    Conflict Diamonds: Agency Actions Needed to Enhance
    Implementation of the Clean Diamond Trade Act (27-SEP-06,
    GAO-06-978).

    In 2003, the United States and other countries began implementing
    the Kimberley Process Certification Scheme (KPCS) to curtail the
    trade of rough diamonds that had fueled severe conflicts in
    Africa, known as conflict diamonds. CDTA provides the statutory
    framework for U.S. implementation of the KPCS. As mandated in
    CDTA, this report (1) describes the institutional framework
    established to implement the act, (2) examines implementation of
    the domestic provisions of the act and challenges it faces, and
    (3) examines how the United States has helped to strengthen the
    KPCS and challenges it faces.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-978
        ACCNO:   A61464
      TITLE:     Conflict Diamonds: Agency Actions Needed to Enhance
    Implementation of the Clean Diamond Trade Act
         DATE:   09/27/2006
      SUBJECT:   Data collection
    	     Documentation
    	     Export regulation
    	     Exporting
    	     Federal law
    	     Foreign trade policies
    	     Import regulation
    	     Importing
    	     Inspection
    	     Internal controls
    	     International cooperation
    	     International organizations
    	     International trade
    	     International trade regulation
    	     Monitoring
    	     Precious stones
    	     Program implementation
    	     Africa
    	     Kimberley Process

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    GAO-06-978

         * Results in Brief
         * Background
              * Kimberley Process Certification Scheme
              * Clean Diamond Trade Act
         * Several U.S. Agencies and USKPA Have Implemented CDTA
              * U.S. Agencies and USKPA Have Implemented CDTA's Domestic Pro
              * U.S. Agencies Have Implemented the International Provisions
         * U.S. Agencies Have Improved Systems for Implementing CDTA's
              * Census Has Improved Collection and Reporting of Rough Diamon
              * CBP's System to Control Rough Diamond Imports Has Weaknesses
                   * CBP's Import Control Process Involves Documentation Review o
                   * CBP Does Not Have a Policy or Plan for Conducting Physical I
                   * The United States Has Confirmed Few Import Receipts with For
              * U.S. System to Control Rough Diamond Exports Shows Weaknesse
                   * Census, State, and USKPA Have Established System to Control
                   * U.S. Export Process Involves Limited U.S. Government Monitor
                   * Monitoring of Export Operations Limited to Electronic Data C
                   * USKPA does not have a plan to conduct reviews of licensees
                   * U.S. Trading Partners Report Problems with U.S. Kimberley Pr
         * The United States Has Helped to Strengthen KPCS Internationa
              * The United States Has Participated in KPCS Activities and Re
              * The United States Has Helped Two Countries in Their Efforts
                   * U.S. Diamond-Related Assistance Helped Sierra Leone Comply w
                   * Diamond Management Program
                   * The Diamond Project
                   * Diamond Policy and Management Project
                   * Peace Diamond Alliance Support Project
                   * Integrated Diamond Management Program
                   * U.S. Diamond-Related Assistance Is Helping Liberia in Its Ef
                   * Donor Assistance Faces Challenges, But a Regional Approach f
         * Conclusions
         * Recommendations for Executive Action
         * Agency Comments and Our Evaluation
         * Appendix I: Objectives, Scope, and Methodology
         * Appendix II: U.S. and Global Trade In Rough Diamonds
         * Appendix III: Top Polished Diamond Exporting and Top Diamond
         * Appendix IV: Timeline of KPCS and CDTA-Related Events
         * Appendix V: List of KPCS Participants
         * Appendix VI: Comments from the Department of State
         * Appendix VII: Comments from the Department of the Treasury
         * Appendix VIII: Comments from the Department of Homeland Secu
         * Appendix IX: Comments from the Department of Commerce
         * Appendix X: Comments from the Department of Interior
         * Appendix XI: GAO Contact and Staff Acknowledgments
              * GAO Contact
              * Staff Acknowledgments
                   * Order by Mail or Phone
         * d06978page1-3v1.pdf
              * Results in Brief
              * Background
                   * Kimberley Process Certification Scheme
                   * Clean Diamond Trade Act
              * Several U.S. Agencies and USKPA Have Implemented CDTA
                   * U.S. Agencies and USKPA Have Implemented CDTA's Domestic Pro
                   * U.S. Agencies Have Implemented the International Provisions
              * U.S. Agencies Have Improved Systems for Implementing CDTA's
                   * Census Has Improved Collection and Reporting of Rough Diamon
                   * CBP's System to Control Rough Diamond Imports Has Weaknesses
                        * CBP's Import Control Process Involves Documentation
                          Review o
                        * CBP Does Not Have a Policy or Plan for Conducting
                          Physical I
                        * The United States Has Confirmed Few Import Receipts
                          with For
                   * U.S. System to Control Rough Diamond Exports Shows Weaknesse
                        * Census, State, and USKPA Have Established System to
                          Control
                        * U.S. Export Process Involves Limited U.S. Government
                          Monitor
                        * Monitoring of Export Operations Limited to Electronic
                          Data C
                        * USKPA does not have a plan to conduct reviews of
                          licensees
                        * U.S. Trading Partners Report Problems with U.S.
                          Kimberley Pr
              * The United States Has Helped to Strengthen KPCS Internationa
                   * The United States Has Participated in KPCS Activities and Re
                   * The United States Has Helped Two Countries in Their Efforts
                        * U.S. Diamond-Related Assistance Helped Sierra Leone
                          Comply w
                        * Diamond Management Program
                        * The Diamond Project
                        * Diamond Policy and Management Project
                        * Peace Diamond Alliance Support Project
                        * Integrated Diamond Management Program
                        * U.S. Diamond-Related Assistance Is Helping Liberia in
                          Its Ef
                        * Donor Assistance Faces Challenges, But a Regional
                          Approach f
              * Conclusions
              * Recommendations for Executive Action
              * Agency Comments and Our Evaluation
              * GAO Contact
              * Staff Acknowledgments
              * GAO's Mission
              * Obtaining Copies of GAO Reports and Testimony
                   * Order by Mail or Phone
              * To Report Fraud, Waste, and Abuse in Federal Programs
              * Congressional Relations
              * Public Affairs

    Contents

    Letter 1

    Results in Brief 3
    Background 6
    Several U.S. Agencies and USKPA Have Implemented CDTA 10
    U.S. Agencies Have Improved Systems for Implementing CDTA's Domestic
    Provisions but Are Still Vulnerable to Illicit Trade 13
    The United States Has Helped to Strengthen KPCS Internationally, but
    Assistance-Related Efforts Face Challenges 29
    Conclusions 38
    Recommendations for Executive Action 40
    Agency Comments and Our Evaluation 41
    Appendix I Objectives, Scope, and Methodology 42
    Appendix II U.S. and Global Trade In Rough Diamonds 44
    Appendix III Top Polished Diamond Exporting and Top Diamond Mining
    Countries 46
    Appendix IV Timeline of KPCS and CDTA-Related Events 48
    Appendix V List of KPCS Participants 49
    Appendix VI Comments from the Department of State 51
    Appendix VII Comments from the Department of the Treasury 55
    Appendix VIII Comments from the Department of Homeland Security 57
    Appendix IX Comments from the Department of Commerce 59
    Appendix X Comments from the Department of Interior 61
    Appendix XI GAO Contact and Staff Acknowledgments 62

    Tables

    Table 1: U.S. Agency Responsibilities for Implementing CDTA's
    International Provisions 12
    Table 2: U.S. Import Confirmations to Select Countries Compared to All
    Other Trading Countries, 2004 and 2005 22
    Table 3: Number of U.S. Kimberley Process Certificates Issued, 2003-2005
    26
    Table 4: U.S.-Funded Diamond-Related Projects Supporting the
    Implementation of KPCS in Sierra Leone and Liberia 31
    Table 5: Top Destinations for U.S. Rough Diamond Exports, 2005 (value > 1
    percent of U.S. exports) 44
    Table 6: Top Sources of U.S. Rough Diamond Imports, by Exporting
    Participant, 2005 (value > 1 percent of US imports) 44
    Table 7: Top (Non-Mining) Rough Diamond Exporting KPCS Participants, 2003
    (exports > $200 million) 45
    Table 8: Economic Importance of Mining for Selected Countries, 2003 45

    Figures

    Figure 1: KPCS Structure and Responsibilities 8
    Figure 2: Discrepancy in U.S. Rough-Diamond Trade Volume and Census Data
    Improvements 17
    Figure 3: U.S. Import Control Process and Weaknesses 18
    Figure 4: U.S. Export Control Process and Weaknesses 24
    Figure 5: Diamond Mining Site in Sierra Leone-A Recipient Country of U.S.
    Assistance 34
    Figure 6: Liberian Ministry of Lands, Mines, and Energy Building and
    Secured Annex under Construction for Housing Liberia's Rough Diamond
    Exporting and Importing Authority 36
    Figure 7: Top Polished Diamond Exporting Countries, 2004 (estimated
    exports > $200 million) 46
    Figure 8: Top Diamond Mining Countries, 2003 (mining value > $50 million)
    47

    Abbreviations

    AES Automated Export System CBP Customs and Border Protection CDTA Clean
    Diamond Trade Act DIPAM Diamond Policy and Management Project IDMP
    Integrated Diamond Management Program KPCS Kimberley Process Certification
    Scheme MSI Management Systems International PDA Peace Diamond Alliance
    Support Project UN United Nations USAID United States Agency for
    International Development USGS United States Geological Survey USKPA
    United States Kimberley Process Authority WTO World Trade Organization

    Report to Congressional Committees

    United States Government Accountability Office

    GAO

    September 2006

    CONFLICT DIAMONDS

    Agency Actions Needed to Enhance Implementation of the Clean Diamond Trade
    Act

    GAO-06-978

    United States Government Accountability Office

    Washington, DC 20548

    September 27, 2006 September 27, 2006

    The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
    Ranking Minority Member Committee on Finance United States Senate The
    Honorable Charles E. Grassley Chairman The Honorable Max Baucus Ranking
    Minority Member Committee on Finance United States Senate

    The Honorable Richard G. Lugar Chairman The Honorable Joseph R. Biden, Jr.
    Ranking Minority Member Committee on Foreign Relations United States
    Senate The Honorable Richard G. Lugar Chairman The Honorable Joseph R.
    Biden, Jr. Ranking Minority Member Committee on Foreign Relations United
    States Senate

    The Honorable Henry J. Hyde Chairman The Honorable Tom Lantos Ranking
    Minority Member Committee on International Relations House of
    Representatives The Honorable Henry J. Hyde Chairman The Honorable Tom
    Lantos Ranking Minority Member Committee on International Relations House
    of Representatives

    The Honorable William M. Thomas Chairman The Honorable Charles B. Rangel
    Ranking Minority Member Committee on Ways and Means House of
    Representatives The Honorable William M. Thomas Chairman The Honorable
    Charles B. Rangel Ranking Minority Member Committee on Ways and Means
    House of Representatives

    When legitimately traded, rough diamonds (uncut and unpolished diamonds)
    can make a major contribution to the economies of producing, exporting,
    and importing countries, especially developing countries. In the 1990s,
    however, rough diamonds that became known as conflict diamonds fueled
    severe conflicts and humanitarian crises in countries such as Liberia,
    Sierra Leone, the Democratic Republic of the Congo, and Angola.1 When
    legitimately traded, rough diamonds (uncut and unpolished diamonds) can
    make a major contribution to the economies of producing, exporting, and
    importing countries, especially developing countries. In the 1990s,
    however, rough diamonds that became known as conflict diamonds fueled
    severe conflicts and humanitarian crises in countries such as Liberia,
    Sierra Leone, the Democratic Republic of the Congo, and Angola.1 Although
    many of these conflicts have now ended and the international community has
    taken steps to gain control of the rough diamond trade, the United Nations
    (UN) and other sources report that illicit trading of rough diamonds still
    exists and could potentially finance civil conflicts as well as criminal
    and terrorist activities.2

    1The United Nations (UN) General Assembly defines conflict diamonds as
    rough diamonds used by rebel movements to finance efforts to undermine or
    overthrow legitimate governments. UN General Assembly Resolution 55/56
    (Jan. 29, 2001).

