South African Diamond Board

Meeting report

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This Report is a Contact Natural Resource Information Service
Taking Parliament to People, and People to Parliament
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The aim of this report is to summarise the main events at the meeting and identify the key role players. This report is not a verbatim transcript of proceedings.

MINERALS AND ENERGY PORTFOLIO COMMITTEE
4 October 2000
BRIEFING BY MINISTER OF MINERALS AND ENERGY ON THE SOUTH AFRICAN DIAMOND BOARD (SADB), DE BEERS, AND THE TRADE OF ILLEGAL DIAMONDS (CONFLICT DIAMONDS)

Documents handed out:
Meeting with the Portfolio Committee on 4 October 2000: Briefing notes for the Minister (Appendix 1 below).

Officials present:
Director-General of the Department of Minerals and Energy, Adv. S Nogxina and Dr J Bredell, the Deputy Director General (Mineral Development) who is also a member of the South African Diamond Board (SADB).

MINUTES
The meeting began with a brief discussion of the Abolition of the Lebowa Mineral Trust Bill and the programme for future deliberations. On Thursday, 5 October the Committee is meeting with the Deputy Minister to discuss the Abolition of the Lebowa Mineral Trust Bill. The Chairperson, Mr D. Nkosi (ANC) asked for clarification about where the committee should be before the Ministerial briefing.

Mr Davidson (DP) commented that due to the constitutional questions it might be wiser for the committee to put off discussions on this bill until after the Mineral Development Bill is passed. He was also concerned that the abolition would strip the Northern Province of its mineral rights and further decrease the already perilous economic situation of the provinces' citizens.

Mr Oliphant (ANC) responded that the ANC's policy position is that mineral rights belong to the state and that this policy will be articulated in the upcoming Bill that is currently in Cabinet.

At this point the Minister arrived and the chair instructed the committee to hold their opinions until the following morning when they would have a chance to discuss these issues.

Briefing by the Minister of Minerals and Energy
The Minister began her presentation by going over the major issues that were to be discussed in this briefing. The first was to deal with concerns about the South African Diamond Board (SADB) and its relationship with De Beers. The second issue was the growing problem in which natural resources are used to finance armed rebellion. Known as 'conflict diamonds', countries such as Sierra Leone and Angola have shown the need for international action in this area.

The Minister began her presentation with an overview of some of the problems of the SADB.

"Most of the problems which have surfaced over the past two years such as the dispute between the Government Diamond Valuator (GDV) and De Beers, complaints about corporate governance in the SADB, delays in exports of diamonds, lack of clarity as to the role and functions of the GDV, financial problems experienced by the SADB, etc. can in fact be regarded as symptoms of fundamental deficiencies of the current legislation, i.e. the Diamonds Act, 1986 (Act 56 of 1986)." Minister's Briefing Notes

While interim measures have been taken by the Ministry and the Department to resolve the issues with the SADB, permanent solutions are needed. According to the Minister, the only permanent solution will be to amend the legislation.

"The Department has drafted this legislation in the form of a chapter in the new Mineral Development Bill, which will replace the present Diamonds Act. This chapter will aim to address all the fundamental deficiencies outlined [above], realign the legislation with the Constitution, the Minerals Policy and other recent legislation, and it will also take into account issues raised in submissions made to the Commission of Inquiry into the SA Diamond industry on which a report was released in December last year. More specifically it will provide for the regulatory functions of the Diamond Board to be performed by the DME and SARS, thereby removing any conflict between the regulator and the regulated." Minister's Briefing Notes

The Minister informed the Committee that to deal with the current conflict of interest problem, where SADB Members are also stakeholders in the industry, the Ministry has appointed four new board members with no affiliation to the industry.

The Minister then moved on to a discussion of 'conflict diamonds' and the international reaction to diamond profits being used to finance armed rebellion in certain countries, particularly Sierra Leone and Angola. The Minister outlined what South Africa has been doing in the international arena. She noted that South Africa was not in favour of a full boycott as it would negatively affect South Africa, Botswana and Namibia, who combined produce 50% of the world's diamonds.

According to the Minister, SA coordinates a committee of Southern African producer nations who are looking at ways to certify diamonds, labeling their source, thus being able to control the cross border flow. As of now there is no way to track diamonds, the result making any sanctions useless. The Minister stated that the United States and the United Kingdom had found a scientific method of certification, but after review it was decided that this was not feasible as it is difficult to scientifically identify the origin of a diamond. The committee turned to administrative solutions, opting to use the model currently in use to monitor diamond trading in SA, Namibia and Botswana.

