Except maybe Neil Diamond.
From BloombergBusinessweek, September 6:
The bank thought it would be a good idea to expand a unit making loans secured by the jewels. Now it wants out.
Standard Chartered Plc’s plunge into the risky business of diamond lending began eight years ago with a cocktail party at its London headquarters.
Maurice Tempelsman, longtime escort of Jackie Kennedy and head of one of the biggest U.S. diamond companies, was there. So was diamantaire Dilip Mehta, who had been made a baron by the king of Belgium, and other luminaries from the industry of middlemen who buy rough stones from mining companies like De Beers, polish them and sell to jewelers and retailers. Flitting among the guests was the man who made it possible, Kishore Lall, recently hired to run the bank’s diamond-lending business.
The cost of that ill-fated venture is still being tallied. Since around 2013, Standard Chartered has accumulated about $400 million in actual and provisioned losses on a portfolio of loans to these diamantaires that once reached $3 billion, according to a bank official familiar with the matter. Including lending to diamond miners and retailers, the bank’s total exposure to the gems was $4.5 billion. Chief Executive Officer Bill Winters, who took over two years ago, is still trying to clean up the mess.
How Standard Chartered became the world’s dominant diamond financier is a cautionary tale of a bank that thought it knew better than rivals, according to interviews with more than 20 people, including executives who worked at the bank and had knowledge of the loan process. Some of the people said the bank ignored risk warnings from its own employees. All of them asked not to be identified for fear of harming their careers.
Diamond loans never accounted for more than 2 percent of Standard Chartered’s assets. But the business was emblematic of a wider pattern of what Winters has called “looseness” under previous management. Those practices resulted in the bank having to pay almost $1 billion to settle U.S. investigations into sanctions and money-laundering violations and promises by former CEO Peter Sands to raise the bar on conduct.
The fines didn’t relate to loans involving diamond companies, but fraud was an ever-present danger in a business where parcels of gems are moved from company to company and country to country, borrowed against at each step of the way.
“The diamond industry has deliberately wrapped itself in a cloak of obfuscation, and it should be treated with extreme caution by any outsider,” said Charles Wyndham, a former sales director at De Beers and founder of WWW International Diamond Consultants Ltd. “The parallels between what’s happening now in the diamond industry and what happened in the subprime crisis are so painfully obvious.”
A spokesman for Standard Chartered declined to comment. Lall, who left the bank in 2015, said in an email that fraud wasn’t rampant in the diamond industry, that the bank had a “strong, independent risk culture” and that it “simply didn’t happen” that his team ignored warnings.
Standard Chartered, Lall wrote, “was not an organization where it was prudent—or even possible—to violate bank policy and ignore risk.”
The February 2009 cocktail party, where the bank announced it had money to lend, came at an unusual time. It was five months into a global financial crisis, and other banks, including JPMorgan Chase & Co., Bank of America Corp. and HSBC Holdings Plc, were getting out of the diamond-financing business. Prices of rough stones had tumbled, sending shock waves through an industry that spanned mines in Botswana, traders in Belgium, polishers in India and jewelry stores in the U.S.
A few months earlier, Standard Chartered had hired Lall, a former chief financial officer of New York’s Gristedes supermarket chain. The son of an Indian diplomat and a graduate of MIT’s Sloan School of Management, Lall had remade himself as a diamond financier at Dutch lender ABN Amro NV.
But that bank, then the world’s leading diamond lender, was crushed by the financial crisis. That’s when Mike Rees, Standard Chartered’s head of wholesale banking, made his move. The London bank, which had weathered the crisis relatively unscathed, was looking for new opportunities. Rees, who declined to comment, wanted Lall to replicate ABN Amro’s business, according to people with knowledge of the plan. And he wanted it done fast.
Companies such as Eurostar Diamond Traders NV and Arjav Diamonds NV were soon borrowing hundreds of millions of dollars from Standard Chartered as it undercut rival lenders and offered flexibility on credit deals they couldn’t match, according to people familiar with the matter.
There was one snag. Compliance, credit and risk officers, as well as members of Lall’s own team, were raising red flags, according to some of the people. The credit team had strict rules. They had to check that buyers were real and credible; that the diamonds were actually being shipped; that the IOUs, known as receivables, were being paid; that those payments were servicing the loan; and that the bank’s share of debt to any company didn’t exceed 25 percent.
All that caution was for good reason. Because traders borrowed against sales, it was in their interest to inflate those numbers, according to people familiar with the industrywide practice. And unlike gold or silver, diamonds are difficult to value. They also come with a warning. U.S. government guidelines describe diamonds as “highly attractive to money launderers and other criminals, including those involved in the financing of terrorism.’’
There were other danger signs....MUCH MORE