The European Union’s 12th sanctions package includes new and extended sanctions against Russia. In addition to the transit prohibition and the reporting obligations for money transfers, which were widely publicised in the media, the diamond ban adopted internationally by the G7 was introduced by the European legislator. Blockchain technology is being used for the first time to enforce sanction measures.
What is the diamond ban?
The diamond ban in Art. 3p of Regulation 833/2014 has prohibited the import, purchase or transfer of diamonds from Russia, whether directly or indirectly, since 1 January 2024. This includes diamonds originating in Russia, diamonds exported from Russia and diamonds transited through Russia. In contrast to the previous sanctions, diamonds processed in third countries other than Russia are also banned. This is a first step by the EU to combat the circumvention of sanctions.
In regulatory terms, an indirect ban on the import of natural and synthetic diamonds processed in third countries will be imposed gradually over the period from 1 March 2024 to 1 September 2024, initially from 1 carat and then from 0.5 carat.
The G7 states and European legislators are also aware – as are readers – that although the intention of this sanction is well thought out and necessary in view of the four billion euro Russian diamond sector, there are considerable difficulties in enforcing it. Well-known methods, such as issuing licences or certificates in paper form or digital certificates, which are supposed to certify the supposed origin of the diamonds, are simply not trustworthy in view of the constantly increasing numbers of cybercrimes.
Distributed ledger technology – Savior in times of need?
To enable effective enforcement, the G7 is planning a suitable traceability mechanism, the so-called G7 Certification Scheme. This is to be based on a blockchain-based G7-ledger – a first.
DLT is already a recognized secure and tamper-proof system due to its decentralized network and the transparency provided by the chain, which can be viewed by anyone. Until now, however, its use has been limited to private projects; now it is being used as a regulatory means of enforcing sanctions on an international scale. The main reasons given for this are the security and independence of the system. In addition, the rapid and effective implementation of the system is also likely to be a decisive factor. The diamond ban was adopted in December 2023 and will be implemented on September 1st 2024 following a pilot phase from March 1st 2024.
How the G7-ledger works
Following the publication of the sanctions package, the EU Commission provided an initial FAQ on compliance with the diamond sanction. The US consulate in Botswana, the second largest diamond producer in the world, also published further descriptions.
The practical application of the traceability mechanism is described essentially as follows:
- The identity information of a rough diamond is registered either at the export location of the producing country or at the G7 import nodes.
- Once the rough diamond has been sent to the G7 import node, it is verified by means of a physical check, among other things. If verification is successful, the G7 certificate is created and added to the G7-ledger.
The first G7 import node will be set up in Antwerp, Belgium, and further import nodes will be considered after the introduction, test phase and perfection. In Antwerp, the authority for verifying the diamonds will be located in the existing authority, the Federal Public Service Economy at the Diamond Office.
Conclusion
The use of DLT initiated by the G7 in the fight against the circumvention of sanctions illustrates the advantages of the system, which states are now also relying on. It can be assumed that it will not only be used to verify diamonds, but will also be used in a variety of ways in the context of sanctions. Although this cannot be seen as the starting signal for DLT systems to enter the state regulatory portfolio, it does provide an initial practical example that could prove to be decisive in gaining new insights.