    In November 2002, diamond producing and diamond trading countries launched
    a voluntary global system, called the Kimberley Process Certification
    Scheme (KPCS), to control the trade of rough diamonds and to assure
    consumers that the diamonds they purchase have not helped to finance
    violent conflicts.3 Implementation of KPCS began on January 1, 2003. The
    United States and other KPCS participants are responsible for ensuring
    that the integrity of the certification scheme is upheld and that the
    Kimberley Process works towards preventing conflict diamonds from entering
    the legitimate trade of rough diamonds. In instances of noncompliance,
    KPCS can expel or suspend a participant from the certification scheme. For
    example, in July 2004, the Chair of KPCS expelled the Republic of Congo
    from participation because this country could not account for the origin
    of large quantities of rough diamonds.4

    The United States has a major interest in KPCS because the certification
    scheme helps ensure the protection of the legitimate trade in these
    diamonds by breaking the link between conflict and rough diamonds.
    Although the United States is not a producer of rough diamonds, it is a
    significant global trader of rough and polished diamonds and the world's
    largest consumer market for diamond jewelry. In 2003, the United States
    was the seventh largest exporter of rough diamonds among non-mining KPCS
    participants (exporting about $227 million worth), and the fifth largest
    exporter of polished diamonds.5

    2In November 2005, KPCS adopted a resolution on the subject of illicit
    diamond production in Cote d'Ivoire that outlined a series of measures to
    prevent the introduction of conflict diamonds from Cote d'Ivoire into
    legitimate trade, including a detailed assessment of the import and export
    volumes. The assessment will be carried out in cooperation with the UN.

    3In mid-2002, GAO reported on the efforts to develop KPCS. See GAO,
    International Trade: Critical Issues Remain in Deterring Conflict Diamond
    Trade, GAO-02-678 (Washington, D.C.: June 14, 2002); and GAO,
    International Trade: Significant Challenges Remain in Deterring Trade in
    Conflict Diamonds, GAO-02-425T (Washington, D.C.: Feb. 13, 2002).

    4For additional details regarding KPCS, see www.kimberleyprocess.com .

    5Appendixes II and III contain additional rough- and
    polished-diamond-related information.

    The United States enacted the Clean Diamond Trade Act (CDTA) in April 2003
    to provide the statutory framework for implementing KPCS.6 As mandated in
    CDTA, this report (1) describes the institutional framework the U.S.
    government has created to implement CDTA, (2) examines how the United
    States has implemented the provisions of CDTA domestically and what
    principal challenges it faces, and (3) examines how the United States has
    helped to strengthen KPCS and what principal challenges it faces.

    To meet these objectives, we examined documents relevant to the Kimberley
    Process and CDTA implementation from the UN, KPCS, U.S. and foreign
    government agencies, the diamond industry, and non-governmental groups.
    Additionally, we conducted audit work in the United States (Washington,
    D.C., and New York City); Canada; Belgium; Russia; Italy; Sierra Leone;
    and Liberia. We also met with representatives from the Department of State
    (State), the Department of the Treasury's (the Treasury) Office of Foreign
    Assets Control (OFAC), the Department of Homeland Security's (Homeland
    Security) Bureau of Customs and Border Protection (CBP) and Bureau of
    Immigration and Customs Enforcement (ICE), the Department of Commerce's
    (Commerce) Bureau of the Census (Census), the Department of the Interior's
    U.S. Geological Survey (USGS), the U.S. Agency for International
    Development (USAID), the Office of the U.S. Trade Representative (USTR),
    and the U.S. Kimberley Process Authority (USKPA); as well as
    non-governmental groups, the diamond industry, foreign governments, and
    the UN and other international organizations. Furthermore, we analyzed
    Census data submissions to KPCS. We conducted our work from September 2005
    through September 2006 in accordance with generally accepted government
    auditing standards. Appendix I contains a more detailed description of our
    scope and methodology.

                                    Results in Brief

    The United States uses multiple U.S. agencies and a private,
    not-for-profit entity (USKPA) to implement the domestic and international
    provisions of CDTA. State and the Treasury lead U.S. efforts to implement
    the domestic provisions of the act; State leads the U.S. efforts to
    curtail trade in conflict diamonds abroad. Domestically, State, the
    Treasury, Homeland Security, Commerce, and USKPA are responsible for
    preparing and sharing statistics on the U.S. trade of rough diamonds, and
    for controlling U.S. imports and exports of rough diamonds. State and the
    Treasury coordinate and lead U.S. agency efforts by convening and
    co-chairing regular interagency meetings, as well as ongoing informal
    discussions with other U.S. agencies, in which CDTA and KPCS-related
    implementation issues are discussed. For example, State and other U.S.
    agencies recently met to discuss, among other things, U.S. plans for
    providing additional diamond-related technical assistance; U.S. comments
    on recommendations made to KPCS on the preliminary results of the 3-year
    review of the certification scheme that is currently under way on issues
    such as creating and financing a KPCS Secretariat; and the issues raised
    at the June 2006 KPCS intersessional meeting in Gaborone, Botswana,
    including enhancing KPCS monitoring and statistics. State is also
    responsible for overseeing USKPA, which, through 17 licensed private
    entities, issues the Kimberley Process certificates that must accompany
    U.S. export shipments of rough diamonds. Internationally, State leads U.S.
    participation in KPCS. State and USAID have helped Sierra Leone's efforts
    to comply with KPCS. State has recently worked with USGS to help Liberia
    become a member of KPCS.

    6Pub. L. 108-19. The act directs the President to prohibit imports and
    exports of rough diamonds that are not controlled through KPCS. The act
    defines the term "controlled by the Kimberley Process Certification
    Scheme" to include any system that substantially meets standards,
    practices, and procedures of KPCS.

    Domestically, the U.S. systems for reporting rough diamond statistics and
    for controlling imports and exports of these diamonds have improved but
    are still vulnerable to illicit trade of rough diamonds. Through Census,
    the United States has enhanced the accuracy and reporting of its rough
    diamond trade data, but work remains to be done. Despite improving the
    accuracy of its trade data on rough diamonds, resulting in a significant
    reduction in the excess of exports over imports-from almost 3 million
    carats in 2003 to less than 300,000 carats in 2005-the United States does
    not know what factors, such as diamond stockpiles, account for the
    remaining excess in exports. The United States does not periodically or
    regularly inspect rough diamond imports or exports, a control feature that
    allows participants to match the contents of the rough diamond parcels and
    Kimberley Process certificates and deters illicit trade in rough diamonds.
    The United States does not have an effective system for confirming the
    receipt of rough diamond import shipments, a control feature that allows
    participants to track shipments and prevent their diversion. For example,
    by relying on importers to confirm imports and having no U.S. agency to
    track these confirmations, the United States did not confirm most import
    shipments originating from four key U.S. trading partners-Canada, Belgium,
    Israel, and the United Kingdom-in 2004 and 2005, and it does not know the
    extent to which it has not confirmed imports with other countries. Despite
    recent U.S. efforts to improve the process for confirming receipt of
    imports, the percentage of confirmations remains low. The United States
    has not implemented a plan for overseeing the activities of USKPA and its
    licensees but, according to State officials, the department is developing
    and testing such a plan-a control feature that would allow the United
    States to conduct periodic or regular, independent, and systematic
    oversight of USKPA activities to make sure that they conform with KPCS
    standards.

    Internationally, the United States has helped to strengthen KPCS by
    participating in KPCS activities and providing assistance to help Sierra
    Leone and Liberia in their efforts to comply with KPCS; however, donor
    assistance to these countries faces challenges. The United States has
    helped strengthen KPCS by participating in the activities of its working
    groups and committees, such as the working groups on monitoring and
    statistics. For instance, U.S. officials including geological experts have
    participated on several Kimberley Process peer review teams to help
    monitor implementation of the certification scheme among participants.
    Also, the United States has recently assumed lead roles within KPCS by
    leading a peer review visit to Brazil and offering to identify and
    coordinate donor assistance to countries seeking to implement or
    strengthen KPCS. The United States has provided approximately $7.57
    million in assistance to support Sierra Leone ($6.13 million) and
    Liberia's ($1.44 million) efforts to implement systems for controlling
    their trade in rough diamonds. The United States has helped Sierra Leone
    develop and implement a system for controlling rough diamond exports. The
    United States is currently helping Liberia to, among other things, build
    and equip a secure facility and train personnel for the Liberian authority
    that will be responsible for controlling the rough diamond trade. The
    effectiveness of donor assistance in both countries is constrained by
    their limited capacity and resources for implementing KPCS, and the need
    to harmonize diamond policies among these countries and other countries in
    the region vulnerable to illicit cross-border trading. For example,
    officials in both Sierra Leone and Liberia noted their lack of resources
    for monitoring large mining areas and highly porous borders, which
    contributes to illicit mining and trading. Donors and diamond producers
    are considering a regional approach to help enhance the effectiveness of
    donor assistance. This regional assistance would complement
    country-specific assistance provided to diamond-producing countries within
    a region.

    This report contains recommendations to the Secretaries of State, Homeland
    Security, the Treasury, and Commerce. Specifically, it recommends
    improvements in (1) the accuracy of U.S. rough diamond trade data to
    improve the effectiveness of these data as a tool for detecting illicit
    trade in rough diamonds; (2) the processes for importing and exporting
    rough diamonds, including conducting physical inspections periodically or
    regularly and confirming rough diamond import receipts with foreign
    exporting authorities; (3) the oversight of the activities of USKPA and
    its licensees; and (4) U.S. diamond-related assistance by developing and
    implementing a regional approach for providing some of this assistance.

    We received written comments on a draft of this report from State, the
    Treasury, Homeland Security, Commerce, and Interior (see apps. VI, VII,
    VIII, IX, and X) indicating that they concurred with our recommendations.
    We also received technical comments on this draft from State, the
    Treasury, USAID, and USTR, which we have incorporated where appropriate.

                                       Background

    KPCS participants produce and trade the vast majority of rough diamonds in
    the world. However, the nature of diamonds and the lack of effective
    control systems create opportunities for illicit trade, including trade in
    conflict diamonds. By deterring potential illicit trading, effective
    control mechanisms could help prevent illicit diamonds from entering the
    legitimate trade. For example, without systems to accurately capture and
    analyze rough diamond trade data, KPCS participants cannot readily
    identify anomalies in imports and exports that could indicate illicit
    activity. Also, without effective systems for inspecting imports and
    exports or confirming import receipts, illicit rough diamonds could enter
    the legitimate trade.

    On November 5, 2002, 37 ministers and heads of official delegations
    launched KPCS, which contained elements for participants to consider in
    establishing control systems for monitoring the production and trade in
    rough diamonds. These elements included, among other things, systems for
    collecting and sharing data on production and trade of rough diamonds,
    inspecting the contents of import and export shipments to verify the
    details declared on the Kimberley Process certificate, and confirming
    import receipts with the foreign exporting authority.7 Implementation of
    KPCS began on January 1, 2003. Currently, 46 participants, including the
    European Community, voluntarily participate in KPCS and account for
    approximately 99.8 percent of the global production of rough diamonds.
    (See appendix IV for a timeline of KPCS and CDTA-related events and
    appendix V for the list of KPCS participants.) Consistent with KPCS
    provisions, the United States enacted CDTA on April 25, 2003, to establish
    an institutional structure for controlling and monitoring U.S. imports and
    exports of rough diamonds.8

    Kimberley Process Certification Scheme

    The structure of KPCS includes a Chair and Vice-Chair, a Secretariat
    serving under the Chair, working groups, and committees; KPCS participants
    also hold an annual plenary meeting. Figure 1 depicts KPCS's structure and
    the responsibilities of the Chair, Secretariat, working groups, and
    committees. In addition to participants, only applicants and official
    observers-including representatives from the diamond industry,
    non-governmental groups, and international organizations-can participate
    in KPCS meetings and activities.

