefinite period.

4 The U. S. government, industry, and international entities such as the
World Bank accept these internal control standards applied to organizations.
See Standards for Internal Control in the Federal Government, (GAO/ AIMD-
00- 21.3.1, Nov. 1999), and Internal Control- Integrated Framework (1985),
published by the Committee of Sponsoring Organizations of the Treadway
Commission and used by the World Bank.

GAO- 02- 425T Page 4 is voluntary and monitoring and enforcement are self-
regulated. Other issues relating to

accountability are also being discussed by four Kimberley working groups:
the establishment of a secretariat; compliance with World Trade Organization
rules; sharing of statistics; and monitoring needs. Although the Kimberley
Process participants have achieved significant cooperation among industry,
nongovernmental organizations, and governments to address trade in conflict
diamonds, our work suggests that the participants face considerable
challenges in establishing a system that will effectively deter this trade.

Background

Conflict diamonds are primarily associated with four countries: Sierra
Leone, Liberia, Angola, and the Democratic Republic of the Congo. 5 In all
four countries, the production and/ or trade of diamonds have played a role
in fueling domestic conflict, or, as is the case with Liberia, fueling
conflict in neighboring Sierra Leone through the Revolutionary United Front
(RUF). Today, Sierra Leone is experiencing relative peace with the aid of
the United Nations and other efforts. Nonetheless, diamond mining remains
one of the only viable economic opportunities for ex- combatants, and thus
experts believe the ability to adequately manage this resource will be
important for efforts at establishing long- lasting peace. In Angola, the
National Union for the Total Independence of Angola (UNITA) retains control
of some diamond production areas, as well as unknown quantities of
stockpiled diamonds. And in the Democratic Republic of the Congo, diamonds
continue to serve as a source of revenue for armed militias fighting in the
north of the country. To date, United Nations sanctions have been targeted
solely at rough diamond exports from the RUF in Sierra Leone; Liberia; and
UNITA in Angola. Also, both the governments of Sierra Leone and Angola have
national diamond certification schemes in which certificates of origin are
issued and accompany rough diamonds from their first export to their first
import into a foreign country.

5 Adjacent countries, such as Congo- Brazzaville, Guinea, Cote d?Ivoire, and
the Gambia, have all been listed in U. N. reports as countries through which
conflict diamonds are smuggled. People named in U. N. reports for their
involvement in trading conflict diamonds have been citizens of the Middle
East, Europe, and the United States. Also, recent media reports have focused
on the possible use of diamonds by terrorists to fund their activities.

GAO- 02- 425T Page 5 Structure of Diamond Industry The international diamond
industry comprises three sectors: mining, rough diamond trading and sorting,
and cutting and polishing. This industry structure includes both

large and well- organized components as well as small, uncontrolled
operations. For example, due to the substantial capital required for deep
mining, just four companies mine 76 percent of the world supply of rough
diamonds. 6 Yet, across Africa, countless individual diggers mine widely
scattered alluvial fields 7 for diamonds. Similarly, while De

Beers controls a large percentage of diamond shipments to key trading
centers, U. N. data suggest that more than 100 countries worldwide
participate in rough diamond exporting. In terms of cutting and polishing,
markets have largely evolved to reflect labor costs, with 9 out of 10 rough
diamonds cut and polished in India. However, mining countries such as
Russia, South Africa, Botswana, and Namibia are trying to expand their
cutting

and polishing activities to supplement mining revenues. The Kimberley
Process In May 2000, African diamond producing countries initiated the
Kimberley Process in Kimberley, South Africa, to discuss the conflict
diamond trade. Participants now include states and countries of the European
Union involved in the production, export, and import of rough diamonds; as
well as representatives from the diamond industry, notably the World Diamond
Council, 8 and nongovernmental organizations. The goal is to create and
implement an international certification scheme for rough diamonds, based

6 These four companies are De Beers Consolidated Mines Ltd., Alrosa Ltd.,
Rio Tinto, and BHP Billiton. 7 Alluvial fields are surface areas containing
secondary deposits of weathered volcanic rock called kimberlite deposited by
river systems. 8 The World Diamond Council is an industry association
comprising the World Federation of Diamond Bourses and the International
Diamond Manufacturers Association, which formed this body expressly to
address conflict diamonds.

