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.