Thursday, June 4, 2020

Inside Botswana/De Beers secret agreement

A costly blunder in the highly secretive sales agreement between De Beers and Botswana Government has opened a revenue rort pathway which enables the mining giant to rob Botswana out of billions of Pula annually ÔÇô Sunday Standard investigations have revealed.

Documents passed to the Sunday Standard suggests that Debswana may have been robbed out of more than P40 billion in the 2018 financial year when its “special stones”, “exceptional stones” and “very exceptional stones” were devalued on export only to assume a higher value abroad.

The money that accrued from the adjustment of the Debswana diamond exports’ price was all diverted to swell the De Beers bottom line.

This is over and above billions of Pula sapped from Botswana’s treasury through De Beers’ base erosion and profit shifting.

Debswana contributed 24.1 million carats to the De Beers 35.8 million carats output in 2008 accounting for 67.5% of the De Beers total carat output.

During the same year, Debswana reported total revenue of US$ 1, 25 while De Beers posted US$ 6.1 billion. Curiously, revenue from Debswana accounted for a paltry 23% of the De Beers total revenue.

This suggests that more than US$ 4 billion (P43 billion) of the Debswana revenue almost vanished into thin air. This is more than half the value of  Botswana’s current foreign reserves which stand at P 74.3 billion and slightly less than the country’s total revenues and grants for 2017/18 estimated at P57 billion.

Sunday Standard investigations have turned up a revenue bolthole in the sales agreement between De Beers and Botswana which has allowed De Beers to make billions of pula by undervaluing Debswana’s “special stones”, “exceptional stones” and “very exceptional stones” on export and adjusting their value once they have left Botswana.

An analysis of confidential data on rough Botswana gemstones shows an average 77, 6 percent increase in value for the stones once they leave Botswana and arrive in a foreign country ÔÇö before any cutting or polishing takes place.

To address this huge price differential, the Sales Agreement entered into between Botswana and De Beers on 16th September 2011 has what is called the “40 Day Adjustment” clause under which De Beers pays Diamond Trading Company Botswana (DTCB) within 40 days 95% of the balance between the undervalued price and the price realised outside the country.

DTCB on the other hand pays Debswana 90% of the adjusted price.

The clause however excludes big stones classified under the agreement  as “special stones”, “exceptional stones” and “very exceptional stones” and only covers  small stones referred to as “Serie diamonds.”

An industry source told the Sunday Standard that the “special stones”, “exceptional stones” and “very exceptional stones” are the holy grail of the diamond mining industry and profits from one is often enough to change the fortunes of a mine from loss making to profitable.

For example, the blue diamond discovered by Debswana recently had an estimated value of US $200 million (about P2 billion) which would account for more than 15% of the Debswana 2018 revenue of US$ 1, 25 billion.

Sources inside the diamond industry have revealed that Debswana discovers“special stones”, “exceptional stones” and “very exceptional stones” almost every week, however, unlike most miners, the lucky strike is never publicized.

This revenue leakage from undervaluing special stones is over and above the billions of Pula hemorrhaging from Botswana’s treasury through De Beers’ base erosion and profit shifting.

Sunday Standard investigations have turned up documented information showing that the Debswana diamonds’ value miraculously increases when they are traded between different countries after escaping Botswana’s national borders ÔÇö and tax brackets. The data appears to indicate use of an old trick known as profit- shifting, whereby a commodity is undervalued to reduce tax liability. But when the diamonds arrive in a tax-free jurisdiction such as the “free ports” of Switzerland, their value increases by up to 200 percent. (A Freeport is a free-trade zone where products can be stored duty-free while awaiting re-export.)

Although De Beers through the 40 day adjustment clause refunds government the money it lost as a result of undervaluing the Serie diamonds, this does not include the tax on the additional amount because it accrues outside Botswana’s tax regime.

This suggests that the Botswana government is losing significant tax revenues when the diamonds are being undervalued on export only to assume a higher value abroad.

The value of the gems varies greatly depending on which country imports them from Botswana.

For example, Switzerland shows a pattern of importing gemstones before exporting them at much higher values, without having added value to the stones by cutting or polishing them.

Between 2003 and 2016, confidential data shows the value of diamonds originating in Botswana and traded between Switzerland and other countries totalled $67,4bn. This figure includes rough diamonds directly exported from Botswana by Debswana.

Records show that these companies pay an average of $519/ carat for rough stones that are then re-exported at $1 644/carat ÔÇö a 216 percent increase in value.

Sometimes the run-up is even bigger. In 2016 about 269 rough gem carats originating from Botswana were re-exported from Switzerland to Laos at $16, 5 million, or more than $61 000/carat. In 2016, Swiss freeports exported parcels worth $118m to the US, averaging $84 000/carat.

An analysis of this official inter-government data shows that by the time the rough diamonds left Switzerland for other countries, they had increased in value by $27.8bn.

At least half of this multi- billion “re-export” trade in rough diamonds appears to be the same stones in different packages: Subsidiaries of companies received and repackaged diamonds into new parcels with new invoices. The data shows that the rough diamonds were re-imported and re-exported between different jurisdictions, particularly tax havens, at increasingly higher values.

Data analysis identified 17.1m carats of rough diamonds originating from Botswana from 2003 to 2012. When the stones left Botswana, they were valued at an average of $125.9/carat. When they were re-exported from foreign countries, they were valued at an average of $223.8/carat, for a total of more than $3.8bn over the period ÔÇô a 77.6 percent increase in value.

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