GAO- 02- 425T Page 6 primarily on national certification schemes 9 and
internationally agreed minimum

standards for the basic requirements of a certificate of origin. The
scheme?s objectives are to (1) stem the flow of rough diamonds used by
rebels to finance armed conflict aimed at overthrowing legitimate
governments; and (2) protect the legitimate diamond

industry, upon which some countries depend for their economic and social
development. U. N. General Assembly Resolution 55/ 56, adopted on December
1, 2000, requested that countries participating in the Kimberley Process
present to the General Assembly a report on progress developing detailed
proposals for a simple and workable international certification scheme for
rough diamonds.

According to the South Africa Department of Foreign Affairs, the Kimberley
Process submitted a report to the U. N. General Assembly in late 2001. 10
The report was accompanied by a proposal for an international certification
scheme for rough diamonds dated November 28, 2001, which was to provide the
basic elements envisaged for the certification scheme. Participants asked
that the certification scheme be established through an international
understanding as soon as possible, recognizing the urgency of the situation
from a humanitarian and security standpoint. The report also requested an

extension of the Kimberley Process mandate to the end of 2002 to enable
finalization of the international understanding. Those in a position to
issue the Kimberley Process Certificate were to do so immediately. All
others were encouraged to do so by June 1, 2002. Further, it was the
intention of participants to start full implementation of the scheme by the
end of 2002. Finally, a draft resolution seeking an international
endorsement of the scheme will be submitted to the U. N. General Assembly
for consideration, possibly as soon as late February.

9 National certifications schemes have been set up in Angola, Sierra Leone,
and Guinea. The High Diamond Council in Antwerp provides technical
assistance. 10 The report has to be translated into the working languages of
the United Nations before it can be distributed. This work is almost
complete, and the report is expected to be distributed to U. N. members in

New York very shortly.

GAO- 02- 425T Page 7 U. S. Participation in the Kimberley Process In May
2000, the U. S. government established an interagency working group to
provide input to and representation at the Kimberley Process meetings. The
working group is headed by the Department of State; other participants
include the Departments of

Commerce, Justice, and Treasury, U. S. Customs Service, Federal Trade
Commission, Office of U. S. Trade Representative, U. S. Agency for
International Development, National Security Council, Central Intelligence
Agency, and the Office of Science and Technology. The United States is
currently chairing the Kimberley Process working group on World Trade
Organization compliance issues.

Nature of Diamonds and Non- Transparent Industry Operations Create
Opportunities for Illicit Trade

The illicit diamond trade, including that in conflict diamonds, is
facilitated by the nature of diamonds and the lack of transparency in
industry operations. Although industry and nongovernmental organizations
have made estimates of both the illicit and conflict diamond trades, the
criminal nature of the activity precludes determination of the actual extent
of the problem. Conflict diamond estimates vary from about 3 to 15 percent
of the rough diamond trade and are often based on historical production
capacities for rebelheld areas. Some industry experts dispute the larger
percentage, believing it includes non- conflict illicit trade.

The Nature of Diamonds Facilitates Illegal Trade The nature of diamonds
makes them attractive to criminal elements. Diamonds are found in remote
areas of the world and can be extracted both through capital- intensive deep
mining techniques as well as from alluvial sources using rudimentary
technology. Individual diggers across west and central Africa mine alluvial
fields that are widely scattered and difficult to monitor, a problem made
worse by porous borders and corruption. Diamonds are easy to conceal and
smuggle across borders, and smuggling