At a recent conference in Belgium industry leaders offered their support to a program of self-policing and tracking of diamond trading. A technical committee of the international working group began work on an international certification program. At the Ministerial Conference in September 2000 the certification program was approved. The countries involved will now take the report on logistics from the technical committee and begin the process of implementation analysis on a national level. In SA for example, this will be incorporated into the upcoming Mineral Development Bill. Unfortunately, said the Minister, the conference was missing some key countries in the diamond industry. These included India, Israel, Switzerland and Brazil.

The Ministers agreed on the following issues:
· "A comprehensive approach should be explored to deal with the causes and drivers of conflict;
· A mechanism of establishing an intergovernmental body to monitor compliance with the certification system should be investigated. This should include investigating the relationship between the intergovernmental body and the World Diamond Council;
· To maintain the momentum of the Kimberley Process by moving ahead into an intergovernmental process to design a workable international certification scheme for rough diamonds;
· To ensure that the Diamond trade optimally contributes to sustainable development and of the importance of working towards that objective;
· To draft a resolution that will serve in the United Nations General Assembly." Minister's briefing notes

The Minister also added that SA has been chosen to sponsor the resolution for the United Nations and that the goal is to pass it before the end of 2000.

Discussion:
Mr Davidson (DP) congratulated the Minister on the Ministry's work in the area of conflict diamonds. His questions were the following: Is the government valuator adequately fulfilling the role ascribed to him/her? Why has the Minister had to intervene so frequently in disputes? Mr Davidson also wanted to know if the Board is insolvent and if it is true that the GDV is suing the SADB for 4 million Rand, and if so, what the status is of the legal action. The member also had questions about the performance of the CEO of the SADB and the rumour that this individuals contract had been terminated by the Board.

Mr Oliphant (ANC) expressed his concern over the conflict between the GDV and private valuators. He also wanted more information on the new appointees to the SADB.

Prof. Mohammed (ANC) asked if it was true that De Beers is defrauding the government of tax income.

The Minister began her response by noting that the SADB is bordering on insolvency and is facing significant financial difficulties. Some of the disputes that have arisen have led to non-payment and this has affected the SADB budget. With respect to the legal matters the Minister commented that negotiations are in progress to end any legal action. The CEO's performance has been under review and a warning has been issues along with clearer performance guidelines for the next review period.

The Director-General responded to the question concerning the composition of the board. According to the DG, the SADB currently has on their Board a number of stakeholders with direct interest in the industry, creating conflicts of interest. The four new members, who have no experience in the diamond industry will enable the Board to reach a balanced position in terms of fulfilling their prescribed functions.

Dr Bredell pointed out to members that the GDV is not an individual, it is a company that has been contracted by the government to act as an impartial valuator of rough diamonds. The GDV has been performing well, not idle as stated by Mr Davidson. In terms of the solvency of the Board, Dr Bredell noted that there are significant financial difficulties due to the nature of the SADB's revenue intake. The Board is restricted to collecting a levy on unfinished diamonds that have been reduced in numbers by their own regulations. As far as Dr Bredell knows, there have been no delays in recent diamond exports.

The Minister mentioned that in terms of De Beers defrauding the government, currently she had no knowledge of this being so. She noted that there were mechanisms in place to ensure that this did not happen, most notably the Auditor-General.

Mr Davidson (DP) followed up his first question by asking about the legality of the contract with the GDV. It was mentioned in a report that there was actually no legal basis to the contract that had been signed. Was this true? The member also wanted clarification on the Minister's intervention in recent export problems. Is this a normal procedure?

The DG responded to the first question by stating that the contract with the GDV is legal and binding.

Dr Bredell noted that the Minister's interventions were well within the framework of conflict dispute in the valuation process.

The chair thanked the guests and adjourned the meeting.

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Appendix 1:

MEETING WITH THE PORTFOLIO COMMITTEE ON 4 OCTOBER 2000: BRIEFING NOTES FOR THE MINISTER

• Perspectives of the Ministry of Minerals and Energy on the SADB.
• Notes on Conflict Diamonds.
• Findings and recommendations of the task Team appointed by the Minister to investigate corporate governance in the SADB.
• Minutes of the Proceedings of the Portfolio Committee on Minerals and Energy: 2 March 2000.

PERSPECTIVES OF THE MINISTRY OF MINERALS AND ENERGY ON THE SADB

Most of the problems which have surfaced over the past two years such as the dispute between the Government Diamond Valuator (GDV) and De Beers, complaints about corporate governance in the SADB, delays in exports of diamonds, lack of clarity as to the role and functions of the GDV, financial problems experienced by the SADB, etc can in fact be regarded as symptoms of fundamental deficiencies of the current legislation, i.e. the Diamonds Act, 1986 (Act 56 of 1986).

