Are Diamonds the Terrorists' Best Friends?

Aug. 25, 2003 -- — In the bustling heart of Midtown Manhattan's diamond district, where shop windows display a dazzling range of jewelry and shoppers vie for space with hurrying merchants and courier vans, a new worry is taking taking the shine off America's jewelry business.

Earlier this month, with curious merchants and sales staff looking on, FBI agents swooped into an office at the corner of 47th Street and Fifth Avenue, seizing documents, computer drives and arresting two men — Yehuda Abraham and Moinuddeen Ahmed Hameed — in the final, public phase of a massive anti-terrorism sting.

Hameed, an Indian based in Malaysia, and Abraham, the owner of Ambuy Gem Corp., were charged with arranging illegal money transfers for an alleged plot to smuggle surface-to-air missiles into the United States.

Earlier that day, U.S. officials had arrested Hemant Lakhani, a British citizen of Indian descent, in a New Jersey hotel for his involvement in the same alleged plot.

In the wake of the arrests, which the government hailed as a major victory in the war on terror, some experts questioned the sting's significance, calling it a government setup of small-fry operators, conducted with the help of a key cooperating witness seeking lenient treatment on federal drug charges.

But whatever the import of the sting itself, the fallout for America's gem trade and jewelry industry is potentially severe, casting as it does the dark cloud of money laundering and terrorism.

Old-Style Business Dealings

The U.S. gem trade is a thriving business in which dealers, designers, merchants and middlemen buy and sell diamonds, precious metals and gemstones (or colored stone in industry parlance). The industry runs the gamut from large companies to tens of thousands of small businesses catering to the vast American market.

More than 80 percent of America's diamonds at one time or another filter through New York's diamond district, where the real dealings are done in tight-security upstairs rooms, far from the prying eyes of sundry shoppers.

Concentrated in a single block on Manhattan's 47th Street between Fifth and Sixth Avenues, the diamond district is home to more than 2,500 independent businesses that traffic in the cutting, trading and selling of some of the world's most precious stones.

Dating back to around World War II, when Belgian Jews fleeing Nazi persecution set up businesses in a trade they were familiar with, the district has long been dominated by Jewish jewelers.

But in recent years, a growing section of Indian jewelers — primarily from the Gujarati community — have begun filling in the ranks. Indian exports of gems and jewelry to the United States currently exceeds $6 billion and is the South Asian nation's foremost foreign exchange earner.

What both communities have in common, though, is an old-style inclination toward secretive trading using personal networks for cash transactions. That has experts worried the business makes a ready vehicle for money-laundering, which in turn could help bankroll terrorist groups.

Ripe for Laundering

In its latest Report on Money Laundering Typologies, the Paris-based Financial Action Task Force warns that precious metals and gemstones are favored vehicles for moving terrorist funds.

"In general, anybody that deals in high amounts of cash would definitely be targets for money launderers," says Joseph Foy, a spokesman for the Internal Revenue Service Criminal Investigation Division. "Money laundering depends on the ability for criminals to get rid of cash quickly."

The nature of the products in the business is also particularly conducive to laundering. Small yet valuable stones can be easily hidden and smuggled. What's more, as an industry source put it, barring the higher-grade stones that have value certificates, "the value of a gem stone lies in the eye of the beholder," making it particularly easy to inflate or over-invoice prices as necessary.

"The jewelry and diamond and gems and precious metals industry has been viewed as money-laundering targets and money-laundering centers for a long time," says Charles Intriago, publisher of moneylaundering.com and a former federal prosecutor. "The fact that it has come up again with this case does not surprise me."

While dirty money allegations and links to drug cartels and arms bazaars are familiar terrain in the jewelry business, the concern has been particularly keen in the wake the Sept. 11, 2001, terror attacks. That event prompted closer tracking of terror financing — a complicated business of monitoring cash transactions ranging from multinational "front" organizations to the shadowy world of traditional, informal remittance networks.