GAO- 02- 425T Page 8 routes are well established by those who have done so
for decades to evade taxes. Though it may be possible for experts to
identify the source of an unmixed parcel of rough diamonds, once diamonds
from various sources are mixed, they become virtually

untraceable. Identifying the origin of alluvial diamonds is complicated by
the fact that the river systems depositing those diamonds run across
government- and rebel- held areas as well as national borders. Although
rough diamonds can be marked, once they

are cut and polished, any form of identification is erased. All of these
factors, combined with inadequate customs and policing worldwide, make
diamonds attractive to criminal elements who may use them to trade arms,
support insurgencies, and plausibly engage in terrorism. Likewise, diamonds
can be used as a means of currency in connection with

drug deals, money laundering, and other crime or as a store of wealth for
those wishing to hide assets outside the banking sector where they can be
detected and seized.

Industry?s Lack of Transparency Also Facilitates Illicit Trade The flow of
diamonds from mine to consumer, referred to as the ?diamond pipeline,? has
no set patterns. Diamonds can change hands numerous times as shown by the
fact that the value of world rough diamond exports is three times as large
as the value of world rough diamond production. According to industry
experts, diamonds are sold back and forth and mixed and re- mixed making
tracking a particular shipment through the pipeline and across borders an
arduous if not impossible task. Diamonds can be traded in smaller markets
and diverted through alternative routes either to disguise origin or in

response to low taxes and less burdensome regulations. Thus, the mobility of
the trade has also acted as a disincentive for individual governments to
implement stricter controls.

Limited transparency in diamond flows is reflected in inconsistent and
insufficient data. U. N. data show large discrepancies between export and
import data. For example, while Belgium reported selling $355 million worth
of rough diamonds to the United States in 2000, the United States reported
buying only $192 million worth of rough diamonds from Belgium. U. N. data
also suggest that reported world imports of rough diamonds from

GAO- 02- 425T Page 9 many countries far exceed those countries? production.
For instance, the Central African Republic?s production of rough diamonds
was worth $72 million in 2000, while global

imports from that country totaled $168 million, and the Democratic Republic
of the Congo?s production was worth $585 million in 2000, while global
imports from that country totaled $729 million. Similarly, global imports of
rough diamonds from the United Arab Emirates totaled $177 million in 2000,
while that country neither mines rough diamonds nor reports having imported
rough diamonds from producing countries.

These data inconsistencies can be attributed to a wide variety of factors
including:

differences in how customs officials appraise shipments so that export
values differ from import values; industry practices such as selling goods
on consignment or unloading stockpiles so that trade data differ from
production capacities;

false declarations by importers on where they obtained their shipment,
leading to data indicating a country?s exports exceed its production; or

smuggling. Unfortunately, diamond trade data limitations have been difficult
to rectify given that the industry has historically avoided close scrutiny.
According to industry experts and government officials, U. S. and
international diamond firms do not share trade information freely and
business may be conducted on the basis of a handshake, with limited
documentation. Furthermore, information problems resulting from industry?s

lack of transparency are made worse by poor data reporting from many mining
and trading nations.

Another factor with the potential to limit transparency in the international
diamond industry is the current trend toward merging mining with cutting and
polishing activities at the country level. In response to reduced demand and
declining rough diamond

prices, a number of mining countries are encouraging domestic cutting and
polishing. However, when diamonds are cut and polished in mining countries,
the source of the rough diamonds used cannot be verified.

GAO- 02- 425T Page 10

The United States Cannot Detect Conflict Diamonds With Present Import
Controls

Under its current import control system, the United States cannot determine
the true origin of diamond imports nor ensure that conflict diamonds do not
enter the country. In 1998, the United States began to enhance controls to
prevent conflict diamonds from

entering the country from U. N. and U. S. sanctioned sources. Since 1998,
there have been six diamond- related investigations. However, none of these
cases resulted in federal prosecutions relating to diamond smuggling.
Without an effective international system to identify the origin of rough
diamonds, the United States remains vulnerable to

diamonds from conflict sources sent to second countries and then shipped to
the United States.