    7To complement worldwide KPCS implementation efforts, the international
    diamond and jewelry industry initiated a voluntary system of warranties.
    This system requires that for every diamond transaction-rough, polished,
    or diamond jewelry-the seller must affirm on the invoice that the diamonds
    have been purchased through authorized channels that are not involved in
    funding conflict. While the system is voluntary, the industry views the
    system as a requirement for all its members involved in the diamond trade.
    Noncompliance with the system of warranties can result in expulsion from
    diamond trade organizations. The U.S. industry adopted this system of
    warranties.

    8Several KPCS participants, including the United States (through the U.S.
    Trade Representative) obtained a 4-year waiver needed for implementing
    KPCS and CDTA from the World Trade Organization (WTO) in 2003. These
    participants are currently trying to obtain a 6-year waiver extension from
    WTO and expect to get it in November 2006, according to USTR officials. In
    the absence of a waiver, WTO could impose sanctions on KPCS participants
    if WTO deemed the certification scheme an unauthorized trade barrier.
    Also, without a waiver, CDTA might lapse because the act requires that the
    President certify the existence of either a WTO waiver or a binding
    resolution of the UN Security Council for its provisions to remain in
    effect. See Pub. L. 108-19, sec. 15.

    Figure 1: KPCS Structure and Responsibilities

    The Chair is responsible for overseeing the implementation of KPCS,
    leading the annual plenary meeting, overseeing the operations of three
    working groups and two committees, and the general administration of the
    Kimberley Process. Under the Chair, a Secretariat is responsible for
    scheduling meetings, circulating documents among participants, maintaining
    the KPCS Web site, and all other duties the Chair designates. The
    Secretariat does not have permanent staff. The country chairing the
    certification scheme is responsible for staffing the Secretariat.
    Currently, Botswana chairs KPCS and the Vice-Chair is from the European
    Community.

    KPCS holds a plenary meeting normally once per year, in which participants
    and official observers typically discuss and assess the implementation of
    the certification scheme. KPCS participants and official observers work
    together in monitoring, statistics, and diamond experts working groups,
    and in the Participation Committee and the Selection Committee, to
    strengthen the certification scheme.

    KPCS's key provisions require participants to:

               o  enact or amend appropriate laws or regulations to implement and
               enforce the certification scheme, and maintain dissuasive and
               proportional penalties for transgressions;

               o  designate importing and exporting authorities;

               o  establish control systems designed to eliminate the presence of
               conflict diamonds from the rough diamond trade, such as systems
               for physically inspecting rough diamond import and export parcels;

               o  ensure that a Kimberley Process certificate accompanies each
               import and export shipment of rough diamonds;

               o  acknowledge the receipt of rough diamond import parcels to the
               foreign export authority;

               o  ensure that rough diamonds are imported and exported in
               tamper-resistant containers; and

               o  collect and maintain rough diamond data on production, imports,
               and exports; and collate and exchange such data with KPCS.

               Clean Diamond Trade Act

    			  CDTA provides the institutional structure for implementing its
               domestic and international provisions.

               Regarding domestic implementation, key CDTA provisions

               o  designate importing and exporting authorities,

               o  establish an interagency Kimberley Process Implementation
               Coordinating Committee for coordinating U.S. implementation
               efforts,

               o  give the U.S. government responsibility for overseeing any
               entity involved in the issuance of the certificates that must
               accompany each shipment of rough diamonds exported from the United
               States,

               o  impose civil and criminal penalties to enforce implementation
               of CDTA, and

               o  support the collection and exchange of U.S. import and export
               data on rough diamonds.

               Regarding international implementation, key CDTA provisions

               o  urge the U.S. government to strengthen KPCS by monitoring the
               effectiveness of the certification scheme and by sharing
               statistics, and

               o  allow U.S. agencies to make technical assistance available to
               countries seeking to implement KPCS.

               Several U.S. Agencies and USKPA Have Implemented CDTA

    			  Consistent with the provisions of CDTA, the United States has used
               several U.S. agencies and USKPA to implement the domestic and
               international provisions of the act.

               U.S. Agencies and USKPA Have Implemented CDTA's Domestic Provisions

               State, the Treasury, Commerce, Homeland Security, and USKPA have
               had responsibilities for implementing the domestic provisions of
               CDTA. State and the Treasury have led these U.S. implementation
               efforts.9

               o  State: The department co-chairs the U.S. interagency group for
               implementing CDTA. State is responsible for reviewing the
               activities of USKPA and its licensees and for annually reporting
               to the Congress the results of its review.10
               o  The Treasury: The department co-chairs the interagency group
               for implementing CDTA. OFAC is responsible for promulgating the
               rough diamond regulations to implement CDTA. One of these
               regulations designates the final recipient of the shipment (i.e.,
               the ultimate consignee) with the responsibility of confirming,
               with the foreign exporting authority, the receipt of a rough
               diamond import shipment.11

               o  Homeland Security: Under CDTA, Homeland Security's CBP is the
               importing authority responsible for regulating U.S. rough diamond
               imports. The department's Bureau of Immigration and Customs
               Enforcement is responsible for pursuing criminal investigations
               related to violations of CDTA and its regulations.

               o  Commerce: Under CDTA, Census is the exporting authority
               responsible for regulating U.S. rough diamond exports. Also,
               Census is responsible for collecting and analyzing data on the
               U.S. trade of rough diamonds and reporting it to KPCS.

               o  USKPA: Unlike most KPCS participants, the United States has
               assigned the responsibility of issuing Kimberley Process
               certificates to a private entity rather than to a government
               agency. USKPA produces these certificates and currently relies on
               17 licensees for issuing them.

               o  Interagency Coordination Committee: State and the Treasury
               co-chair an interagency committee, the Kimberley Process
               Implementation Coordinating Committee, that CDTA created for
               coordinating U.S. government activities on rough diamonds. Aside
               from convening and leading committee meetings, State and the
               Treasury have no formal authority over the actual activities of
               the other agencies in carrying out their assigned CDTA roles.
               Nevertheless, U.S. officials noted that the formal and informal
               interagency coordination processes have effectively addressed many
               operational issues. For example, State and other U.S. agencies
               recently met to discuss topics such as U.S. options for providing
               additional diamond-related technical assistance; U.S. comments on
               recommendations made to KPCS on the preliminary results of the
               3-year review of the certification scheme that is currently under
               way on issues such as creating and financing a KPCS Secretariat;
               and the issues raised at the June 2006 KPCS intersessional meeting
               in Gaborone, Botswana, including enhancing KPCS monitoring and
               statistics.

               U.S. Agencies Have Implemented the International Provisions of CDTA

    			  State, Census, USAID, and USGS are involved in implementing the
               international provisions of the act. See table 1 for a brief
               description of the responsibilities of these agencies. Consistent
               with KPCS, the key international provisions of the act cover the
               United States' participation in KPCS and the U.S. technical
               assistance to participants seeking to implement KPCS.

               Table 1: U.S. Agency Responsibilities for Implementing CDTA's
               International Provisions

               Source: GAO analysis of U.S. agency information.

               State leads U.S. efforts in KPCS and works with other U.S.
               agencies to, among other things, strengthen KPCS by monitoring its
               effectiveness in preventing trade in rough diamonds. State and
               other U.S. agencies participate in various aspects of KPCS,
               including attending annual (and other) KPCS meetings, and serving
               on KPCS working groups and committees. For example, State serves
               on the KPCS working group on monitoring, which is mandated to
               monitor and assess implementation of KPCS by all participants.
               Also, State and Census serve on the KPCS statistics working group
               and USGS has done statistical analysis of rough diamond trade data
               for the monitoring working group.

               The CDTA authorizes federal agencies to provide technical
               assistance to countries seeking to implement KPCS. Thus far, State
               and USAID have provided diamond-related assistance to Sierra
               Leone, and State and USGS have provided this assistance to
               Liberia. Specifically, through Management Systems International,12
               USAID has provided technical assistance to Sierra Leone to help
               the country gain control of its trade of rough diamonds. State has
               recently funded USGS to provide, through Constella Futures
               International,13 technical assistance to Liberia for implementing
               KPCS.

               U.S. Agencies Have Improved Systems for Implementing CDTA�s Domestic
    			  Provisions but Are Still Vulnerable to Illicit Trade

    			  U.S. entities responsible for implementing the domestic provisions
               of CDTA have improved the system for collecting and sharing U.S.
               trade data on rough diamonds and have established systems for
               controlling the U.S. trade in these diamonds, yet these systems
               are still vulnerable to illicit trade. Because most of these
               vulnerabilities involve limited government monitoring or
               oversight, U.S. control systems cannot help deter illicit rough
               diamonds from entering the legitimate trade.14

               Census Has Improved Collection and Reporting of Rough Diamond Data,
    			  But Some Work Remains to Be Done

               Since the enactment of CDTA in 2003, Census has steadily improved
               its system for capturing and reporting U.S. rough diamond trade
               statistics in response to KPCS concerns. However, this system
               needs further improvement to assure that the rough diamond trade
               does not include illicit diamonds. CDTA recommends that the
               executive branch keep and publish statistics on rough diamond
               imports and exports, recognizing that reliable and comparable data
               on the international trade in rough diamonds are an essential tool
               to effectively implement the certification scheme. These data can
               help to identify any irregularities or anomalies that might
               indicate the presence of conflict diamonds in the legitimate trade
               in rough diamonds. For example, because the Republic of Congo was
               not able to explain its reports of rough diamond exports that were
               far in excess of its known production capacity or imports, KPCS
               decided to ban this country from participation in the
               certification scheme in 2004.

               KPCS has expressed several concerns about the trade data the
               United States has submitted. Subsequent to the enactment of CDTA,
               Census reported U.S. rough diamond trade data to KPCS that
               contained a greater volume of exports than imports. For example,
               it reported that the United States had exported about 3 million
               carats more than it imported in 2003. As a non-producing nation,
               this excess in exports was not plausible and raised concerns about
               the accuracy of the U.S. trade data and the potential laundering
               of rough diamonds through the United States. In fact, because the
               United States does not produce rough diamonds and cuts and
               polishes some rough diamonds, exported carats should, on average,
               be lower than imported carats. In 2005, the KPCS peer review visit
               to the United States recommended that Census identify all
               anomalies within the systems for recording data and correct them
               as necessary, that the United States provide explanations for the
               large differences between exports and imports in 2003 and 2004 to
               the KPCS Working Group on Statistics, and that the group follow up
               on this issue with the U.S. authorities.

               To improve the quality of its data and to comply with KPCS data
               requirements, Census made a number of changes, including the
               following:

               o  Census officials indicated they had identified anomalies that
               affected the accuracy of the data, including the misclassification
               of shipments by individual filers and the Census' use of a method
               that altered some shipments by recalculating quantities of exports
               or imports based on historical price data.

               o  Census continues to pursue potential causes of inaccuracy in
               U.S. rough diamond import and export data. Specifically, Census
               officials told us of their efforts to determine how many carats of
               rough diamonds are entering the United States under the generic
               U.S. Goods Returned Code.15 In addition, Census officials also
               reconcile U.S. trade data bilaterally with other trading partners,
               as this can also help to identify any data anomalies.16

               o  In early 2006, Census started collecting and reporting data
               from Kimberley Process certificates. This change harmonized the
               U.S. system for data collection with the vast majority of other
               KPCS participants. Before this change, Census used data from its
               traditional customs-based method to report to KPCS, which can be
               different from data collected based on Kimberley Process
               certificates.17

               o  Census now checks its own data against the monthly data it
               receives from USKPA on the disposition of certificates issued each
               month. This extra step has helped Census to identify errors
               involving quantities or shipments that were misclassified as rough
               diamonds.

               o  Census and CBP modified the Automated Export System (AES) and
               the Automated Broker Interface (ABI), so that these computer
               systems, through which filers enter export and import shipment
               data, require Kimberley Process certificate numbers when entering
               information on rough diamond exports and imports. With these
               changes, filers will now receive an error if they do not provide a
               Kimberley Process certificate number after entering a rough
               diamond tariff code. Prior to these modifications, polished
               diamonds and diamond jewelry could be (and were) misclassified as
               rough diamonds.

               o  Census stopped estimating the quantity for shipments that fell
               outside of a reasonable price range.18

               As figure 2 shows, Census' actions resulted in a significant
               reduction in the reported discrepancies between U.S. rough diamond
               export and import data. Compared to the nearly 3 million carat
               discrepancy reported between imports and exports in 2003, by 2005
               Census reported an excess in exports of less than 300,000 carats
               compared to imports. However, Census has not determined whether
               this annual excess of U.S. exports compared to imports is
               reasonable for a non-mining country and, thereby, does not involve
               illicit rough diamonds. Factors that might contribute to this
               annual excess include the levels of inventories held and the
               volume of cutting and polishing done in the United States.

