Diamonds Are Forever……Sanctioned

The title of this blog is not necessarily true, however, there has been quite a buzz recently in the world of diamond trade regarding trading with diamond mining companies who are blocked on the United States Department of the Treasury Office of Foreign Assets Control (OFAC) Specially Designated Nationals (SDN) List. Those parties finding themselves on OFAC’s SDN List will have all assets owned or controlled by them under U.S. jurisdiction frozen. Moreover, U.S. persons will be prohibited from engaging in any transactions with those parties.

Earlier this week I wrote about the impact these sanctions are having on diamond trading in Zimbabwe. Today a trade alert was announced when the Rapaport group warned diamond traders not to do business with Kimberly Process (KP), alleging that KP authorizes export of Marange diamonds in violation of OFAC regulations. Furthermore, Rapaport warned diamond traders not to list diamonds from KP on RapNet. Finally, Rapaport called upon all U.S. trade organizations to expel members that deal in these diamonds.

Rapaport’s trade alert provides a perfect example of where the real impact of being designated as an OFAC SDN comes from: being shunned by the private sector. There are a number of SDNs who could be minimally impacted by OFAC sanctions if they were merely enforced by the U.S. government. However, private sector companies, both foreign and domestic, also fear repercussions from any sort of dealings with an OFAC SDN, and will take any steps necessary to remove themselves from dealings with an SDN. Therefore, when someone finds themselves on the OFAC SDN List, often times the most damaging consequences of the designation result from former trading partners turning their backs on them, banks closing their accounts, and customers looking for new vendors. This is what I have referred to in the past as the Anaconda Effect. What it really amounts to is an economic death penalty.

The fact that Kimberley Process, who is not on the OFAC SDN List, is being called out in a trade alert for purportedly dealing in diamonds in violation of OFAC regulations, shows the environment of fear that surrounds those potentially impacted by these sanctions. KP’s best option here is to double check its OFAC compliance program, self disclose any potential violations to OFAC, and do damage control through the press. Otherwise, the consequences of this trade alert could be severe.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrari-legal.com.

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