Standard Chartered thought it would be great to expand a unit making loans secured by the jewels. Now it wants out
Sep 11, 2017
Franz Wild, Thomas Biesheuvel, and Stephen Morris
Standard Chartered Plc’s plunge into the risky business of diamond lending began a little more than eight years ago with a cocktail party at its London headquarters. Maurice Tempelsman, longtime companion of the late Jackie Onassis and head of one of the biggest U.S. diamond companies, was there. So were diamond trader Dilip Mehta, who’d been made a baron by the king of Belgium, and other luminaries from the industry of middlemen who buy rough stones, polish them, and sell them to jewelers and retailers.
Flitting among the guests was Kishore Lall, who’d recently been hired to run the bank’s business of issuing loans secured by diamonds and receivables. The party marked the announcement that Standard Chartered had money to lend. Among the crowd, many of the diamond traders, known as diamantaires, were potential clients.
The cost of that ill-fated venture is still being tallied. Since about 2013, the bank has accumulated roughly $400 million in actual and likely losses on a portfolio of loans that once reached $3 billion, according to a bank official familiar with the matter. Chief Executive Officer Bill Winters, who took over the bank two years ago, is still trying to clean up the mess.
Standard Chartered would become the world’s dominant diamond financier—lending to mining companies but mostly to diamond cutters, dealers, and traders in need of financing to purchase the gems. It would also serve as a cautionary tale: a bank that thought it knew better than rivals, according to interviews with more than 20 people, including executives who worked at the bank. 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.
While diamond loans never accounted for more than 2 percent of Standard Chartered’s assets, they were part of a wider pattern of what Winters has called “looseness” under previous management. Some of those practices resulted in the bank having to pay almost $1 billion to settle U.S. investigations into sanctions and money laundering violations— fines unrelated to the diamond loans. 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 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,” says Charles Wyndham, a former sales director at mining giant De Beers Group of Cos. 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 to Bloomberg that fraud wasn’t rampant in the diamond industry and the bank had a “strong, independent risk culture.” 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 came five months into the global financial crisis, when other banks, including Bank of America, HSBC Holdings, and JPMorgan Chase, 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.
Lall, who once served as the chief financial officer of New York’s Gristedes supermarket chain, is the son of a former Indian diplomat and a graduate of MIT’s Sloan School of Management. He remade himself as a diamond financier at ABN Amro Bank NV, the world’s leading diamond lender. Crushed by the financial crisis, the Dutch bank was vulnerable to new competition. Mike Rees, Standard Chartered’s head of wholesale banking, had been looking for a way into the diamond-lending business and went after Lall in the fall of 2008. Rees charged him with replicating ABN Amro’s business, according to people with knowledge of the plan. Rees declined to comment for this article.
Over the next four years, Standard Chartered opened its wallet to diamantaires, undercutting other lenders and offering flexibility on credit deals that rivals couldn’t match. Companies such as Eurostar Diamond Traders NV and Arjav Diamonds NV borrowed hundreds of millions of dollars from the bank.
There was one snag: Compliance, credit, and risk officers, as well as some members of Lall’s own team, were raising red flags, according to people familiar with the communications. The credit team had strict rules and 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. 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.
Lall said in his email that his team worked with the bank’s risk officers and external auditors to make sure each company pursuing a loan was authentic. It “simply didn’t happen” that his team ignored warnings. He said they could only propose loans, while it was up to the risk officers to approve them.
By early 2014 rough diamond prices, which had recovered after the financial crisis, were tumbling again. Consumer demand was stagnant, and traders were struggling to make a profit. At the same time, the leading supplier of the raw gems, De Beers, which had sold rough diamonds at a discount to handpicked customers, became more aggressive with pricing, cutting traders’ margins.
In May 2013, Lall’s boss, Sanjeev Paul, flashed 20 charts on a screen at Mumbai’s Trident Hotel, where Standard Chartered’s diamond team was having its annual get-together. Each slide represented the debt of a top client, according to two people who attended the meeting. And each showed the bank held more than half the company’s debt. In two cases, it was more than 70 percent. Paul, who declined to comment for this story, told the team to start cutting back, the people say. If they had any issues, they should come to him.
That summer, Standard Chartered’s diamond business had its first major default. Winsome Diamonds & Jewellery Ltd., a jewelry manufacturer based in Surat, India, that had been borrowing from the bank long before Lall joined, was unable to make payments on $1 billion of loans. About 15 percent of them were from Standard Chartered, people familiar with the matter say. When Indian authorities investigated, they found that $700 million of all the loans to Winsome Diamonds had been diverted to 13 companies registered in the United Arab Emirates. Winsome Director Harshad Udani says the company is trying to recover what it’s owed and settle the debt.
Losses continued to mount. Lall moved back to New York and left the bank in September 2015, when the team was disbanded. He said his departure was the result of global cost-cutting and he left in good standing. Rees, who earned $72 million over a sixyear period, according to company filings, and was promoted to deputy CEO in 2014, left in 2016.
Standard Chartered still is owed about $1.7 billion in outstanding diamond debt, part of $100 billion in risky assets that Winters has said he wants to restructure, according to two people familiar with the matter. While the bank has been trying to sell its remaining loan book, it hasn’t found a buyer at a recovery rate it’s willing to accept. Meanwhile, rough diamond prices have fallen more than 20 percent over the past three years. Banks in Dubai and India have started financing diamond cutters, polishers, and traders, but many companies face a credit crunch.
Arjav, one of the diamond-trading companies that owes Standard Chartered money, is feeling the pain. “They were very aggressive, they really wanted to lend money,” Arjav President Ashit Mehta says of the bank. “The terms and conditions were lenient from each and every point.” —Franz Wild, Thomas Biesheuvel, and Stephen Morris
THE BOTTOM LINE Standard Chartered once proudly ran a $3 billion portfolio of loans to diamond traders, making it the world’s most dominant financier. There would be few jewels in that crown.