Part 16

The reason for the extraordinary security is that the room is one of the most important clearing points for diamonds in all the world. It is the workshop of the Customs experts whose job it is to appraise the value--and determine the duty--on the diamonds, rubies, sapphires, and other precious and semi-precious stones which are brought into the United States.

Approximately $75 million worth of cut and polished diamonds enter the United States each year, along with $75 million to $100 million worth of rough diamonds and other precious stones. Each shipment of cut and polished diamonds--with few exceptions--must pass through the obscure little room presided over by Chief Examiner Leroy N. Pipino, a slender, dark-haired, young-looking man who maintains a remarkably detached view toward the treasures that are spread before him each week. In the past ten years, Pipino has appraised diamonds worth more than $1 billion.

Soon after joining the Customs Service in the mid-Thirties, Pipino was assigned as an under clerk to the diamond office. As he watched the flow of gems arrive from abroad and as he listened to the discussions of their good and bad points, he became fascinated with the trade in precious stones.

Pipino began to read all he could about gems in New York City’s libraries. He learned much from the Customs Bureau’s own experts and each day’s work was an education in itself. At night he attended Columbia University to take courses on gems and gemology, and often he talked to some of the country’s leading experts, learning from them.

Pipino advanced to the post of assistant appraiser during the war years, and then in 1949 he was appointed chief examiner. In the handling of so impressive a fortune in jewels, one might expect to find him in the elegant surroundings of a Tiffany showroom. But in Pipino’s rather drab-looking workshop, the gems are spread irreverently on a battered table for examination. Around the room are laboratory aids commonly used by gemologists--the diamondscope, a binocular microscope with a special attachment for controlling light source; a dichroscope which reveals color variances in stones; a refractometer for measuring light rays; equipment to test the hardness of stone; and the most-used instrument of all, a ten-power microscope.

Ninety-five per cent of all the diamonds coming into the United States pass through the port of New York and are brought to Pipino’s office for examination. Most of them come from Europe, South Africa, Israel or Brazil. They are weighed and their value is appraised. If there is no discrepancy between the weights and the values listed on the importer’s invoices, the gems are released to Customs brokers for delivery to the persons or firms to which they were shipped.

In this small room also are made the examinations of the modern gold and platinum jewelry and all the antique jewelry. The cut and polished diamonds are subject to a 10 per cent duty. Rough diamonds arrive duty-free. Diamonds which have been incorporated into industrial tools or processed for industrial use are dutiable at 15 per cent of their value. There is no duty required on antique jewelry.

Antwerp is the largest diamond-cutting center in the world, and has been for many years. Most of the cutting of small diamonds is done by the Antwerp craftsmen, although in recent years Israel has developed into an important diamond-cutting center.

The birth of the Israeli diamond industry was part of the chain reaction of the Nazi invasion of the Lowlands in World War II. Many of the best diamond cutters in Europe were Jews. When the invasion came, they fled from Belgium and from Holland. As Hitler’s persecution of the Jews became more and more oppressive, reaching further and further, they scattered across the world to places of asylum. Many of these wanderers later went to the new state of Israel and with their skills they founded an industry that has been growing steadily in importance.

Diamonds--like gold--are sensitive to economic and political instability. There is a constant shifting of these treasures about the world, seeking havens of safety or places of the greatest profits.

Leroy Pipino and his associates didn’t even have to read the newspaper headlines back in 1938–1939 to know that trouble was brewing in Europe. They could read the warnings in the increasing volume of diamonds and other precious stones which were being imported into the United States. The flight of jewelry from Europe was a measure of the fears of millions of people.

Most of the jewels arriving in New York at that time were carried by refugees fleeing before the threat of the Nazis. Families brought with them their treasured and often priceless heirlooms. Many had converted their property and life savings to the currency of diamonds.

As non-residents, the alien refugees were permitted by law to bring all of their personal jewelry into the country without paying a customs duty. But if they intended to sell any of the jewelry within a period of three years from the date of their arrival, then the jewelry had to be declared and duty paid on it.

There was, and still is, a provision in the law which allowed these people to manipulate their jewelry and to take advantage of the lowest customs rate in cases where they intended to sell the gems. They could do this by removing the stones from their settings.

Gems imported in their settings automatically become subject to a 30 per cent duty, based on the total value of the gems and the settings. But if the stones were separated from the mountings, then the importer paid only a 10 per cent tax on the stones and a 30 per cent tax on the mountings. Since most of the value of jewelry was in the stones, the refugees were able to reduce the duty roughly 20 per cent by this manipulation.

Americans travelling abroad today may take advantage of this law when they bring home a fine piece of jewelry. They are permitted to separate gems from setting and then have them appraised separately.