Examples of such deficiencies are:

1. The inherently conflicting statutory mandate of the Board, being a body responsible for both the promotion and regulation of the downstream diamond industry.
2. The composition of the Board which is prescribed by the Act to be dominated by representatives of the regulated sectors of the industry (producers, traders, dealers, cutters, employees of cutters, etc).
3. Funding of the Board which is for all practical purposes restricted to a levy which has to be paid by the regulated. Currently this levy is based on the value of unpolished diamonds which are exported, exposing the Board to uncertainty as far as income and budgeting is concerned.
4. The apparent ineffectiveness of section 59 agreements which are supposed to be a mechanism to promote and stimulate the local processing of diamonds.

1. INTERIM MEASURES TO ADDRESS THE PROBLEMS

In view of the inherent statutory deficiencies, measures to address problems have had to be confined up to now to intervention by the Ministry on several occasions, e.g.:

1. Investigation into the dispute between De Beers and the GDV on the valuation of unpolished diamonds for export purposes (resolution provided by the Minister in May 1999).
2. Investigation into complaints about corporate governance in the SADB (investigation completed and remedial instructions issued by the Minister).
3. Delays in diamond exports resolved through facilitation by the Ministry.
4. Dispute about nonpayment by De Beers for alleged out-of-scope work performed by the GDV - partly resolved through intervention by the Ministry.
5. Advice provided by the Minister to the CEO on how to address the immediate financial problems of the Board.
6. Appointment of a new Chairperson and three new members to the Board in order to balance the interests with the Board.

1. PERMANENT SOLUTIONS

It is clear from the above that the only permanent solution will be to amend the legislation.

The Department has drafted this legislation in the form of a chapter in the new Mineral Development Bill which will replace the present Diamonds Act. This chapter will aim to address all the fundamental deficiencies outlined in par. 1 above, realign the legislation with the Constitution, the Minerals Policy and other recent legislation, and it will also take into account issues raised in submissions made to the Commission of Inquiry into the SA Diamond industry on which a report was released in December last year. More specifically it will provide for the regulatory functions of the Diamond Board to be performed by the DME and SARS, thereby removing any conflict of interest between the regulator and the regulated.

FINDINGS AND RECOMMENDATIONS OF THE TASK TEAM APPOINTED BY THE MINISTER OF MINERALS AND ENERGY TO INVESTIGATE COMPLAINTS REGARDING CORPORATE GOVERNANCE IN THE SOUTH AFRICAN DIAMOND BOARD (SADB)

FINDINGS

1. No documentary evidence was supplied to indicate beyond reasonable doubt that the terms and conditions of the contract with the Government Diamond Valuator (GDV) were formally approved by the Board and that someone had been authorised to sign the contract on behalf of the Board.

2. It is difficult to come to a conclusion on the appointment of Board Committees, due to the lack of response on this issue.

3. The mere fact that a substantial number of Board members felt aggrieved about the proceedings concerning the entering into of the GDV contract, and the accusation that the appointment of Board Committees was not approved by the Board, as well as the fact that the disputes could not be resolved in the Board, together with the inability to refute the accusations, put a serious question mark against corporate governance in the SADB. In fact, if measured against the King Report on Corporate Governance as well as a draft report on Corporate Governance in the Public Sector by the Public Sector Committee of the International Federation of Accountants (IFAC) (copies attached), the SADB has been found to be seriously lacking.

4. There is undoubtedly a need to reconcile opinions in the SADB, which include Board members and staff.

5. The minutes or parts thereof which have been submitted as a consequence of this investigation, clearly indicates incoherency and that matters are not brought to a point. There is also a clear lack of delegated powers.

6. Most of the issues would be difficult to address from outside, unless drastic steps are taken such as the dismissal of board members. Matters such as the need to reconcile opinions can best be addressed by the personalities concerned.
7. The shortcomings identified during this investigation can be regarded as symptomatic of fundamental deficiencies in the legislation governing the SADB, in particular the composition of the Board, the inherent conflict between regulation and promotion, the manner in which the SADB is funded and a lack of clarity on the role of the GDV. The only lasting solution to the current problems will therefore be to drastically review the Diamonds Act (a process which has already commenced).

RECOMMENDATIONS

1. Until such time as new legislation is in place to provide a permanent solution to the current problems, the following is recommended to improve corporate governance in the SADB:

2. The SADB should be given the opportunity to get their house in order.

3. It is therefore recommended that the issues which led to the complaints and accusations be referred back to the SADB to resolve the matters. In order to prevent similar complaints arising in the future, the Chairperson and other Board members, as well as the CEO, which have been appointed by the Minister should receive an instruction from the Minister to immediately attend to the following:

3.1 The Chairperson must give Board members the opportunity and encourage them to raise their concerns at Board meetings where matters should be resolved and brought to conclusion.