Diamond Imports Subject to General Import Controls; Limited Controls Added
to Implement U. N. Sanctions Diamond imports are subject to the same import
controls used for most commodities. Documentation accompanying diamond
shipments entering the United States must include a commercial invoice,
country of last export, total weight, and value. However, the regulations do
not require exporters to specify the country of extraction nor the place of
first export. For example, rough diamonds could be mined in one country and
traded several times before reaching their final destination. The ability to
determine the true source of origin is further impeded because U. S. import
shipments can contain diamonds mixed together from numerous countries. Under
the current system, Customs would only have documentation citing the last
export country.

Until 1998, the United States did not consider conflict diamonds a commodity
of focus. But beginning in 1998, the United States put into place import
controls to target diamonds documented as originating from the National
Union for the Total Independence of Angola, the Revolutionary United Front
in Sierra Leone, and Liberia- all of which are subject to U. N. sanctions.
Rough diamonds from Liberia have been

GAO- 02- 425T Page 11 banned indefinitely from the United States. U. S.
Customs requires that all shipments from Angola and Sierra Leone have a
certificate of origin or other documentation that

demonstrates to U. S. Customs authorities that they were legally imported
with the approval of the exporting country governments. However, the
controls do not prevent diamonds from these conflict sources from being
shipped to a second country and mixed within shipments destined for the
United States.

In fiscal year 2000, about $816 million of rough diamonds from 53 countries
officially entered the United States through 19 different ports of entry.
According to Customs officials, 35 random physical inspections of rough
diamond mixed shipments have been performed since 1998. Of these, five cases
were found to have minor discrepancies primarily because of incorrect
documentation or the diamonds were misdelivered. 11 Customs officials stated
that it is virtually impossible to determine the original source of

rough diamonds based on physical inspection; thus U. S. Customs officials
must rely on the accuracy of the source cited in accompanying import
documentation.

Current Kimberley Certification Scheme Lacks Key Aspects of Accountability
The Kimberley Process working document describing the essential elements of
an international diamond certification scheme 12 does not contain the
necessary accountability to provide reasonable assurance that the scheme
will be effective in deterring the flow of conflict diamonds. Without
effective accountability, the certification scheme may provide the
appearance of control while still allowing conflict diamonds to enter the
legitimate diamond trade and, as a result, continue to fuel conflict. The
Kimberley scheme primarily provides a description of what participants
should do as well as ?recommendations? and ?options.? The document
describing the scheme is 11 According to U. S. Customs officials, these
inspections were suspended after September 11, 2001, because

the agencies? primary focus has shifted to security and anti- terrorism
efforts. 12 Essential Elements of an International Scheme of Certification
for Rough Diamonds, With a View to Breaking the Link Between Armed Conflict
and the Trade in Rough Diamonds (Nov. 29, 2001).

GAO- 02- 425T Page 12 divided into sections covering definitions, the
Kimberley Process certificate,

undertakings concerning international trade, internal controls at the
national and industry levels, cooperation and transparency, and
administrative matters. Elements of internal controls are addressed
throughout the document, such as the requirement that the Kimberley Process
certificates, designating the country of origin for unmixed parcels,
accompany each shipment of rough diamonds and that the certificates be
readily

accessible for a period of no less than 3 years. However, the scheme lacks
key aspects of effective controls, and some ?controls? are considered
?recommended? or ?optional.? Some of the areas needing further attention
include issues on which agreement has not

yet been reached. Working groups have been assigned to address these issues,
which include the possible establishment of a secretariat, compliance with
World Trade Organization rules, 13 sharing of statistics, and the level of
monitoring needed.

