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 CDTAï¿½s 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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