3.2 Board members must use the opportunity at Board meetings to raise their concerns and resolve matters within meetings.

3.3 The Chairperson, CEO and other Board members must pursue the reconciliation of opinions in the SADB.

3.4 The Board must -

1. with regard to the minutes of meetings develop and implement proper procedures with respect to the recording of resolutions and the execution thereof;
2. formally establish the Executive Committee and specifically appoint at least two additional members to serve on the Executive Committee as provided for in section 10(2) of the Diamonds Act, 1986;
3. formally establish and appoint specific Board Committees in terms of section 11 of the Act;
4. consider the delegation of certain powers to the Executive Committee and other Board Committees in terms of sections 10 and 11 of the Act, respectively; and
5. consider whether specific powers should be delegated to the Chairperson of the Board in terms of section 97(2)(a) and (b) of the Act.

5. The Management of the SADB must be instructed to study the attached reports on governance (King Report on Corporate Governance and a draft report on Corporate Governance in the Public Sector by the Public Sector Committee of the International Federation of Accountants) and make recommendations for adoption by the Board of practices and procedures that would realign the SADB with the criteria contained therein.

4. The Chairperson should be requested by the Minister to report back as soon as possible on the execution of the instruction given by the Minister.

DEPARTMENT OF MINERALS & ENERGY

Date: 02 October 2000

1. In June 1998, the United Nations Security Council adopted a resolution, number 1176, which included an embargo on the direct or indirect importation of unofficial diamonds (diamonds without a Certificate of Origin issued by the Angolan government). Thus far, Resolution 1176 has been almost ineffective.

 

2. Several European NGOs including Global Witness, Niza, Medico International and Novib launched the international diamond campaign, Fatal Transactions, in October 1998; to highlight the way in which natural resources like diamonds are used to finance armed rebellion.
3. Various Governments in Africa and elsewhere expressed their support for an effort whose objective is to alleviate the war-induced suffering of people in conflict areas. However, these governments were also concerned about the threat that companies may cause on the African diamond industry.
4. The Ministers responsible for Mining and Minerals from diamond producing countries in Africa, who attended the Mining Indaba 2000 conference, met in Cape Town, South Africa on 10 February 2000 to weigh different options that could be followed to find lasting solutions to avert the potential threats of the conflict diamonds campaign on the economies of the producing countries.
5. The Minister's confirmed that various diamond-producing countries have introduced measures to regulate the mining, trading and exports of diamonds. South Africa, Botswana and Namibia have functioning diamond pipe-line tracking systems whilst Angola has introduced a new system to fight illegal mining and trading in diamonds. The Ministers requested that South Africa host a Ministerial Conference to explore solutions that may address challenges facing the African diamond industry.
6. From 11 to 12 May 2000 a Technical Forum was held in Kimberly to prepare for the Ministerial Conference. The Forum was attended by representatives from government, industry and civil society.
7. The Forum reached broad consensus on the following:

• Investigation of the establishment of a regulating regime;
• Investigation of the establishment of a global ethical committee;
• Investigation of the role of the industry in development and the creation of functional societies in mining areas;
• Formation of an International Working Group.

1. The Working Group comprising stakeholders held the following meetings to prepare for the Ministerial Conference:

• Luanda : 12 - 14 June 2000
• London : 20 July 2000
• Windhoek : 4 - 5 September 2000

1. The Working Group prepared a report (Appended) for the Ministerial Conference, which was held on 19 - 21 September 2000.
2. The Ministerial Conference was attended by major stakeholders, Ministers and government representative of the following diamond producing and importing countries:

• Canada (Government Representative)
• United Kingdom (Minister)
• Sierra Leone (Minister)
• Angola (Deputy Minister)
• South Africa (Minister of Minerals and Energy and Department of Foreign Affairs)
• Russia (Minister)
• Belgium (Government Representatives)
• Botswana (Minister)
• Namibia (Minister)
• Lesotho (Minister)
• United State (Government Representatives)
• DRC (Deputy Minister)

The Ministers noted the International Working Group document and agreed on the following key issues:

• A comprehensive approach should be explored to deal with the causes and drivers of conflict;
• A mechanism of establishing an intergovernmental body to monitor compliance with the certification system should be investigated. This should include investigating the relationship between the intergovernmental body and the World Diamond Council;
• To maintain the momentum of the Kimberley Process by moving ahead into an intergovernmental process to design a workable international certification scheme for rough diamonds;
• To ensure that the diamond trade optimally contributes to sustainable development and of the importance of working towards that objective.
• To draft a resolution that will serve in the United Nations General Assembly;
• The International Working Group should hold a meeting in Namibia to find way of taking the process forward.