The flight of jewelry to the United States from Europe was great before the war, but it was even greater in the years immediately following the conflict. Pipino’s office handled a record-breaking 10,000 packages of gems in 1947. And the rise in diamond shipments was a gauge of Europe’s economic desperation.

In the postwar years, Europe’s economy was shattered. Factories were in ruins. People were digging out of the debris of war to repair the ravages of the long struggle. They needed money not only to rebuild, but to survive.

Men and women took their gems from vaults, cupboards, and from secret burial places and forwarded them to the United States to exchange them for U.S. dollars. The demand for diamonds and other precious stones was strong in the United States and prices were high. The flow of gems became a flood.

The weakness of Britain’s pound sterling in the postwar years also had a strong influence on the movement of diamonds. Countries with a large accumulation of sterling were willing to give discounts of up to 10 per cent on diamonds if the purchasers agreed to pay for them in dollars. And in this juggling of currencies and discounts, diamonds were moving about the world in strange patterns.

Diamond shipments would leave South Africa and go to Holland, for example. There they would be re-addressed and shipped to the United States so that payment could be made to Holland. Holland would accept dollars in payment and transfer pounds sterling to South Africa. The same thing was happening in Japan and other countries in the Far East where the currencies were weak.

Black market operators also found ways to evade currency controls. Some of them shipped their diamonds to Switzerland and then used that country as their base of operations to take advantage of Switzerland’s total secrecy in banking operations. In this manner they were able to mask the origin of the diamonds.

Through the postwar years, the United States was the financial magnet drawing jewels from all parts of the world. But as the economies of the European countries improved with the support of American foreign aid programs, the tide began to turn in the 1950s. The purchasing power of the West Germans, British, French and Italians had improved to the point where the flight of jewelry was from the United States to Europe. The time had come when the baubles were more important to the buyers than American dollars.

Despite the ebb and flow of the diamond trade, diamonds remain one of the most tightly controlled commodities in the world. Each diamond-producing country tries to police the production to maintain price stability--since diamonds are an important means of earning dollar exchange.

The Diamond Syndicate, based in London, each month allots the rough diamond material to buyers in Belgium, Holland, Israel and the United States. Each country’s share depends on the Syndicate’s appraisal of what the world market will absorb without disturbing the price structure. The list of dealers permitted to purchase the rough stones remains relatively constant and there is rarely room for new members.

The tight monopoly held by the Syndicate has created a black market supported by dealers who look to sources other than the Syndicate for their merchandise. This market is called, in polite terms, the “open market.” It also is the market of the underworld, operating illicitly and in defiance of the Syndicate controls.

Liberia in recent years has become an important source of diamonds for the “open market.” It is whispered in the diamond trade that all of the diamonds which come from Liberia actually were stolen from the neighboring diamond-producing country of Sierra Leone where the production is controlled by the Syndicate. There are some who claim these diamonds were mined on Liberian soil near the Sierra Leone border.

One enterprising European dealer years ago started a mail-order business with individual diamond miners who would smuggle diamonds from the mines and mail them to him at various post office boxes. From a small beginning, these shipments reached the point where a $50,000 shipment was not uncommon.

This flow of bootleg diamonds has created a problem for Customs. The illicit material cannot be officially acknowledged by the merchants and no record can be made by the cutters in those countries where the production is carefully policed. The result is that these diamonds find their way into the hands of smugglers, who constantly are seeking ways to slip them past Customs without payment of duty.

With the rise in popularity of the marquise and teardrop diamonds, the demand for the emerald-cut diamond has waned. Cutters look for rough material which can be shaped into the marquise, teardrop, or the round diamond. The round stone has never lost its popularity and continued year after year among the fashion leaders. The oval diamond fell from popularity for a period of time but it, also, has staged a comeback.

Determining the value of a gem is often a controversial task for Pipino and his aides, who must study such factors as size, the quality of the cutting, the color of the stones, their cleanliness, and the imperfections left by nature. A diamond may be “ice white” or it may be any shade of yellow from “top silver cape” to “canary” or any one of several hues of brown. The colors may vary with the location of the window through which the light falls on the stone. The imperfections may range from a speck smaller than a fleck of dust to sizable fissures, crystals or carbon spots. It may be slightly off-color or the color may lack a clear definition.

Basically, the value of a diamond is determined by what is known in the trade as the Four Cs--color, cleanliness, cutting and caratage. As far as Pipino is concerned, the most important of all of these is the color, even though color often can be extremely deceptive in certain diamonds. Stones which come from the Premier mine in South Africa have a bluish cast in daylight, but when placed under an artificial light they have a yellowish glow. However, the Customs experts usually can look at a diamond and make an educated guess as to its origin--whether it came from Brazil, South Africa or French Equatorial Africa. Very seldom are these guesses wrong.

