Money Laundering And The Diamond Jeweller

Not For Love

A lawyer who is now very well known to residents of Singapore, the police, and participants in the diamond market here, bought some diamonds: a 10.89 carat IF fancy yellow rectangular modified) brilliant, a 10.70 carat VS2 fancy yellow (rectangular modified) brilliant and a few others. The lawyer bought these jewellery, for a few million Singapore dollars, from a Singapore jeweller with whom he had no apparent prior dealings.

The sales staff at the jeweller noted that the lawyer was going on a vacation with his family at the end of the week (2nd June 2006) and he needed the jewellry for investment purposes. Between 31st May and 2nd June 2006, the lawyer bought a handful of diamonds (mostly VS2s or VVS2s), many pieces of jewellry, and two large blue sapphires. He allegedly asked for, and received, a total price for the whole lot and then bargained on the total price. It is alleged that the invoices don’t provide the individual price for the loose and certificated diamonds. It also is alleged that some of the fancy yellow diamonds were bought without even being seen.

The jewellery store owner was at no stage involved in the negotiations with the lawyer. All the negotiations were done through sales assistants. Multiple payments were made, including a wire transfer for an amount greater than the value of what was purchased. But for the subsequent events, his wife could have been a happy lady- after all diamonds are a girl’s best friend.

Shortly thereafter, the lawyer disappeared and his present whereabouts are unknown. It subsequently transpired that the lawyer had defrauded his clients and stole their money. The diamonds where after all not for his loved ones.

Money Laundering

The fact is that this lawyer laundered money (stolen from a client) through transportable high value items that can be turned into cash again elsewhere in the world.

Singapore joined the Financial Action Task Force (“FATF”) in 1991. The purpose of FATF is to examine and report on measures to combat money laundering, to monitor implementations of counter money laundering measures, to track and review money laundering activities.

In 1990, the FATF issued its Forty Recommendations which “provide a comprehensive blueprint for action against money laundering, covering the criminal justice system and law enforcement, the financial system and its regulation; and international cooperation”. Amended in 1996 to reflect changes in money laundering trends and potential future threats and again in 2003 to include terrorism financing, the “Forty Plus Nine Recommendations” are the most comprehensive set of anti-money laundering directives yet created for governments, legislatures, law enforcement, financial institutions and businesses in general.

FATF’s Recommendation Twelve concerns dealers in high-value goods which would include gems. It requires such parties to comply with “customer due diligence and record-keeping” and “reporting of suspicious transactions and compliance” requirements.

In Singapore, the FATF Recommendations have been implemented in certain industries. The Monetary Authority of Singapore has rules and regulations covering the Banking, Money-Changing & Remittance Businesses. The Singapore Law Society has regulations in place for lawyers. ICPAS likewise has guidelines for auditors.

Jewellers (high-value dealers) in the United States and in Europe know that the law imposes specific obligations with respect to reporting and completing suspicious (or “irregular”) transactions. Jewellers in Asia, especially in FATF member countries, should be in a similar situation – but they are not. There are no specific regulations covering jewellers in Singapore.

Can Singapore Jewellers Therefore Ignore the FATF Recommendations?

That is a question that may soon be argued before the Singapore courts. As Singapore does not have specific guidelines for the high value dealers (those engaged in precious stones and metals), what yardsticks and parameters will be used by the courts?

The question is whether the behavior of the customer should have raised the suspicions of a reasonably competent jeweller and/or should have raised reasonable grounds for a jeweller to suspect that the customer was laundering criminal proceeds.

FATF Recommendations could be the internationally accepted standards that the courts can benchmark the standard of care that a reasonably competent jeweller have to meet to prevent a customer from laundering criminal proceeds.

The only relevant legislation in Singapore is the Corruption, Drug Trafficking, and Other Serious Crimes (Confiscation of Benefits) Act of 1999 (“CDSA”). Section 44 makes it an offence for a person to enter into an arrangement knowing or having reasonable grounds to believe that the arrangement will allow a criminal to retain the benefits of his criminal act.

Even though financial institutions must report suspicious transactions, positively identify customers engaging in large currency transactions and are required to maintain adequate records, there is no specific rules for jewellers other than s.44 of the CDSA.

The question then is whether the jeweller knew or had reasonable grounds to believe that the customer “is a person who engages in or has engaged in criminal conduct or has benefited from criminal conduct”. The immediate question that arises concern the “Know Your Client” and client due diligence requirements imposed by FATF on high value dealers. Have these requirements been satisfied?

Suspicious Conduct of A Buyer

Was the lawyer-buyer buying the jewellery for investment?

Without individual prices for each piece of jewellery, how can an investor know if his investment has increased or decreased in value? He cannot. So any genuine investor will ask for individual prices for each piece.

Also, it is unusual for an investor to walk into any jewellery store looking for investment grade diamonds. Usually, such buyers are introduced by other buyers. A genuine buyer will not buy from just any store.

Likewise, it is unusual for such investment decisions to be made in a hurry. Investment in diamonds on a retail level is a long-term proposition that requires considerable skill, especially on the part of the jeweller, to make sound investment recommendations to the buyer.

The buyer overpaid and then asked the jeweller to give him back the overpaid amount in cash. The amount apparently wasn’t enormous but this is a classic scheme. Shouldn’t the refund of the overpayment be made by cheque and not cash?

Should such events have alerted the jeweller?

It could be that the buyer is just a novice diamond investor with just too much money. After all, many diamond buyers who buy on impulse claim to be doing so as an investment, perhaps to ease some of the guilt in spending so much money. Can a jeweller not take advantage of a “good deal”? Unfortunately, the difference between “a good deal” and “a good deal of trouble” is often not clear.

It is likely that the Singapore jeweller is a good, decent and honest person and we do not imply anything different. But he/she can still be negligent if he/she did not carry out the necessary checks when he/she had reasonable grounds to suspect that this buyer was doing something illegal.

“Reasonable grounds to suspect” imposes an “objective test” whether the person failed to report a suspicious occurrence. The Singapore High Court will have to look at the facts and circumstances at hand and decide whether they would have caused a reasonable person to surmise knowledge or develop a suspicion that someone was engaging in money laundering activities.

Conclusion

We like to think that this present situation will cause the Singapore government to consider a better implementation of the FATF’s 40+9 Recommendations for high value goods traders like jewellers. It will give better certainty to jewellers in the conduct of their business and deter money-launderers from using Singapore as a conduit to launder money using jewelleries. At some point international diamond and jewelry suppliers will cease to deal with non-compliant jurisdictions. Better to act sooner than later.