To assess the current scheme, we looked at evaluations of other
international certification schemes and other sources for criteria that can
be used to evaluate the Kimberley certification system. We believe the best
criteria available are based on standards for internal control that have
been developed for organizations. 14 The Kimberley Process participants
recognize the importance of internal controls, 15 and the U. S. government,
industry, and the international entities such as the World Bank have
accepted these standards. While the Kimberley Process is not an
organization, the criteria provide useful insights into the ability of the
Kimberley Process to achieve basic objectives of accountability and
transparency. The guidelines include five control elements- control
environment, risk assessment, control activities, information and 13 Under
the Kimberley scheme, participants are to ensure that no shipment of rough
diamonds is imported from or exported to a non- participant. However,
article XI of the General Agreement on Tariffs and Trade (GATT), 1994,
obligates countries to refrain from imposing quantitative restrictions or
similar measures on the importation of products from other countries. Two
possible exemptions under GATT are being discussed- article XX provides
general exemptions and article XXI provides a security exemption. 14 See
Standards for Internal Control in the Federal Government, (GAO/ AIMD- 00-
21.3.1, Nov. 12, 1999), and Internal Control- Integrated Framework,
published by the Committee of Sponsoring Organizations of the Treadway
Commission.

15 According to the November 2001 Kimberley Ministerial statement, ?an
internal certification scheme will only be credible if all participants have
established effective internal systems of control designed to eliminate the
presence of conflict diamonds in the chain of producing, exporting, and
importing rough diamonds within their territories??

GAO- 02- 425T Page 13 communications, and monitoring. I will discuss each
element and some of the key aspects lacking in the current Kimberley scheme.

Control Environment: A control environment is one with a structure,
discipline, and climate conducive to sound controls and conscientious
management. The Kimberley scheme faces serious challenges in meeting these
criteria.

Kimberley participants have been unable to agree on the form of
administrative support at the international level, whether it is a
secretariat or some other mechanism. According to the Kimberley document,
institutional arrangements, or the administrative support for the scheme,
will be discussed at a future plenary meeting, and no commitments have been
made with regard to staffing or funding. 16 Individual participants are
required to set up a system of national internal controls

and effective enforcement and penalties. It is unclear how and when the
capabilities of different participants to do so will be assessed and, where
needed, assistance provided. If countries fail to comply with the essential
elements of the scheme, then according to the scheme, they can be excluded
from trading with participants. However, whether this provision complies
with trade agreements such as those under the World Trade Organization has
been a point of contention since early in the process and remains under
discussion by one of the working

groups.

Political willingness as well as industry commitment to support and
implement Kimberley vary. Membership is voluntary, and despite efforts to
recruit more members, some key countries have not participated in the
Kimberley Process. Further, the United Nations discontinued its ?name and
shame? policy concerning trade in conflict diamonds because of the lack of
clear and consistently applied investigative standards. How the United
Nations responds to the Kimberley

16 Researchers reviewing multilateral environmental agreements have noted
that institutional arrangements have come to be seen as crucial to their
effectiveness and that the lack of institutions limits the capacity to
monitor states? implementation of and compliance with treaty requirements or
to take action when noncompliance is ascertained.

GAO- 02- 425T Page 14 document and what form the final document will take
(an agreement,

memorandum of understanding, or some other form) are not known. Risk
Assessment: A risk assessment is a mechanism for properly identifying,
analyzing, prioritizing, and managing risks to meet objectives. The
Kimberley Process does not include a formal risk assessment and thus
participants cannot be assured that appropriate controls are in place. Three
potential high- risk areas not adequately addressed in the Kimberley scheme
include the following.

Industry experts and Kimberley participants agree that unless the segment of
the diamond pipeline from when the diamond is first discovered in the
alluvial field or mine to the point it is first exported is subject to
controls, conflict diamonds may enter the legitimate trade. The scheme does
little to address this issue, offering only recommendations encouraging
participants to license diamond miners and maintain effective security.

Industry and others hold stockpiles of diamonds with undocumented sources
and the number of diamonds held in stockpiles may be considerable. Since the
Kimberley scheme requires information on origin, it is unclear how these
diamonds will be addressed. Apparently, any conflict diamond could be
claimed as a stockpiled diamond at the scheme?s initiation.