    9Controlling imports and exports of rough diamonds involves at least four
    entities in the United States. A number of countries, including some of
    those we visited (Belgium, Canada, and Sierra Leone) have used a single
    government entity for controlling their trade of rough diamonds.

    10State has submitted three reports on USKPA activities to the Congress
    covering 2003, 2004, and 2005 respectively.

    11In the United States, issuing Kimberley Process certificates and
    confirming import receipts involves private entities (USKPA and the
    ultimate consignee). These activities are a government responsibility in a
    number of countries, including the three countries we visited (Canada,
    Belgium, and Sierra Leone).

    Agency Unit                           Responsibilities
    State  Economic Affairs Bureau        Leads U.S. efforts in KPCS.

              Africa Bureau                  Funded technical assistance to
                                             support Sierra Leone and Liberia's
                                             KPCS-related efforts.
    Census Foreign Trade Division         Analyzed rough diamond data for KPCS
                                             Statistics Working Group.
    USAID  Office of Transition           Funded technical assistance to
              Initiatives/Bureau for Africa  support Sierra Leone's KPCS-related
                                             efforts.
    USGS   Middle East and Africa Section Under an agreement with State,
                                             provided KPCS-related technical
                                             assistance to Liberia.

                                             Analyzed rough diamond data for KPCS
                                             Monitoring Working Group.

    12Management Systems International is a USAID contractor.

    13Constella Futures International, formally known as Futures Group
    International, is a USGS contractor.

    14Monitoring is an internal control standard that focuses on assessing-
    through ongoing monitoring activities and separate evaluations-the quality
    of performance over time to ensure that the government promptly identifies
    and addresses any problems. See Internal Control Management and Evaluation
    Tool, GAO-01-1008G (Washington, D.C.: Aug. 2001).

    15According to officials at Census, the U.S. Goods Returned code may be
    used when diamonds that were exported from the United States are returned,
    for example, following a trade show or a failed transaction. Since this
    generic code is used for a variety of commodities, it is difficult to
    identify rough diamond imports classified under this code, which could
    bias the level of imports down.

    16If Census detects differences in bilateral trade data, it will ask the
    trading partner to send information on specific shipments. Then Census can
    check if it has the Kimberley Process certificate for the shipments in
    question and can also check ABI to see if the shipment was filed at all.
    However, Census is constrained by Title XIII, which prohibits it from
    discussing individual shipments with other countries; this makes it more
    challenging to perform these reconciliations.

    17The Kimberley Process Working Group on Statistics conducted a study
    comparing 2004 KPCS-based data with non-KPCS-based data. They found fewer
    differences between export and import transactions derived from KPCS-based
    data than non-KPCS-based data.

    18This method, which used historical prices to estimate a new quantity,
    relied on assumptions that could bias the quantity estimate. The
    procedure, known as imputation, assumes that the quantity was recorded
    incorrectly, and that the shipment value was recorded correctly. However,
    if the shipment value was incorrect, scaling it by a historical price will
    not produce the correct quantity.

    Figure 2: Discrepancy in U.S. Rough-Diamond Trade Volume and Census Data
    Improvements

    CBP's System to Control Rough Diamond Imports Has Weaknesses

    CBP has established a system for controlling U.S. rough diamond imports
    through documentation review and physical inspections. However, because
    these physical inspections do not occur periodically or regularly, the
    system cannot ensure that illicit shipments of rough diamonds are not
    entering the country. Furthermore, since 2003, U.S. importers have failed
    to confirm rough diamond import receipts with foreign exporting
    authorities, resulting in U.S. non-compliance with this KPCS standard. See
    figure 3 for a graphic depiction of the import control process and
    weaknesses in U.S. government oversight.

    Figure 3: U.S. Import Control Process and Weaknesses

      CBP's Import Control Process Involves Documentation Review of All Imports and
      Physical Inspections

    CDTA prohibits the importation into the United States of any rough diamond
    that has not been controlled through KPCS, which details a number of
    requirements to control imports of rough diamonds. For example, the United
    States must:

               o  require imports to contain a valid Kimberley Process
               certificate;

               o  ensure that no shipment of rough diamonds is imported from a
               non-participant;

               o  ensure that rough diamonds are imported in tamper-resistant
               containers; and

               o  establish a system of internal controls designed to eliminate
               the presence of conflict diamonds from rough diamond import
               shipments.

               To implement CDTA import provisions, CBP created a system that
               selects all rough diamond import shipments for documentation
               reviews. Depending on the approach CBP uses for physical
               inspections, the system might choose all or some of these
               shipments for physical inspections, although not periodically or
               regularly. CBP controls about 300 ports of entry into the United
               States. Although rough diamonds come into the United States
               through multiple ports of entry, about 85 percent of them come
               through one port of entry-John F. Kennedy (JFK) Airport in New
               York City. Under the current system, after a rough diamond import
               arrives at a port of entry, the customs broker sends the hard-copy
               entry documentation to the CBP office at the port, at which time
               the information is entered into CBP's computer system for review.

               All rough diamond shipments must, at least, receive a document
               review by an import specialist, who verifies that the Kimberley
               Process certificate is authentic and ensures that the information
               on the certificate (such as the certificate number, and the value
               and quantity of the rough diamonds) matches the information on the
               invoice accompanying the shipment. If the reviewing import
               specialist detects a problem with the documentation, the shipment
               is detained until CBP obtains the necessary documentation to
               release the shipment. The shipment may be seized if the
               information is not obtained within a certain time frame.

               CBP has used four approaches to select imports of commodities for
               physical inspections. In the case of rough diamonds, this means
               physically opening and examining the content of import parcels.
               First, given the large number of imports arriving into the United
               States every day, CBP uses an approach to identify high risk
               import shipments for physical inspections. According to CBP
               documentation, this approach enables CBP to balance its efforts to
               enforce CDTA with the agency's Priority Trade Issues and other
               responsibilities.19 Second, CBP has a compliance measurement
               program that randomly selects shipments for physical inspection
               across all ports. Less than 1 percent of rough diamond shipments
               each year are selected for a physical inspection through this
               program, according to CBP. Third, physical inspections occur at
               the discretion of the ports. At JFK, for instance, CBP physically
               inspects shipments for different reasons, including (1)
               intelligence information entered into CBP's computer system before
               the shipment arrives at port; (2) suspicious discovery in the
               documentation review; (3) shipments from unknown importers; or (4)
               other information. Finally, CBP inspected all rough diamond
               imports that came into JFK on two occasions in 2004 and 2005.
               According to CBP documentation, on these two occasions,
               inspections found a high rate of importer compliance with U.S.
               requirements regarding declaration of rough diamond imports.

               Since 2003, CBP has seized seven shipments for violations of CDTA.
               One case involved a rough diamond import without a valid Kimberley
               Process certificate that was not packed in a sealed
               tamper-resistant container. Of the remaining six cases, three
               closed cases were resolved through the administrative process,
               with one resulting in a fine. Three cases are open and proceeding
               through the administrative process.

               CBP Does Not Have a Policy or Plan for Conducting Physical Inspections
    			  Periodically or Regularly

    			  Although CBP has used four approaches for selecting rough diamond
               import shipments for physical inspections, none of these
               approaches results in periodic or regular physical inspections.
               According to accepted government internal control standards,
               control activities such as periodically or regularly reviewing
               assets-in this case, rough diamond shipments-should be evaluated
               periodically or regularly to ensure that they are still
               appropriate and working as intended.20 While the total inspection
               of rough diamond imports at JFK, referred to above, helped CBP to
               assess the effectiveness of its import control systems during two
               periods of time, the agency has no policy or plan for conducting
               these total inspections periodically or regularly in any of its
               ports of entry. Furthermore, CBP has no policy or plan for
               conducting other physical inspections periodically or regularly.
               Without these types of physical inspections, the United States
               cannot ensure that its import control system deters illicit rough
               diamond shipments.

               The United States Has Confirmed Few Import Receipts with Foreign
    			  Exporting Authorities

    			  The United States has not fully complied with the KPCS standard
               that requires KPCS participants to confirm rough diamond import
               receipts to the relevant foreign exporting authority. The 2005
               KPCS peer review reported that the implementation of this
               requirement has been sporadic and recommended that the United
               States take steps to ensure that it enforces this provision.
               During our fieldwork, we found that the United States had not
               confirmed receipt of most import shipments to foreign exporting
               authorities of four KPCS participants, which are key U.S. trading
               partners, and the United States did not know the extent to which
               it had not confirmed import receipts with the rest of the
               participants. For example, the United States confirmed receipt of
               2 percent of rough diamond import shipments from Belgium in 2004,
               and 18 percent of these shipments in 2005. All other countries
               confirmed receipt of 95 percent of rough diamond import shipments
               from Belgium in 2004, and 97 percent of these shipments in 2005.
               See table 2 for U.S. confirmation of import receipts to four
               countries, and all other countries' confirmation of import
               receipts to three of these four countries in 2004 and 2005.

    19CBP's Priority Trade Issues include risks to the economic interests of
    the United States or the health and safety of the American public.
    Specifically, these issues include Penalties, Revenue,
    Antidumping/Countervailing Duties, Agriculture, Intellectual Property
    Rights, and Textiles.

    20See Internal Control Management and Evaluation Tool, GAO-01-1008G .

    Table 2: U.S. Import Confirmations to Select Countries Compared to All
    Other Trading Countries, 2004 and 2005

                                            2004                          2005
                             Number of Number of                Number of Number of
    Country   KPCS        certificates   imports Percentage  certificates   imports Percentage
    reporting participant         sent confirmed  confirmed          sent confirmed  confirmed
    Canada    United                32         7        22%            44         7        16%
              States
              All other            139       126        91%           149       134        90%
              trading
              countries
    United    United               224        35        16%           262       132        50%
    Kingdom   States
              All other          1,523     1,415        93%         1,490     1,370        92%
              trading
              countries
    Belgium   United             1,466        36         2%         1,333       236        18%
              States
              All other         3,1778    30,191         95        31,722    30,710        97%
              trading
              countries
    Israel    United               235         3         1%           286        41        14%
              States
              All other          7,476      N/Aa       N/Aa          7388      N/Aa       N/Aa
              trading
              countries

    Source: GAO analysis based on data from Canada, the United Kingdom,
    Belgium, and Israel.

    aIsrael could not provide specific numbers, but indicated that all other
    countries confirm most imports from Israel.

    The United States has delegated the responsibility for confirming rough
    diamond import receipts to importers. Through OFAC, the Treasury clarified
    this requirement in its September 2004 revisions to the Rough Diamond
    Control Regulations by making the ultimate importer (i.e., the ultimate
    consignee instead of the importer-of-record) responsible for confirming
    rough diamond import receipts to the relevant foreign exporting authority.
    The revised regulation also requires that the ultimate importer send the
    confirmation within 15 calendar days of the import's arrival at the U.S.
    port of entry, and clarifies that the confirmation may be in any form and
    may be submitted electronically, by mail, or by courier. The regulations
    include civil and criminal penalties for any person who violates, or
    attempts to violate, any order or regulation issued under CDTA.