The standards used in judging the value of a diamond are the same as those used in determining the value of other precious stones. The finest of the rubies, sapphires, emeralds and many of the semi-precious stones have a deep, rich, velvety color instantly recognizable by the expert. In addition, the better stones have a glow which comes from within the stone itself.

Most of the fine gems imported into the United States in recent years have been those which came from famous jewel collections of the past. A tiara which Napoleon I reputedly presented to Empress Marie Louise was brought into the country as an artistic antiquity--free of duty. Then the jeweler, quite legally, removed the gems from the tiara and placed them in pieces of modern jewelry. Other fine stones have come from the collections of Indian maharajas.

To qualify as an artistic antiquity--free of duty--a piece of jewelry (or any other object) must have been produced prior to 1830. This arbitrary date for determining antiquity is a sensitive point in the import trade. As Pipino explained it to one puzzled inquirer: “Anything that was produced before 1830 is permitted into the country free of duty as an artistic antiquity--and not as an antique. We don’t presume to tell a dealer or a curator what is to be considered antique and what is not. But an antique is not necessarily an artistic antiquity. To qualify for this legal description, it must have been produced prior to 1830--the date fixed by Congress for determining which cultural objects shall be free of duty and which shall not.”

Many in the import-export trade angrily take exception to the law, passed in 1930, which refuses to recognize any object under 100 years old as being an artistic antiquity. But most will agree that the date 1830 marked the beginning of industry’s mechanization, which permitted mass production of many items. Mechanization came to the jewelry trade around 1850 in the Victorian era, and a great deal of mass-produced jewelry was made in this period of prosperity in England. Customs does not permit its importation as an artistic antiquity--and it cannot do so unless Congress changes the date which controls the legal definition.

To the casual observer, Customs’ little diamond room on Varick Street would appear to be far removed from anything but the dollars and cents value of precious stones arriving from abroad. But to Leroy Pipino it is a place where an adventure story unfolds every day for those who can read the meaning behind the ebb and flow of jewels.

14

THE DIAMOND SMUGGLERS

Richard X, an American dealer in diamonds, sat at the desk in his hotel room in Antwerp, Belgium, in June, 1953, scribbling figures on a sheet of paper. Even allowing for an unexpected drop in prices on the diamond market, his figures showed that this day’s work eventually should bring him a net profit in the neighborhood of $100,000--a pleasing 50 per cent on his investment and no taxes on profits to be paid to the Internal Revenue Service.

Long before this, Mr. X had decided it was foolish to bring $200,000 worth of cut diamonds into the United States, to declare the gems on his customs declaration, to pay the government the required 10 per cent duty, to pay the Federal luxury tax on retail sales, and then to pay another tax on the profits from the sale of the diamonds.

He had learned there was a more profitable way to do business. True, it had its risks--but no one ever made money without risks. The trick was to buy insurance which guaranteed duty-free delivery of the diamonds in New York City. The risks were minimized. The system was about as foolproof as any system could be because you dealt with a reliable syndicate. By buying and selling secretly the profits were enormous.

Three years earlier Mr. X had arrived in Antwerp on his first buying trip, carrying a letter of credit for $200,000 from his bank in New York, and had fully expected to carry his diamond purchases home with him on his return.

Soon after his arrival, he had called a business acquaintance in the Antwerp diamond trade and asked him to dinner at his hotel. He had met the Belgian in New York City and the Belgian had insisted that they should get together on his first trip to Antwerp. The friend had arrived at the hotel and they had enjoyed an excellent dinner that evening. Over a brandy, they had discussed business. Mr. X had confided that the next day he intended to purchase $200,000 worth of diamonds in the market. And then he had complained of the customs duties and the taxes that he would have to pay on the profits.

After several more brandies, his friend had said to him: “Listen to me. It is silly for you to pay such taxes when it is unnecessary. Let me tell you how you can avoid the taxes. Tomorrow, go to any of the regular diamond houses, any that you prefer, and make discreet purchases. After you have selected the stones, go to the coffeehouse on the corner of (and he named the street). Order a cup of coffee and then tell the waiter that you wish to speak to the manager. When the manager comes to your table, ask him to have a cup of coffee with you. Tell him that you have purchased some merchandise and you wish to contact someone who will deliver the merchandise to you in New York City. The manager, quite naturally, will say he knows nothing of such affairs, but in a short time you will be approached by a stranger. This man will say he understands you wish the delivery of certain merchandise to the United States. He will ask you, ‘How do you wish to pay for this?’ And you say, ‘By cash.’”

Mr. X had interrupted to say, “Can you give me the name of this man who will approach me?”

His friend had shaken his head. “No. You will never know his name--and you will never know the names of anyone with whom you deal. You must trust these men because they are reliable. They have to be reliable to stay in business.”

