Did 'Bling King' Wash Dirty Diamond Dollars?

June 19, 2006 — -- Can you deal with gangsters without becoming one yourself?

Last Thursday Jacob Arabov -- also known as Jacob the Jeweler -- was arrested on accusations of money laundering on a warrant issued by federal authorities in Detroit. Arabov, celebrity supplier of jewelry whose clients include Madonna, 50 Cent and Rudolph Giuliani, was famous for large pieces of "bling" or "ice" -- slang terms for diamonds often used in large, loud medallions.

Court documents allege that Arabov "facilitated the purchase of jewelry utilizing drug proceeds … to conceal the true source, nature and ownership of the funds." Federal prosecutors believe he knowingly accepted drug money for his famously extravagant jeweled pieces.

"He's going to fight the case," Howard Jaffe, a defense lawyer representing Arabov, told ABC News.

Others named in the indictment -- men identified by nicknames that include "C Bear," "Southwest T " and "B-Smooth" -- are charged with conspiracy to distribute cocaine. According to the indictment, they used drug money to buy jewelry, luxury cars and winning lottery tickets.

The accused are part of the "Black Mafia Family," a nationwide crime ring based in Detroit that has been linked to the hip-hop music industry. In 2005, Drug Enforcement Agency officials arrested 30 members of BMF, seizing $3 million in cash and 2½ kilograms of cocaine. A 1.8 carat diamond Jacob & Co. watch and a custom-made Jacob & Co. necklace with 224 Asscher-cut diamonds were among the 27 jewelry items seized by authorities from BMF members.

Arabov's defense lawyer said Arabov was willing to cooperate with authorities, and that his arrest was an attempt to humiliate him

"We believe that the government is doing this as an attempt to embarrass him," Jaffe said. "They could have just called him and he would have shown up."

Documenting Cash Flow?

It's unclear what laws Arabov may have violated to prompt last week's charges. Since the Sept 11, 2001, attacks, anti-money-laundering laws and industry standards have been tightened, largely to prevent the flow of terrorism dollars through the jewelry trade.

Section 352 of the USA Patriot Act, for example, requires that all financial institutions -- including jewelers -- institute anti-money-laundering programs. To comply, any jewelry dealer who accepts cash for purchases needs to document the source of the payment and verify that it is not coming from criminal activity.

Multiple sources in the jewelry business told ABC News that while those measures are law, it's not always realistic to assume they'll always be followed.

"The Patriot Act doesn't set a clear standard; it just tells you that you need to do your due diligence," industry expert Martin Rapaport told ABC News. "You have to be very careful when dealing with cash, and you have to know your customers."

According to the Diamond Information Center, diamond jewelry sales in 2005 rose to $33.7 billion, up 7 percent from $31.5 billion in 2004. Sales were fueled in part by growth in the diamond hip-hop jewelry market.

Arabov's company, Jacob & Co., is seen as a marqee brand in the rap music world. "Jacob the Jeweler" is mentioned in the lyrics of such hip-hop hits as Kanye West's "Touch the Sky" and "Diamonds from Sierra Leone."

"Bling" sales are not only a status symbol but also a form a rebellion.

"It's an important act of expression ... a way to thumb one's nose at Connecticut housewives," Rapaport.

A Misunderstanding?

Arabov's wife was with him in court on Thursday when he signed a $100,000 recognizance bond. His lawyers promised he wouldn't leave the United States without permission.

"If you fail to appear as required, you could be charged with the crime of bail jumping," New York magistrate judge Frank Maas told Arabov. "Even if this money-laundering case were to be dismissed, you could be prosecuted on that charge."

A spokesman for Jacob & Co. declined comment for this story. But he has said that Arabov's arrest was a "misunderstanding that we believe will be straightened out in the next several weeks."

Arabov's next court date is set for July 10, in a U.S. District Court in Michigan.