    The United States has not made any U.S. agency responsible for tracking
    these import confirmations, and has only learned about the U.S. failure to
    confirm import receipts when exporting authorities from other countries
    have complained about this problem. In response to these complaints, the
    United States has recently taken steps to improve the compliance of U.S.
    importers with this KPCS requirement. Between April and June 2006, State
    sent letters to about 150 U.S. importers reminding them of the requirement
    under the rough diamond control regulations to confirm receipt of rough
    diamond imports to foreign exporting authorities. Based on information
    provided by State to OFAC, in August 2006, OFAC opened investigations and
    started to issue administrative subpoenas to importers who had not
    confirmed import receipts. If any importer continues to fail to confirm
    import receipts, that is, fail to comply with the regulation, civil
    penalties may result.

    These enforcement efforts have had a positive effect on U.S. compliance
    with this requirement, but the United States is not yet fully compliant.
    As of June 2006, for instance, Belgium reported receiving confirmations of
    import receipts for 35 percent of its shipments to the United States,
    compared to 18 percent in 2005. Likewise, Canada reported receiving
    confirmations of import receipts for 33 percent of its shipments to the
    United States compared to 16 percent in 2005. Despite these improvements,
    the United States is far from fully complying with this requirement.
    Because the United States has not assigned an agency to track confirmation
    of import receipts by importers, it cannot monitor the compliance of
    importers with this KPCS standard and also is not able to detect possible
    diversions of rough diamond import shipments. See figure 3 for a depiction
    of the rough diamond import process and existing weaknesses.

    U.S. System to Control Rough Diamond Exports Shows Weaknesses

    State, Census, and USKPA have established a system for controlling U.S.
    rough diamond export shipments. However, the system shows weaknesses
    because it involves little direct U.S. government monitoring, thereby
    preventing the United States from being sure that illicit shipments are
    not leaving the country. See figure 4 for a depiction of the export
    control process and weaknesses in U.S. government oversight.

    Figure 4: U.S. Export Control Process and Weaknesses

      Census, State, and USKPA Have Established System to Control Rough Diamond
      Exports

    CDTA requires exportation of any rough diamond from the United States to
    be substantially consistent with KPCS, which details a number of
    requirements to control rough diamond exports. For example, the United
    States must:

               o  ensure a Kimberley Process certificate accompanies each
               shipment of rough diamonds on export, and that the certificates
               meet the minimum requirements set out by KPCS;

               o  ensure that no shipment of rough diamonds is exported to a
               non-participant;

               o  ensure that rough diamonds are exported in a tamper-resistant
               container; and

               o  establish a control system designed to eliminate the presence
               of conflict diamonds from export shipments of rough diamonds.

               Under the oversight of State, USKPA, through its licensees, issues
               Kimberley Process certificates. According to a State report to
               Congress, USKPA, which is comprised of representatives of the
               diamond industry, was established in 2003 to issue and control
               Kimberley Process certificates for rough diamond exports from the
               United States.21 To issue U.S. Kimberley Process certificates,
               USKPA subcontracted out to 17 licensees. These licensees represent
               companies that ship on behalf of third parties, as well as
               companies engaged in the business of buying and selling rough
               diamonds that agree to fulfill the requirements of KPCS and all
               relevant U.S. laws and regulations.22 Each licensee also agrees,
               through contractual agreements, to a set of fixed procedures in
               order to qualify to obtain and use Kimberley Process certificates
               when exporting rough diamonds. Under these procedures, licensees
               agree to maintain a supply of Kimberley Process certificates in
               safekeeping, keep records for 5 years for each shipment where a
               Kimberley Process certificate is issued, and submit to an audit by
               USKPA. Also, licensees/shippers agree to complete an application
               form.23

               Licensees submit monthly and annual reports to USKPA with all of
               the certificates issued in that period. These reports are
               forwarded to State and Census. See table 3 for the number of
               certificates issued by the United States from 2003 to 2005.

               Table 3: Number of U.S. Kimberley Process Certificates Issued,
               2003-2005

               Source: GAO analysis of State data.

               CDTA requires that State conduct an annual review of the
               standards, practices, and procedures of USKPA to determine whether
               these activities are in accordance with KPCS, and that State
               report the results of the review to Congress. State has reported
               as required; however, the content of the annual report is more
               descriptive than evaluative. According to State, it has not used a
               formal plan for overseeing USKPA and its licensees. State is
               currently developing this plan and has tested some of its elements
               in 2006, according to State officials. The implementation of this
               plan would help State to conduct periodic or regular, independent,
               and systematic oversight of USKPA and its licensees to make sure
               that they conform with KPCS standards.

               U.S. Export Process Involves Limited U.S. Government Monitoring

    			  The U.S. government monitors the export process using electronic
               data checks rather than physical inspections of rough diamond
               shipments. While USKPA reviews licensees, it does not have a plan
               for conducting these reviews. Finally, KPCS participants reported
               to us that they had received U.S. Kimberley Process certificates
               that did not comply with the certification scheme requirements.

               Monitoring of Export Operations Limited to Electronic Data Checks
    			  with No Physical Inspections

    			  Direct government involvement in the operational export process is
               limited to Census' electronic data checks through AES. Once Census
               validates a shipment for export based solely on data submitted
               through AES, no other government agency reviews the shipment. The
               contents of the parcels are never physically inspected by any
               government agency, USKPA, or its licensees. According to a senior
               official at CBP, no one at CBP physically inspects rough diamond
               export shipments before they are sent, and no requirement exists
               for submitting a Kimberley Process certificate to CBP for these
               export shipments.24 In its final report, a peer review team sent
               by KPCS to the United States to assess implementation of the
               certification scheme found that the U.S. export regime would
               benefit from a more hands-on approach by the government and
               recommended conducting physical inspections of exports
               periodically or regularly to ensure that, among other things, the
               description on the certificate matches the contents of the
               shipment.

               The private sector, through USKPA and its licensees, plays a
               significant role in the U.S. export process, yet these private
               entities do not verify the contents of rough diamond exports
               either. According to a co-director of USKPA, the agency takes no
               responsibility for the information on the certificate; the
               licensee and exporter assume this responsibility. Likewise, a
               senior official from State maintained that the licensees are
               responsible for providing truthful data-thus ensuring that the
               contents meet the information on the documentation.

               However, according to two USKPA licensee freight forwarders
               responsible for issuing about half of the U.S. Kimberley Process
               certificates in 2005, they also do not examine the contents of
               rough diamond parcels they ship. For rough diamonds, they rely on
               the warranty the exporters sign on the application attesting that
               the shipment has been handled in accordance with KPCS. The
               licensees maintain that the exporters are responsible for
               collecting and retaining documentation showing that the diamonds
               were legally imported into the United States. Without an effective
               monitoring strategy that includes a plan for conducting physical
               inspections periodically or regularly, the United States cannot be
               assured that its internal controls for exports sufficiently
               prevent export of illicit shipments. This weakness of the U.S.
               export process could allow illicit diamonds to enter the
               legitimate trade.

               USKPA does not have a plan to conduct reviews of licensees

    			  Under its licensing agreement, USKPA can review a licensee's
               books, records, and other documents to verify compliance with the
               agreement. According to a USKPA co-director, USKPA has visited
               five licensees. However, USKPA does not have a plan to conduct
               these monitoring visits, nor does it have any protocol for
               selecting which licensees will receive a visit. The visit might
               include a review of the security measures used to store the
               certificates, packing procedures, and record-keeping for every
               application received, as well as interviews with the employees
               involved in these processes and those who prepare monthly or
               annual reports. USKPA gave us visit summaries from its annual
               reports to State. USKPA did not give us any other documentation
               regarding these reviews. Without an established monitoring
               strategy, plan, criteria, and documentation, USKPA cannot be sure
               that its licensees are meeting their requirements to prevent
               illicit exports of rough diamonds from the United States.

               U.S. Trading Partners Report Problems with U.S. Kimberley Process
    			  Certificates

    			  Some countries have reported quality control problems with U.S.
               Kimberley Process certificates. For example, in 2005, one country
               reported receiving 26 U.S. Kimberley Process certificates with
               corrections (correction fluid such as Liquid Paper or Wite-Out had
               been used to amend errors on them). Also, 10 certificates had
               typographical errors, and 5 had incorrect dates. In the same year,
               another country reported receiving 21 U.S. Kimberley Process
               certificates with typographical errors and 5 certificates with
               correction fluid. These quality issues raise the possibility that
               the certificates have been tampered with and, thus, do not meet
               KPCS requirements. In the absence of physical inspections of U.S.
               rough diamond exports, foreign importing authorities have alerted
               U.S. officials of these problems. In response, these officials
               began conducting outreach efforts to exporters to address these
               issues.

               The United States Has Helped to Strengthen KPCS Internationally,
    			  but Assistance-Related Efforts Face Challenges

    			  Internationally, the United States has helped to strengthen KPCS
               by participating in KPCS activities and providing assistance to
               help Sierra Leone and Liberia comply with KPCS, but this
               assistance faces challenges. The United States has helped
               strengthen KPCS by participating in the activities of its working
               groups and committees and assuming lead roles; for instance, the
               United States led a peer review visit to Brazil and offered to
               identify and coordinate donor assistance to countries seeking to
               implement or strengthen KPCS. Also, the United States has provided
               approximately $7.57 million in assistance to the diamond producing
               countries of Sierra Leone and Liberia to implement systems for
               controlling their trade in rough diamonds. However, the
               effectiveness of assistance-related efforts in Sierra Leone and
               Liberia is constrained by the limited capacity and resources of
               these countries to implement KPCS and the need to harmonize
               diamond policies among these countries and other countries in the
               region. Donors and diamond producers are considering a regional
               approach to help enhance the effectiveness of donor assistance.

               The United States Has Participated in KPCS Activities and Recently
    			  Led Two of Them

    			  With State leading U.S. efforts, the United States has helped
               strengthen KPCS by regularly attending KPCS-related meetings and
               serving on the three KPCS working groups and the two KPCS
               committees. CDTA expresses the sense of the Congress that the
               United States should strengthen KPCS by monitoring the
               effectiveness of the certification scheme in stemming trade in
               rough diamonds not controlled by KPCS. To this end, the United
               States has taken the following actions:

               o  The United States regularly attends KPCS meetings, which aim to
               strengthen the certification scheme and assess its effectiveness.
               According to U.S. officials, the United States has regularly
               participated in KPCS meetings, including the annual KPCS plenary
               and intersessional meetings, to discuss and assess KPCS
               implementation. Also, it crafted compromises and negotiated
               solutions to disagreements among KPCS participants.

               o  The United States serves as a member of the Statistics Working
               Group and, according to U.S. officials, through diplomatic
               channels has encouraged and assisted several participants to
               provide required statistical reports to KPCS in a timely manner.
               Also, the United States, through Census, has analyzed production
               and trade data for the Statistics Working Group and, through USGS,
               has done it for some of the KPCS peer review teams.

               o  The United States serves as a member of the Monitoring Working
               Group, which monitors how individual participants implement KPCS.
               The primary activity of the Monitoring Working Group has been to
               conduct peer reviews, which include peer review visits to examine
               participants' efforts to implement KPCS. Since the first peer
               review visit to the United Arab Emirates in May 2004, KPCS has
               conducted 31 review visits, including the KPCS peer review visit
               to the United States in 2005. Officials from State and other U.S.
               entities have participated in KPCS peer review visits to the
               following ten participants: United Arab Emirates, Russia, Guinea,
               India, Sierra Leone, Sri Lanka, Ghana, Togo, Brazil, and Guyana.
               The United States also participated in the recent Kimberley
               Process special mission to Liberia.

               o  The United States serves on two KPCS committees: the
               Participation Committee, which assists the Chair of the Kimberley
               Process in handling the admission of new participants to KPCS; and
               the Selection Committee, which reviews and assesses the
               credentials of candidates for the position of Vice-Chair.

               o  The United States has recently led two KPCS activities.
               Specifically, the United States offered to identify and coordinate
               donor assistance for implementing KPCS at the plenary meeting in
               Moscow, Russia, in November 2005. Also, the United States led the
               KPCS peer review visit to Brazil in April 2006.