“Now,” he had continued, “the man who approaches you will take you to an appraiser’s office somewhere in the city. You carry your diamonds with you to be appraised. When the value of the stones is confirmed, you will be asked for a cash payment of six or seven per cent of the stones’ value as insurance which guarantees their safe delivery to you in New York. The insurance rate varies from six to ten per cent depending on circumstances. I think it now is about six or seven. After you pay the fee, you leave the diamonds with the gentlemen. They will tell you when to expect delivery.”

Mr. X remembered his amazement. He had exclaimed, “Do they give me a receipt for the diamonds? Do I just walk out the door with nothing--not even knowing the names of the men I’m dealing with?”

His friend had said, “You get nothing. Believe me, this is the way the syndicates operate. It is done every week. You understand they cannot have a record of these transactions.”

Then his friend had explained the syndicates. In Antwerp there were many wealthy businessmen who could not break into the tightly controlled, legitimate diamond business, which was in the hands of five old-line diamond clubs. Closed out of this market, they had turned to the only diamond business open to them--the insuring of diamonds smuggled into the United States and other countries. They had formed loose syndicates and had organized rings of men and women to act as carriers.

Members of these shadowy syndicates frequented certain coffeehouses in and near the diamond market. When advised that someone had prepared a shipment of diamonds, and wished insurance, the group would meet to prorate the risk. One man would take $20,000, another $30,000, and so on, until the full value of the diamonds was covered. They would agree to pay the appraised value of the stones if the stones were lost, stolen, or seized by Customs officers.

Mr. X had lain awake for hours after the conversation with his friend, trying to decide whether he should make such a gamble. He had decided finally that the risk was worth it. The next day he had gone to the diamond market, purchased the stones, and then gone to the coffeehouse as his friend had suggested. He had talked to the manager. The stranger had approached him. He had been taken to an office in a part of the city which he could never find again. His gems had been appraised. He had paid the insurance fee--seven per cent of the appraised value--and had walked out of the office with nothing to show for any of the transaction.

Before he left the office one of the men had asked him, “When are you leaving for the United States?” He had said that he intended to leave the next day, which was Saturday. Then the man had said, “We will deliver the stones to you on Tuesday night next. You will receive a phone call at your home and be given further instructions.”

Mr. X had returned to New York City and had waited at his home for the expected call on Tuesday night. The call came, finally, at 10 P.M. A voice had said, “Mr. X? Were you expecting delivery of a package?” Mr. X had eagerly assured the caller that he was expecting a delivery. The voice had said, “Can you be on the corner of 57th Street and Third Avenue at 11 P.M.?” Mr. X had told the caller that he would be there. Then the voice had said, “So that I will not make any mistakes, please stand on the southwest corner of the street and have a copy of the _Chicago Tribune_ under your left arm.”

Mr. X had taken a cab to the corner of 57th Street and Third Avenue. He had purchased a copy of the _Chicago Tribune_ at a newsstand selling out-of-town papers, and he folded it under his left arm. As he stood on the corner, a man walked up and said, “Mr. X?” And he had replied, “Yes, I am Mr. X.” The man had said, “Here is your package.” Then he had walked away.

Mr. X had taken the diamonds back to his apartment. He had ripped the paper from the box and had opened it to find every gem that he had purchased in Antwerp and turned over to the syndicate representatives. It was as simple as that. There was not a scrap of paper on record anywhere showing that he was liable for taxes.

The second time he had made the trip to Antwerp he had followed the same procedure, although he had dealt with different men. The second delivery had been made safely also. And now he was ready for the syndicate to make its third delivery. All he had to do was wait....

After Mr. X’s return from his third trip to Antwerp--on July 12, 1953--a Belgian Sabena Airlines plane glided to a landing at Idlewild International Airport in New York City with Capt. Robert Edmund Deppe at the controls.

The passengers debarked. Members of the plane’s crew came down the gangway with Deppe bringing up the rear. Deppe carried in his hand a shoe box tied with a string. He saw one of the airline clerks near the ship and he tossed the box to him.

“Hold this for me, Joe,” he said. “It’s a little gift I brought over for a friend. He’ll be calling for it.”

The clerk said, “Sure, Captain. I’ll put it in the crews’ baggage room.” No one paid any attention to the incident nor did anyone later give a second look at the shoe box when the clerk tossed it onto a shelf in the baggage room.

There was considerable excitement in the terminal when the crew checked in. “What’s going on?” Captain Deppe asked. An airline employee replied, “The Customs people are searching everyone again. You might as well get in line yourself.”

Deppe got in line. He watched the agents and inspectors go through his luggage and then one of them ran his hands lightly over his clothing.

“What is it all about this time?” he asked.