The period after rough diamonds enter a foreign port until their point of
sale as rough diamonds, polished diamonds, and jewelry will be covered by an
industry system called a chain of warranties in which participation is
voluntary and monitoring and enforcement are self- regulated. 17 Control
Activities: Control activities consist of policies, procedures, techniques,
and

mechanisms that ensure that management directives are being carried out in
an effective 17 According to industry officials, the World Diamond Council
will strongly recommend that its member organizations require their
individual members to make the following statement on all invoices for the
sale of rough diamonds, polished diamonds, and jewelry containing diamonds.
?The diamonds herein invoiced have been purchased from legitimate sources
not involved in funding conflict and in compliance with United Nations
resolutions. The seller hereby guarantees that these diamonds are conflict
free, based on personal knowledge and/ or written guarantees provided by the
supplier of these diamonds.?

GAO- 02- 425T Page 15 and efficient manner to achieve control objectives.
The Kimberley scheme?s inconsistent attention to control activities raises
concerns, such as the following.

While some internal controls are delineated, others are recommended or
considered optional without clear justification, and many controls are to be
developed at the national level where capabilities and political will
differ.

The industry chain of warranties is based on voluntary participation and
selfregulation. Although the scheme requires that all sales invoices of
participating industry be inspected by independent auditors to ensure that
the diamonds come from non- conflict sources, an audit trail is problematic
in an industry where

diamonds are sorted and mixed many times. Information and Communications: An
information and communication mechanism is needed for recording and
communicating relevant and reliable information to those who need it in a
form and time frame that enable them to carry out their internal control
responsibilities. Two concerns regarding the Kimberley scheme?s mechanism
for information and communication are as follows.

Although the Kimberley Process has identified information to be communicated
among participants, it has not fully worked out the details of what, how,
and when the information will be shared and used. Participants had a great
deal of difficulty

reaching agreement on sharing statistical data, and a number of issues
remain open. The working document states that the content, frequency,
timing, format, and methods of handling and exchanging statistical data are
to be developed by an ad hoc working group and adopted at a plenary meeting.

The European Union will function as one trading partner under the Kimberley
scheme. It remains unclear how its data will be compiled and shared in a
timely manner.

Monitoring: A monitoring mechanism consists of continuous monitoring and
evaluation to assess the quality of performance over time in achieving the
objectives and ensuring that the findings of audits and other reviews are
promptly resolved. Participants had a great deal of difficulty reaching
agreement on the need for monitoring. Concerns were

GAO- 02- 425T Page 16 raised about sovereignty. A working group is currently
addressing this element. The

Kimberley scheme?s monitoring mechanisms lack details and rely heavily on
voluntary participation and self- assessments. For example,

Monitoring is based on participants? reporting of other participants?
transgressions to initiate a verification mission. A participant can inform
another participant through the Chair if it believes the laws, regulations,
rules, procedures, or practices of that other participant do not ensure the
absence of conflict diamonds in the exports of that other participant.

Review missions are to be conducted with the consent of the participant
concerned and can include no more than three representatives of other
participant members. Membership and terms of reference of the review
missions have not yet been determined. The scheme does not discuss a
mechanism for ensuring that the findings of the review missions are promptly
resolved. No guidelines have been established for developing required self-
assessments.

No system has been proposed for monitoring the industry system of
warranties. No external audit of the scheme?s administration is discussed.
While we do not expect the Kimberley Process proposal to completely address
all aspects of accountability, we hope our analysis will be useful in
enhancing the scheme?s ability to deter the conflict diamond trade. Further,
we acknowledge that while the Kimberley Process has brought together
industry, nongovernmental organizations, and governments to address a
serious humanitarian issue, the participants face significant challenges in
deterring the trade in conflict diamonds.

Mr. Chairman and Members of the Committee, that concludes our prepared
statement. We will be pleased to answer any questions you may have.

GAO- 02- 425T Page 17 Contacts and Acknowledgments For future contacts
regarding this testimony, please call Loren Yager or Phillip Thomas at (202)
512- 4128. Individuals making key contributions to this testimony included

Kathleen Monahan, Zina Merritt, Kendall Schaefer, Sharla Draemel, and Janey
Cohen. (320111) __________________
*** End of document. ***