               The United States Has Helped Two Countries in Their Efforts to
    			  Implement KPCS and Is Considering a Regional Approach to Enhance
    			  the Impact of Its Diamond-Related Assistance

    			  The United States has provided about $7.57 million in assistance
               to help Sierra Leone ($6.13 million) and Liberia ($1.44 million)
               implement KPCS, but the limited capacity and resources of these
               two recipient countries and the need to harmonize diamond policies
               with other countries in the region have restricted the
               effectiveness of this assistance. Donors, including the United
               States, are considering using a regional approach to enhance the
               impact of diamond-related assistance. Table 4 shows the U.S.
               diamond-related assistance to these two countries.

    21The USKPA has three directors who serve without compensation, selected
    by consensus by representatives of the diamond industry. The directors are
    persons familiar with the requirements of KPCS, and are not engaged in the
    buying or selling of diamonds or jewelry containing diamonds. The
    activities of the USKPA are funded through fees paid by USKPA licensees.
    The USKPA designed and produced the Kimberley Process certificate in
    consultation with the U.S. government.

    22According to the 2004 USKPA annual report to State, in order to qualify
    as a licensee each entity has to be authorized as a "known shipper" under
    AES.

    Year Number of U.S. certificates issued
    2003                              1,516
    2004                              1,864
    2005                              1,970

    23The application form that licensees/shippers complete must contain: the
    names, addresses, and tax identification numbers of the applicant,
    exporter, and importer; the carat weight of the shipment; the value in
    U.S. dollars; the number of parcels in the shipment; and the relevant
    Harmonized Commodity Description and Coding System number. In addition,
    the following warranty statement must appear on the application: "The
    applicant hereby asserts that the rough diamonds intended for export
    referenced in this application have been handled in accordance with the
    provisions of the Kimberley Process International Certificate Scheme for
    Rough Diamonds."

    24According to other CBP officials, CBP uses an approach for exports that
    focuses on inspecting high-technology items that could be used by
    potential U.S. enemies. Under this approach, rough diamond shipments do
    not get flagged for inspection.

    Table 4: U.S.-Funded Diamond-Related Projects Supporting the
    Implementation of KPCS in Sierra Leone and Liberia

                                                                        Amount of
    Implementing U.S.              Country/program    disbursementa(dollars in
    agency/contractor              title                             millions)
                                      Sierra Leone
    USAID/Office of Transition     Diamond Management                    $1.26
    Initiatives/Management Systems Program
    International
                                      Subtotal                              $1.26
    USAID/Management Systems       Diamond Project                       $0.06
    International
                                      Diamond Policy and                    $0.94
                                      Management Project
                                      (DIPAM)
                                      Peace Diamond                         $1.08
                                      Alliance Support
                                      Project (PDA)
                                      Integrated Diamond                   $2.79b
                                      Management Program
                                      (IDMP)
                                      Subtotal                              $4.87
                                      Total for Sierra                      $6.13
                                      Leone
                                      Liberia
    USGS/Constella Futures         Kimberley Process                    $1.44b
    International                  Implementation
                                      Program
                                      Total for Liberia                     $1.44
                                      Total for Sierra                      $7.57
                                      Leone and Liberia

    Source: GAO analysis of USAID and USGS data.

    aDisbursements are outlays for programs completed. State has provided $2
    million and USAID provided $0.79 million.

    bThese amounts represent obligations for programs not yet completed. State
    has fully funded this program.

      U.S. Diamond-Related Assistance Helped Sierra Leone Comply with KPCS

    The United States, as part of its support to the Lome Peace Accord in
    1999, helped Sierra Leone initiate diamond policy reform. From September
    1999 to March 2007, USAID, through five rough diamond-related projects,
    plans to provide about $6.13 million in assistance to support Sierra
    Leone's efforts to control rough diamonds at the national and local level.
    Between 1999 and 2001, USAID's Office of Transition Initiatives (OTI)
    provided, through Management Systems International (MSI), about $1.26
    million in funding under one project to support government efforts to gain
    control of its production of and trade in rough diamonds. Between 2002 and
    2007, USAID plans to provide, again through MSI, about $4.87 million in
    assistance under four projects to further enhance the country's efforts to
    gain control over its rough diamonds. The specific programs are outlined
    below.

      Diamond Management Program

    Between 1999 and 2002, OTI, through MSI, provided about $1.26 million,
    under the Diamond Management Program, to support Sierra Leone in its
    efforts to develop and implement diamond policies and a system for
    controlling the trade in rough diamonds. The two primary objectives of the
    program were to (1) help Sierra Leone bring diamonds under control of the
    government and (2) cut the trade in conflict diamonds to diminish this
    trade's financing of warfare. According to a USAID-sponsored evaluation,
    the primary achievement of the program was to assist the government in
    establishing a Certificate of Origin system that the country needed to
    have in place to be able to export rough diamonds. Although this program
    was largely advisory, it also included providing training and equipment to
    the Ministry of Mineral Resources' monitoring staff. The evaluation
    considered the program a success because legitimate exports of rough
    diamonds increased from $1.2 million in 1999 to $26 million in 2001.

      The Diamond Project

    At the end of the OTI-funded Diamond Management Program, USAID granted
    about $62,000 to MSI, under the Diamond Project, to continue working on
    rough diamonds from August 2002 to November 2002. This funding helped MSI
    get ready to start a larger program, called the Diamond Policy and
    Management (DIPAM) program.

      Diamond Policy and Management Project

    From 2002 to 2004, USAID, through MSI, provided $940,000, under the DIPAM
    program, to further help Sierra Leone control its rough diamonds at both
    the national and local level. According to MSI's project closeout report,
    DIPAM had five policy objectives, and successfully implemented programs in
    support of each of them:

               o  Legitimize policy reform. MSI, through DIPAM, worked with the
               government of Sierra Leone to apply economic incentives to shape
               the behavior of both domestic and international actors in the
               diamond sector, and promote legitimate mining and marketing. For
               example, the project explored ways to reward citizens for mining
               rough diamonds legally and for ensuring that their neighbors also
               did so.

               o  Increase community benefits from mining. DIPAM focused on
               increasing community benefits in two ways: by maximizing direct
               income within the country from the production and sale of rough
               diamonds, and by encouraging the government to return a portion of
               rough diamond export tax revenues to communities through the
               Diamond Area Community Development Fund (DACDF). DACDF distributes
               one-fourth of revenue earned from export taxes on rough diamonds
               to communities holding mining licenses. In 2005, over $900,000 in
               DACDF funds were turned over to these communities. In one
               community we visited, these funds helped to build a police
               facility and a town hall.

               o  Engage civil society with government in mining policy
               deliberations and monitor the government's performance. DIPAM
               worked to strengthen community-based institutions to help them
               more explicitly represent community interests with respect to
               diamond mining and alternative development activities.

               o  Establish dialogue among communities, the government, and the
               private sector in industrial mining. DIPAM established forums
               where community voices could be heard. For example, project
               officials worked directly to help property owners express their
               grievances regarding the mining practices of a large mining
               company.

               o  Improve environmental management of artisanal mining. In
               September 2004, DIPAM succeeded in getting the government of
               Sierra Leone to release funds to reclaim land at an illegal mining
               site that was shut down. The government had set aside a portion of
               the revenue that it had received from selling mining licenses to
               pay for environmental reclamation. However, the government had
               never released it before.

               Peace Diamond Alliance Support Project

    			  From 2003 to 2004, USAID, through MSI, provided about $1.08
               million, under the Peace Diamond Alliance Support Project (PDA),
               to help Sierra Leone establish a public/private partnership for
               mining rough diamonds. MSI implemented this project in an
               integrated manner with the DIPAM cooperative agreement discussed
               above. The approach of the PDA has been to remove diamonds from
               the smuggling chain by providing incentives for legal export,
               chiefly by increasing benefits at the local level. Specifically,
               PDA worked to improved diamond management in mining communities by
               encouraging cooperation among government, businesses, and civil
               society.

               The PDA offered training for members of mining cooperatives (which
               are largely made up of unskilled workers) on a number of issues,
               such as valuing stones and improving environmental and safety
               practices. Figure 5 shows diggers working at a diamond mining site
               in Sierra Leone. In addition, the PDA helped to organize 35 mining
               cooperatives between 2003 and 2004, mainly in the Kono District,
               which is one the main diamond mining areas in Sierra Leone.
               However, only five of these cooperatives mined rough diamonds in
               2005 and only one of them continues to mine rough diamonds in
               2006.

               The measure of success for the DIPAM/PDA programs was the degree
               to which legal diamond exports increased and the degree to which
               benefits were returned to communities. By the above measures, the
               DIPAM/PDA projects were successful, according to MSI's project
               closeout reports. For instance, legal diamond exports have
               increased from $10 million in 2000 to over $140 million in 2005.
               U.S. and Sierra Leone government officials view the increase in
               legal diamond exports as an indicator that more diamonds are being
               traded licitly.

               Figure 5: Diamond Mining Site in Sierra Leone-A Recipient Country
               of U.S. Assistance

               Integrated Diamond Management Program

    			  From 2004 to 2006, USAID, through MSI, has implemented the
               Integrated Diamond Management Program (IDMP), to support Sierra
               Leone efforts to improve the management of Sierra Leone's diamond
               sector at both the national and local levels. State has provided
               about $2 million to support this program. In July 2006, USAID
               approved about $790,000 in additional funding to extend this
               program until March 2007. At the national level, IDMP continues to
               help the High-Level Diamond Steering Committee (HLDSC) and its ad
               hoc Technical Committee in their efforts to support the government
               of Sierra Leone formulate diamond-related policy. At the local
               level, IDMP continues to support the PDA, described above, and
               other local initiatives.

               Sierra Leone agreed to create HLDSC to advise the government on
               the effective management and control of the country's rough
               diamond resources. HLDSC members include Sierra Leonean government
               ministers as well as the U.S. Ambassador and equivalent
               representatives from the United Kingdom, the European Community,
               and the UN. The committee formed a technical advisory group to
               address issues raised by the government or donors in early 2004.
               The committee and its ad hoc technical committee serve as key
               policy forums for enhancing national diamond-sector policy
               development and implementation. They analyze strategic policy
               issues and advise the government on important diamond-sector
               policy. For example, recent discussions focused on the
               establishment of diamond cutting and diamond polishing legislation
               and procedures, and policies for transparent land allocation to
               diamond companies. MSI serves as the secretariat for both
               committees. For this reason, these committees have relied on U.S.
               assistance for guidance, recommendations, and support, according
               to recent program status reports.

               U.S. Diamond-Related Assistance Is Helping Liberia in Its Efforts
    			  to Comply with KPCS

    			  In 2005, State asked USAID to transfer funds to USGS for
               developing and implementing a program to help Liberia move toward
               compliance with KPCS.25 With this funding, from September 2005 to
               December 2006, USGS, under an agreement with State and through
               Constella Futures International, plans to provide about $1.44
               million in rough-diamond-related assistance under one project to
               help Liberia in its efforts to comply with KPCS.

               The U.S. assistance focuses on developing and implementing a
               capacity-building and a technical training program in a broad
               range of rough diamond activities, such as improving the
               government capacity for controlling the production and trade in
               rough diamonds and related geological and commercial activities.
               For instance, this program includes funding for building a secured
               annex behind the Ministry of Lands, Mines, and Energy to house
               Liberia's rough diamond exporting and importing authority, as well
               as for buying vehicles and equipment needed to support this
               authority and the ministry's efforts to monitor rough diamond
               mining activities.

               In Monrovia, Liberia, we observed a subcontractor working on the
               secured annex that will house the exporting and importing
               authority. Figure 6 shows the secured annex under construction.
               Recent status reports on the U.S.-funded assistance effort in
               Liberia indicate that the U.S program is helping Liberia make
               progress in different areas. For example, the construction of the
               annex is almost finished, Kimberley Process certificates are under
               development, and training of different staff needed to implement
               KPCS is under way.