The USA Patriot Act, for instance, was passed shortly after Sept. 11, in part as an effort to strengthen the arm of the Treasury Department in regulating and monitoring financial and non-financial sectors.

A Real-Life Spy Thriller

The missile sting is just the latest example of an alleged gem-money laundering link.

For instance, in June, under a sting code-named Operation Meltdown, six jewelry business owners in the diamond district were charged with helping heroin and cocaine dealers launder more than $1 million in gold to be transported to the Colombian drug cartels. The gold was molded into belts, screws, wrenches and other tools, plated with other metal and painted to avoid detection, according to law enforcement officials.

And reports following the Sept. 11, 2001, attacks, suggested al Qaeda had struck deals in "blood diamonds," or diamonds that have been used to help fund civil wars in Africa. The British newspaper The Observer wrote last October that al Qaeda managed to convert more than $20 million of its cash into diamonds before the attacks, which were then easily transported over national borders and converted into cash for operational needs.

Given the reports of al Qaeda's alleged past use of diamonds to fund its activities, Intriago welcomes the latest FBI sting operation. "This is the first time I hear al Qaeda being used as a ruse in an undercover case and it's about time," he says. "This will smoke out their sympathizers."

The details of the missile sting itself read like a John le Carré spy novel. According to the FBI's criminal complaint, in October 2002, a witness cooperating with the FBI gave Abraham $30,000 in cash toward payment for a Russian SA-18 Igla missile. Hameed, a businessman with dealings in the jewelry business, was also a part of the transaction deal, the affidavit charges, and, "he knew he was doing something wrong."

Neither Ambuy Gem Corp. nor Abraham had a license to operate a money transmitting business, the affidavit states.

For their part, lawyers for Abraham and Hameed have maintained their clients' innocence. "It was not alleged that Mr. Abraham engaged in conversations discussing missiles and terrorist activity," Larry Krantz, attorney for Abraham, told Newsday, a New York-based daily.

But arguments by defendants in laundering cases that they were not aware of the exact nature and ultimate destination of the cash flow are typically dismissed by law enforcement officials and financial crime experts.

"U.S. law provides for what is called 'willful blindness' and it refers to a deliberate avoidance of knowledge, of the facts," says Intriago. "That's considered the equivalent of actual knowledge."

Turning Over a New Stone

For their part, jewelers say allegations the industry is rife with money-launderers, and that traders are willing to look the other way, are inaccurate and oversimplified.

"I don't think our industry is any more susceptible than other industries," says Douglas Hucker, executive director of the American Gem Trade Association, based in Dallas, which represents 750 members in the gemstone business. "We are cooperating with the federal government under the Patriot Act to make certain that we can be as responsible as we can possibly be."

In the wake of the Patriot Act, the Treasury Department, taking into account the industry's "vulnerability to money laundering and terrorist financing," plans to issue rules requiring the industry to come up with anti-money laundering programs.

The JVC (Jewelers Vigilance Committee), a New York-based non-profit trade association, has submitted proposed anti-laundering programs to the Treasury Department. They include proposals for businesses to assign a compliance officer, employee training and an independent audit function to review anti-money laundering programs.

According to Cecilia Gardner, executive director and general consul to the JVC, the organization expects the Treasury Department to consider proposed rules until later this year, after which final rules will be established.

Although she is careful to note the arrests of Abraham and Hameed have not as yet been linked to the industry, Gardner concedes "there is a certain logic" to using the industry for laundering purposes given the "high concentration of value" of the goods.

But, she insists, change could come quickly and relatively effortlessly. "The new rules will be easy to implement because every industry has to look at what needs to be done and determine where the vulnerabilities are."

If that's the case, a combination of new self-regulatory rules and increased law enforcement vigilance could bring about a whiff of change in the bustling streets of the diamond district, where secret deals and whispered exchanges still funnel sales of some of the world's most precious stones.