SUMMARY 

Businesses involved in the diamond and related industries must rigorously verify their supply chains to ensure that their diamonds do not originate from Russia and comply with G7 restrictions, particularly Office of Foreign Assets Control (OFAC) regulations and the European Commission (EC) full-traceability requirement. Firms can prevent financial penalties and mitigate reputational risk by rigorously vetting their supply chains. Diamonds supplied through Armenia and the United Arab Emirates (UAE) pose a particularly high risk of originating from Russia.

G7 DIAMOND IMPORT RESTRICTIONS 

On December 6, 2023, the G7 members announced a coordinated effort to restrict diamond imports from Russia. In the first quarter of 2024, the G7 extended the restrictions to cover diamonds mined, processed, or produced in Russia and Russian diamonds supplied through third countries. These restrictions significantly tighten diamond import controls in both the United States and the European Union (EU). To avoid penalties, these restrictions require businesses involved in the diamond trade to adopt sophisticated supply chain tracking to ensure that their products do not contain diamonds of Russian origin.

To track the supply chain, the G7 is working towards requiring diamond importers to use a G7 blockchain ledger system to track diamond imports “from mine to finger.” However, challenges with implementing this blockchain system caused delays, and the system is currently slated to come into force in March 2025.

Official customs inspections cannot accurately distinguish a Russian diamond from a non-Russian one. However, even after a stone passes customs, companies can face penalties later if regulators discover noncompliance, making supply chain due diligence crucial for businesses.

To ensure that diamonds are not of Russian origin, the G7 introduced a full-traceability requirement. In contrast, US importers face a lax requirement to “self-certify,” however US officials have stated that they aim to implement stricter tracking systems. EU importers face stricter regulations: traders must send all diamonds to Antwerp for a two-week inspection to determine if the diamond is of Russian origin. Despite the length of the required lab testing, the process cannot definitively determine a diamond’s origin, leaving a risk that an importer could later face penalties for noncompliance.

Companies that breach the G7’s diamond regulations could face hefty financial penalties and possible business closure. In the EU, fines can be as high as five percent of a company’s global turnover or €40 million, whichever is greater. Additional penalties include being barred from receiving public benefits, placed under judicial supervision, and disqualified from conducting business activities (EU Directive 2024/1226).

In the United States, the Office of Foreign Assets Control (OFAC) has introduced its own set of restrictions to support the G7 prohibition. OFAC’s Diamond Jewelry Determination, which falls under the International Emergency Economic Powers Act (IEEPA), carries civil monetary penalties of up to $368,136 per violation or twice the amount of the violating transaction.

Delays in implementing the G7’s blockchain tracking system do not negate the supply chain tracking requirement, however. To keep up with diamond import requirements, businesses need private supply chain tracking systems. These systems will require regional expertise in detecting evasion, as the Kremlin has pledged to find ways to evade G7 import bans on Russian diamonds.

Overall, having a sophisticated supply chain tracking system is increasingly important to lower the risk of Russian diamonds being smuggled into G7 countries, as stated by European External Action Service Secretary General Stefano Sannino, in an interview with FiveBy at the 2024 Aspen Security Forum.

PENALTIES AND RISKS 

The G7 will likely finalize its Russia diamond import restrictions in 2025. Though the G7’s   Russia diamond restrictions are not yet fully active, previous cases of G7 penalties for diamond imports from other restricted regions indicate the likely penalties companies will face for violations. In 2015, the Council of the EU froze the assets of Bureau d’achat de Diamant en Centrafrique (Badica) and its Belgian sister company Kardiam for illegally importing diamonds originating from the Central African Republic. In a letter to the UN, Kardiam disputed the asset freeze, stating that the parcel of diamonds came through Dubai. The EU rejected the appeal, showing that routing diamonds through third countries still carries a risk of a stiff penalty.

In a recent indictment in the United States, diamond dealer Nazem Said Ahmad and eight associates were charged with evading US sanctions by sending more than $90 million worth of diamonds to a US grading lab. Ahmad, designated by OFAC in 2019 for supporting Hezbollah, used a complex network of associates and companies to disguise his involvement. After the indictment, OFAC sanctioned 52 associates and companies for supporting Ahmad. While the US grading lab was not fined or otherwise charged, it could have prevented legal and reputational challenges by conducting more comprehensive counterparty due diligence, which could have revealed the ties between Ahmad and the associates and companies sending diamonds to the US lab.

EVASION TRENDS 

FiveBy has identified two primary countries that pose a high risk of being used to transship and obfuscate the origin of Russian diamonds: Armenia and the United Arab Emirates (UAE).

Prior to the G7 restrictions on Russian-origin diamonds, Russia was one of the EU’s largest diamond suppliers. Since the G7 restrictions have come into force, Russian diamond suppliers have rerouted their supply roads through Armenia and the United Arab Emirates.

When the EU began discussing Russian diamond import restrictions in 2023, Armenia experienced increased re-exports of Russian diamonds, which hit a record $589 million in 2023. Armenia primarily imports its diamonds from Russia, and Russian diamond re-exports from Armenia increased 25 percent year-over-year in the first quarter of 2024.

Adding to compliance challenges, diamonds from Armenia primarily pass through the UAE before landing in the EU or the United States. While in the UAE, Russian diamonds destined for the EU often undergo an obfuscation process, which entails blending the diamonds with synthetics and selling them locally, and cutting and polishing rough diamonds.

The UAE has not imposed sanctions on Russian diamonds and lacks a system that can track a diamond’s origin. Though the UAE is the chair of the Kimberley Process Certification Scheme (KPCS), the KPCS is prone to fraud and not sufficient to track a complex supply chain.

This circuitous trade route through Armenia and the UAE, along with a lack of regulatory controls in Armenia and the UAE underscores the need for companies to have in-depth due diligence processes and regional expertise to be compliant and avoid penalties. Overall, this ongoing shift in trade dynamics underscores the broader implications of international sanctions and the persistent challenges in enforcing compliance.

FiveBy can support companies in producing tailored solutions along with regional expertise to comply with G7 import restrictions. FiveBy can assist in developing comprehensive compliance programs that align with the latest regulatory requirements and provide risk assessments to identify potential vulnerabilities in the supply chain. By leveraging FiveBy’s expertise, companies can navigate the complexities of international trade restrictions and sanctions, avoid penalties, and maintain the integrity of their operations.

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