               Figure 6: Liberian Ministry of Lands, Mines, and Energy Building
               and Secured Annex under Construction for Housing Liberia's Rough
               Diamond Exporting and Importing Authority

               U.S. and program officials noted that, despite the progress made
               through the support of the U.S. assistance program, Liberia still
               does not have an effective system for controlling its production
               and trade in rough diamonds, which is needed to comply with KPCS.
               In May 2006, the UN completed an assessment of the status of
               Liberia's efforts to comply with KPCS and a second Kimberley
               Process Expert Mission visited Liberia to independently assess the
               status of these efforts.26 The UN reported that Liberia still did
               not comply with KPCS. The UN report, for instance, noted that the
               components needed for a credible, internationally-accredited
               certification scheme for rough diamonds were still some months
               away. In June 2006, the UN decided to extend its rough
               diamond-related sanctions on Liberia for another 6 months, with
               the option of assessing the country's efforts to comply with KPCS
               again in another 4 months. In August 2006, the Kimberley Process
               Expert Mission to Liberia reported that Liberia had made some
               progress towards establishing a system of internal controls, which
               is crucial to the effective implementation of KPCS. However, it
               also noted that Liberia still lacks, for instance, a system of
               internal controls that will ensure that conflict diamonds are not
               entering its production.

               Donor Assistance Faces Challenges, But a Regional Approach for
    			  Providing Some Assistance Would Enhance Impact of This Assistance

    			  Sierra Leone and Liberia's limited capacity and resources to fully
               implement KPCS, and the countries' need to harmonize diamond
               policies with other countries in the regions, constrains the
               effectiveness of donor assistance. Although U.S. assistance has
               provided training, equipment, and vehicles to help Sierra Leone
               monitor diamond mining areas and borders to prevent illicit
               activities, government officials told us during our visit to that
               country that they did not have enough capacity and resources to
               accomplish their mission. For instance, these officials emphasized
               that they did not have enough vehicles for monitoring large
               diamond mining areas under their jurisdiction. Because these
               vehicles included many motorcycles, these officials also noted
               that they faced many difficulties reaching many mining areas given
               the bad conditions of the roads and remoteness of mining sites.
               According to U.S. and Liberian officials, without the U.S. and
               other donor assistance that is providing training, equipment, and
               vehicles to help Liberia comply with KPCS, the country would not
               be able to implement the control systems needed for monitoring
               trade in rough diamonds, large mining areas, and highly porous
               borders. Also, the UN Mission in Liberia (UNMIL) in March 2006
               noted that the problem of porous borders and insecurity in the
               Mano River Basin area-which includes Liberia, Sierra Leone,
               Guinea, and Cote d'Ivoire-has contributed to difficulties in
               effectively dealing with illicit trading of diamonds.

               Donors and diamond producers are considering a regional approach
               to help enhance the effectiveness of donor assistance because this
               assistance is constrained by the limited capacity and resources of
               these countries and the need to harmonize diamond policies among
               countries vulnerable to illicit cross border diamond trading. In
               February 2006, at a meeting of alluvial diamond producers,
               participants encouraged regional and subregional cooperation by
               harmonizing and reinforcing mechanisms to fight more efficiently
               the illicit cross border trade of diamonds. Also, the reports of
               the KPCS peer review visits to Sierra Leone and Liberia stress the
               importance of harmonizing diamond-related policies of these (and
               other) countries in the Mano River region to avoid the illegal
               transfer of rough diamonds across borders. For instance, when
               Sierra Leone significantly raised its diamond-related tax rate
               above the tax rate of other countries in the region in early 2006,
               it experienced a drop of rough diamond exports that led it to
               rescind the tax rate increase. Public and private officials have
               stated that employing a regional approach for some rough
               diamond-related assistance would improve the impact of this
               assistance, thereby further deterring illicit diamond trading.
               These officials have noted that harmonization of taxation and
               other laws among countries within a region is needed to dissuade
               people from illegally moving diamonds across borders. In June
               2006, representatives from Sierra Leone, Liberia, Guinea, and Cote
               D'Ivoire, along with representatives from the United States and
               other donors, met to discuss rough diamond-related
               issues-including policy areas for potential regional
               harmonization. According to U.S. officials, the conference
               highlighted the importance of regional harmonization, as well as
               the complexity-given the differences in national laws-of trying to
               find common positions that could be adopted by all the countries
               within a region. The United States is considering using a regional
               approach to enhance the impact of some of its diamond-related
               assistance. This regional assistance would complement
               country-specific assistance provided to diamond-producing
               countries within a region.

               Conclusions

    			  A system for controlling the trade in rough diamonds will be
               effective only if it has control mechanisms designed to curtail or
               deter the trade in conflict diamonds. The United States has
               established a multi-agency system aimed at controlling trade in
               rough diamonds (thereby curtailing trade in conflict diamonds)
               but, because of weaknesses of the system, the United States cannot
               ensure that illicit rough diamonds are not traded. To succeed,
               KPCS depends on all participants having strong control systems and
               procedures for collecting and sharing trade data on rough
               diamonds, for inspecting imports and exports of these diamonds,
               and for tracking confirmations of import and export receipts.

               Since implementing CDTA, the United States has made significant
               improvements to its system and procedures for collecting and
               sharing data and for controlling the rough diamond trade. However,
               a continual excess of exports over imports raises concerns because
               the United States is not expected to have such excess of exports
               over time (it does not produce rough diamonds and polishes some
               rough diamonds domestically) and because U.S. agencies have not
               conducted an analysis that might help to explain a persistent
               excess of exports. Also, the United States has not had a policy
               and plan for periodically or regularly physically inspecting
               imports and exports of rough diamonds to ensure that illicit rough
               diamonds do not enter the legitimate U.S. trade of these diamonds.
               In addition, the United States has failed to confirm most rough
               diamond import receipts to foreign export authorities, thereby
               failing to comply with a KPCS standard. The United States relies
               on the ultimate recipients to confirm import receipts, but it has
               not tracked whether these recipients do so. Moreover, although
               State and Census have received annual activity reports from USKPA,
               and State has reported to Congress on USKPA activities, State has
               not had a plan for overseeing the activities of USKPA and its
               licensees, who issue the U.S. Kimberley Process certificates.
               Although USKPA has reviewed the activities of 5 of its 17
               licensees, it has not had a plan and protocols for conducting
               these reviews. These weaknesses diminish the effectiveness and
               deterrent effect of the U.S. and international systems for
               controlling imports and exports of rough diamonds.

               The United States has helped to enhance KPCS by, among other
               things, participating in the decision making and operational
               aspects of the certification scheme, and has supported the
               adoption of KPCS by providing technical assistance to two African
               diamond-producing countries, Sierra Leone and Liberia. The United
               States has participated in KPCS since its inception, and has
               recently assumed leadership roles, by identifying and coordinating
               donor assistance to diamond producing countries, and leading a
               peer review visit to Brazil. The United States has helped Sierra
               Leone and Liberia in their efforts to meet the minimum KPCS
               requirements, but the limited capacity and resources of both
               countries-and the need to harmonize diamond policies among these
               countries and other countries in the region-has presented a major
               challenge to U.S. assistance efforts and the countries' ability to
               control their trade in rough diamonds and monitor large mining
               areas and highly porous borders. To enhance the impact of its
               diamond-related assistance and further curtail illicit rough
               diamond trading, the United States, other donors, and diamond
               producers are considering using a regional approach for providing
               some diamond-related assistance, which would help to address
               diamond issues of a regional nature.

               Recommendations for Executive Action

    			  To help the United States ensure that it has a more effective
               system for preventing the importation or exportation of conflict
               diamonds, we are making seven recommendations.

               o  To improve the accuracy of U.S. rough diamond trade data-if
               U.S. rough diamond exports continue to exceed imports--we
               recommend the following:

                            o  The Secretaries of State and the Treasury direct
                            the U.S. Kimberley Process Implementation
                            Coordinating Committee to perform such analysis as is
                            necessary to determine what constitutes a normal
                            excess of exports over imports based on a variety of
                            factors, including market factors such as rough
                            diamond stockpiles and domestic diamond cutting and
                            polishing capacities.

               o  To enhance the U.S. process for inspecting rough diamond
               imports and exports, we recommend the following:

                            o  The Secretary of Homeland Security direct the
                            Commissioner of CBP to develop and implement a plan
                            for conducting physical inspections of both imports
                            and exports of rough diamonds periodically or
                            regularly, including inspecting the quality of U.S.
                            Kimberley Process certificates.

               o  To enhance the U.S. process for confirming the receipt of U.S.
               imports with foreign exporting authorities, we recommend the
               following:

                            o  The Secretaries of State and Homeland Security
                            develop and implement a plan for confirming the
                            receipt of imports-currently the responsibility of
                            individual importers-and for tracking these
                            confirmations. The system for tracking import
                            confirmation receipts would help enhance Census' data
                            on rough diamond imports and exports.

                            o  The Director of OFAC revise the pertinent rough
                            diamond trade regulations to reflect the above
                            change.

               o  To enhance the U.S. process for reviewing the activities of
               USKPA and its licensees who issue Kimberley Process certificates,
               we recommend the following:

                            o  The Secretary of State direct the Assistant
                            Secretary, Bureau of Economic and Business Affairs,
                            to implement a plan for reviewing the activities of
                            USKPA and its licensees.

                            o  The Secretary of State direct the Directors of
                            USKPA to develop and implement a plan for reviewing
                            the activities of its licensees.

               o  Finally, to enhance the impact of U.S. diamond-related
               technical assistance and further curtail illicit rough diamond
               trading, we recommend the following:

               Agency Comments and Our Evaluation

    			  We provided a draft of this report to State, the Treasury,
               Homeland Security, Commerce, Interior, USAID, and USTR. We
               obtained written comments from State, the Treasury, Homeland
               Security, Commerce, and Interior (see apps. VI, VII, VIII, IX, and
               X). They concurred with our recommendations. We also received
               technical comments on this draft from State, the Treasury, USAID,
               and USTR, which we have incorporated where appropriate.

               We are sending copies of this report to interested congressional
               committees, State, the Treasury, Homeland Security, Commerce,
               Interior, USAID, and USTR. We will also make copies available to
               others upon request. In addition, the report will be available at
               no charge on the GAO Web site at http://www.gao.gov .

               If you and your staff have any questions about this report, please
               contact me at (202) 512-4347. Contact points for our Offices of
               Congressional Relations and Public Affairs may be found on the
               last page of this report. GAO staff who made major contributions
               to this report are listed in appendix XI.

               Loren Yager, Director International Affairs and Trade

               Appendix I: Objectives, Scope, and Methodology

    			  As mandated by the Clean Diamond Trade Act (CDTA), this report
               focused on (1) describing the institutional framework the U.S.
               government has created to implement CDTA, (2) examining how the
               United States has implemented the provisions of CDTA domestically
               and what principal challenges it faces, and (3) examining how the
               United States has helped to strengthen the Kimberley Process
               Certification Scheme (KPCS) and what principal challenges it
               faces.

               To address all of these objectives, we interviewed key officials
               from multiple U.S. agencies and the U.S. Kimberley Process
               Authority (USKPA). The agencies we interviewed included:

                            o  The Secretary of State direct the Assistant
                            Secretary, Bureau of African Affairs, to develop and
                            implement a plan for providing some of the
                            diamond-related assistance using a regional approach
                            so that countries within a region can harmonize
                            aspects of their systems for controlling the rough
                            diamond trade across porous borders.

               o  the Department of State (Bureau of Economic Affairs and United
               States Mission to the United Nations),

               o  the Department of the Treasury (Office of Foreign Assets
               Control),

               o  the Department of Homeland Security (Bureau of Customs and
               Border Protection and Bureau of Immigration and Customs
               Enforcement),

               o  the Department of Commerce (Bureau of the Census),

               o  the Department of Interior (U.S. Geological Survey),

               o  the U.S. Agency for International Development, and

               o  the Office of the U.S. Trade Representative.

               To address our first objective of describing the institutional
               framework the U.S. government has used to implement CDTA and our
               second objective of examining how the United States has
               implemented the provisions of CDTA domestically and what principal
               challenges it faces, we reviewed documents from the U.S.
               government and USKPA, including relevant laws, regulations,
               reports, and briefing documents. Also, we interviewed
               representatives and collected documentation from diamond industry
               organizations and non-governmental groups that have been involved
               in the implementation of CDTA. In addition, we interviewed
               representatives from private organizations that have been involved
               in trading rough diamonds to and from the United States. We
               analyzed Census' rough diamond import and export flows in
               conjunction with data collection improvements to determine the
               factors contributing to excess exports. These data have
               limitations, as discussed in the report. We assessed the quality
               of data the Census, the UN, and the KPCS used to describe
               international trade in diamonds, and determined that they were
               sufficiently reliable for our purposes. Finally, we used data
               provided to us by foreign governments to analyze U.S. import
               receipt confirmations. Based on interviews with foreign government
               officials we determined that these data were sufficiently reliable
               to support our findings.

               To address our third objective of examining how the United States
               has helped to strengthen KPCS and what principal challenges it
               faces, we reviewed UN, KPCS, and U.S. and foreign government
               documents, including relevant legislation, reports, and briefing
               documents. Also, we interviewed officials and collected
               documentation from the UN and other international organizations,
               KPCS, diamond industry organizations, non-governmental groups, and
               the U.S. and foreign governments involved in the development and
               implementation of KPCS. In addition, to identify, describe, and
               assess U.S. diamond-related assistance efforts, we interviewed
               U.S., UN, and foreign government officials and non-governmental
               groups and private organizations representatives involved in the
               development and implementation of the diamond-related assistance
               the United States has provided to Sierra Leone and Liberia. We did
               not independently verify the U.S. assistance data.

               We conducted our work in Washington, D.C.; New York, New York;
               Moscow, Russia; Ottawa, Canada; Brussels and Antwerp, Belgium;
               Catania, Italy; Freetown and Koidu, Sierra Leone; and Monrovia,
               Liberia. We conducted our work from September 2005 through
               September 2006 in accordance with generally accepted government
               auditing standards.

               Appendix II: U.S. and Global Trade In Rough Diamonds

    			  Tables 5 to 8 show information related to the U.S. and global
               trade in rough diamonds, including the top destinations for U.S.
               rough diamond exports, top sources of U.S. rough diamond imports,
               top (non-mining) rough diamond exporting KPCS participants, and
               the economic importance of diamond mining for selected countries.
               We assessed the quality of data from the Census, the UN, and the
               KPCS, and, despite limitations, we determined that they were
               sufficiently reliable for our purposes.

               Table 5: Top Destinations for U.S. Rough Diamond Exports, 2005
               (value > 1 percent of U.S. exports)

    KPCS participant     Value of exports Percent of U.S. exports
    Israel                   $204,486,572                   40.0%
    European Community       $157,386,752                   30.8%
    United Arab Emirates      $42,320,452                    8.3%
    South Africa              $32,243,114                    6.3%
    India                     $19,648,240                    3.8%
    Switzerland               $14,578,528                    2.8%
    China                     $13,116,880                    2.6%
    Japan                      $8,786,284                    1.7%
    Namibia                    $6,805,390                    1.3%
    Mauritius                  $6,032,302                    1.2%

               Source: GAO analysis of Census data.

               Table 6: Top Sources of U.S. Rough Diamond Imports, by Exporting
               Participant, 2005 (value > 1 percent of US imports)

    			  KPCS participant     Value of imports Percent of U.S. imports
    European Community       $581,379,013                   64.7%
    Israel                   $215,579,636                   24.0%
    South Africa              $33,102,427                    3.7%
    United Arab Emirates      $21,775,428                    2.4%
    Canada                    $12,305,324                    1.4%
    Guyana                    $10,803,495                    1.2%

               Source: GAO analysis of Census data.

               Table 7: Top (Non-Mining)a Rough Diamond Exporting KPCS
               Participants, 2003 (exports > $200 million)

    KPCS participant     Value of rough diamond exports
    European Community                   $9,760,320,078
    Israel                               $2,948,141,887
    United Arab Emirates                 $1,006,991,024
    Switzerland                            $795,914,964
    Armenia                                $486,569,182
    Japan                                  $299,162,740
    United States                          $227,286,017
    Thailand                               $225,365,729

               Source: GAO analysis of KPCS data.

               aThe KPCS did not record diamond mining for these countries in
               2003.

               Table 8: Economic Importance of Mining for Selected Countries,
               2003

    			                                                                    Mining as a
                                         Mining as a percentage of  percentage of
    Country           Value of mining    gross domestic product        exports
    Botswana           $2,225,275,390                       29%            65%
    Democratic
    Republic of Congo    $910,833,462                       16%            64%
    Namibia              $421,312,014                        9%            24%
    Sierra Leone          $76,700,000                        8%            44%
    Angola               $788,100,104                        6%             8%
    Guyana                $20,626,850                        3% Not available.

               Source: GAO analysis of KPCS, United Nations, World Bank, and U.S.
               Geological Survey data.

               Note: Shares of gross domestic product and exports rounded to the
               nearest percent.

               Appendix III: Top Polished Diamond Exporting and Top Diamond
    			  Mining Countries

    			  Figures 7 and 8 depict the top polished diamond exporting
               countries and the top diamond mining countries.

    25 The UN Security Council imposed sanctions on the export of rough
    diamonds from Liberia in 2001 for its role in the armed conflict in
    neighboring Sierra Leone. Compliance with KPCS is one of the key
    conditions for lifting the sanctions on diamond exports.

    26In February 2005, the first Kimberley Process Mission to Liberia found
    that, while Liberia had enacted the necessary law to implement KPCS and
    designated the Ministry of Lands, Mines, and Energy as the focal point for
    national implementation, this country lacked the means to enforce internal
    controls, including monitoring the activities of diamond-producing
    regions.

    Figure 7: Top Polished Diamond Exporting Countries, 2004 (estimated
    exports > $200 million)

    Note: Exports are estimated as the sum of partner imports. China's
    estimated exports include Hong Kong.

    Figure 8: Top Diamond Mining Countries, 2003 (mining value > $50 million)

    Appendix IV: Timeline of KPCS and CDTA-Related
    Events

    Appendix V: List of KPCS Participants

    States and regional economic integration organizations who have met the
    minimum requirements of KPCS are:

               1. Angola
               2. Armenia
               3. Australia
               4. Belarus
               5. Botswana
               6. Brazil
               7. Bulgaria
               8. Canada
               9. Central African Republic
               10. China, People's Republic of
               11. Congo, Democratic Republic of
               12. Cote D' Ivoire
               13. Croatia
               14. European Community
               15. Ghana
               16. Guinea
               17. Guyana
               18. India
               19. Indonesia
               20. Israel
               21. Japan
               22. Korea, Republic of
               23. Lao People's Democratic Republic
               24. Lebanon
               25. Lesotho
               26. Malaysia
               27. Mauritius
               28. Namibia
               29. New Zealand
               30. Norway
               31. Romania
               32. Russian Federation
               33. Sierra Leone
               34. Singapore
               35. South Africa
               36. Sri Lanka
               37. Switzerland
               38. Tanzania
               39. Thailand
               40. Togo
               41. Ukraine
               42. United Arab Emirates
               43. United States of America
               44. Venezuela
               45. Vietnam
               46. Zimbabwe

    Source: GAO analysis of KPCS information.

    Note: The rough diamond-trading entity of Chinese Taipei has also met the
    minimum requirements of KPCS.

    Appendix VI: Comments from the Department of State

    Appendix VII: Comments from the Department of the Treasury

    Appendix VIII: Comments from the Department of Homeland Security

    Appendix IX: Comments from the Department of Commerce

    Appendix X: Comments from the Department of Interior

    Appendix XI: GAO Contact and Staff Acknowledgments

                                      GAO Contact

    Loren Yager, (202) 512-4347

                                 Staff Acknowledgments

    Zina Merritt served as Assistant Director responsible for this report, and
    Juan Tapia-Videla was the Analyst-in-Charge. In addition to those named
    above, the following individuals made significant contributions to this
    report: Kate Blumenreich, Leah DeWolf, David Dornisch, Mark Dowling, and
    Michael Hoffman. The team benefited from the expert advice and assistance
    of Joe Carney, Randall Cole, Karen Deans, Etana Finkler, Chanetta Reed,
    Kendall Schaefer, Jena Sinkfield, and Mark Speight.

    (320351)

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    Highlights of GAO-06-978, a report to congressional committees

    September 2006

    CONFLICT DIAMONDS

    Agency Actions Needed to Enhance Implementation of the Clean Diamond Trade
    Act

    In 2003, the United States and other countries began implementing the
    Kimberley Process Certification Scheme (KPCS) to curtail the trade of
    rough diamonds that had fueled severe conflicts in Africa, known as
    conflict diamonds. CDTA provides the statutory framework for U.S.
    implementation of the KPCS. As mandated in CDTA, this report (1) describes
    the institutional framework established to implement the act, (2) examines
    implementation of the domestic provisions of the act and challenges it
    faces, and (3) examines how the United States has helped to strengthen the
    KPCS and challenges it faces.

    What GAO Recommends

    This report contains recommendations to the Secretaries of the Departments
    of State, the Treasury, Homeland Security, and Commerce. It recommends
    improvements in the (1) accuracy of U.S. rough diamond trade data; (2)
    processes for importing and exporting rough diamonds, including conducting
    periodic physical inspections and confirmation of rough diamond import
    receipts with foreign exporting authorities; (3) oversight of the
    activities of USKPA and its licensees who issue Kimberley Process
    certificates; and (4) approach for providing some of the U.S.
    diamond-related assistance. The departments reviewed a draft copy of this
    report and concurred with GAO's recommendations.

    The United States has used multiple U.S. agencies and a private,
    not-for-profit entity to implement the domestic and international
    provisions of the Clean Diamond Trade Act (CDTA). The Departments of State
    and the Treasury have led U.S. efforts to implement the domestic
    provisions of the act; State has led the U.S. efforts to curtail trade in
    conflict diamonds abroad. Domestically, the Departments of State, the
    Treasury, Homeland Security, and Commerce, and the private entity, called
    the U.S. Kimberley Process Authority (USKPA), have been responsible for
    controlling U.S. imports and exports of rough diamonds. Internationally,
    State, the U.S. Agency for International Development (USAID), and the U.S.
    Geological Survey have helped to strengthen KPCS.

    Domestically, the U.S. systems for reporting rough diamond statistics and
    for controlling imports and exports of these diamonds are vulnerable to
    illicit trade. The United States has enhanced the quality of its rough
    diamond trade data by improving its collection processes, but work remains
    to be done. Also, the United States does not periodically inspect rough
    diamond imports or exports to ensure that the contents of the rough
    diamond parcels match the Kimberley Process certificates. In addition, the
    United States lacks an effective system for confirming receipt of
    imports-a Kimberley Process requirement for avoiding possible diversions
    of rough diamond imports. Finally, the United States has not had a plan
    for monitoring USKPA, but is developing and testing one.

    Internationally, the United States has helped to strengthen KPCS by
    participating in KPCS activities and providing assistance to Sierra Leone
    and Liberia in their efforts to comply with KPCS, but donor assistance to
    these countries faces challenges. Donors and diamond producing countries
    are considering a regional approach to help enhance the effectiveness of
    donor diamond-related assistance because this assistance is constrained by
    the limited capacity and resources of these countries and the need to
    harmonize diamond policies among countries vulnerable to illicit cross
    border diamond trading.

    Diamond Mining Site in Sierra Leone-A Recipient Country of U.S. Assistance

    Conflict Diamonds Conflict Diamonds Conflict Diamonds

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