JADE ACT: SMUGGLING OF BURMESE GEMS REMAINS HIGH AT MAE SAI

UNCLAS SECTION 01 OF 03 CHIANG MAI 000084

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EFIN ECPS ECON PREL PGOV BM TH
SUBJECT: JADE ACT: SMUGGLING OF BURMESE GEMS REMAINS HIGH AT MAE SAI

REF: A. CHIANG MAI 70 (MAE SOT GEM MARKET)

B. 08 RANGOON 62 (RANGOON AUCTION)

C. RANGOON 333 (BURMESE GEM PRICES)

D. CHIANG MAI 67 (BACKDOOR TRADING ROUTES)

E. 08 CHIANG MAI 97 (BURMESE REMITTANCES)

F. 08 CHIANG MAI 114 (AFRICAN RUBIES DOMINATE MAE SOT)

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Sensitive but unclassified; please handle accordingly.



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Summary and Comment

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1. (SBU) In contrast to other gem markets in Thailand such as
Mae Sot and Chantaburi, where African gems make up the bulk of
the merchandise, smuggled Burmese gems (mainly rubies and jade)
continue to dominate the local Mae Sai market. While Mae Sai
gem traders and jewelry producers complain that the U.S. JADE
Act is harming the local Thai polishing and finishing
industries, they blame the overall decline of Thai gem trade on
the global economic slowdown, higher gem prices forced by the
auctions in Rangoon, and domestic political instability in
Thailand. In Mae Sai, the smuggling of Burmese gems reveals an
informal banking sector and possible links to the narcotics
trade, which further highlight the lawlessness of the
neighboring Wa-controlled region of Burma.




2. (SBU) Comment: As the Burmese regime continues to force gems
to flow through government-sponsored Rangoon auctions and as
African gems grow more competitive globally, it is noteworthy
that the Mae Sai market - though shrinking overall - remains a
significant entry-point for smuggled Burmese gems. In contrast
to Mae Sot (ref a),the smuggling services sector appears to be
burgeoning and relatively open in Mae Sai, a possible
consequence of the fact that the neighboring Wa region of Burma
is politically and geographically isolated from Rangoon.
Despite this, overall trade in Burmese gems appears to be down,
even through Mae Sai's smuggling routes; however, there appears
to be few links between that decline and the U.S. JADE Act. End
Summary and Comment.



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Causes of a Declining Mae Sai Market

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3. (SBU) Amid the global economic downturn and GOB efforts to
control Burmese gem supply, the Mae Sai gem market (like other
gem markets in Thailand) is in decline, local traders and
jewelry businessmen told econ staff during a June 19 visit.
(Note: Mae Sai is located at the northern most point of Thailand
and is adjacent to the Wa-controlled area of Burma. The other
major entry point for smuggled Burmese gems into northern
Thailand is Mae Sot, which is located on the western Thai-Burma
border.) Gem polishers and jewelry makers said that the main
cause of the decline over the past two years has been the global
economic slowdown, which has driven down demand for luxury
goods. According to some gem and jewelry retailers in Mae Sai,
domestic political instability in Thailand is also to blame.
Political turmoil, which has reduced tourism, means fewer
consumers of jewelry products within Thailand, they assert.




4. (SBU) Aside from the economic crisis, Mae Sai businesses also
blame efforts by the GOB to force the flow of Burmese gems
through the Rangoon auctions for the market's decline (refs b
and c). While this process is not new in Burma, Mae Sai based
merchants said they believe the regime has been tightening its
control over gems in recent years. According to one Thai-owned
gem retailer in Mae Sai, as the Burmese regime cracks down on
gem smuggling, it forces more traders to buy at the auctions
where base prices are set artificially high. This pushes prices
of smuggled gems higher, which then raises costs for Thai
polishers and jewelry producers who purchase the gems. Higher
prices have consequently pushed down the volume smuggled into
Thailand. Moreover, Mae Sai traders complained that they cannot

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compete with the purchasing power of other traders at the
auctions, particularly the Chinese and Taiwanese who primarily
purchase Burmese jade. One Thai gem dealer in Mae Sai said that
the Chinese in particular are willing to pay very high prices at
the auction, which he attributed to China's interest in
supporting Burma politically. Thus, official Burmese imports of
gems into Thailand have declined as well.



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Three Smuggling Routes Through Mae Sai

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5. (SBU) While the Mae Sai gem market is in decline, smuggling
of Burmese gems through this border town remains the primary
mode of import. Traders of Burmese gems in Mae Sai said
smuggled gems enter through one of three methods: directly from
a Burmese gem mine, via the auction in Rangoon and,
subsequently, through smuggling networks, or by Thai consumers
who cross into Burma. In the first case, the Mogok mine in
Burma is the primary source for gems bound for Mae Sot, while
the Mineshu mine is the main source for gems going to Mae Sai.
In these cases, miners smuggle the gems out of the mine and sell
them to Burmese traders who carry them to Thailand via Mae Sai.
These Burmese smugglers hide the gems on their body under their
clothes and cross into Mae Sai by foot, at great risk of
detection by Burmese military officials. One Burmese smuggler
told econ staff that he makes himself appear impoverished so
that Burmese officials will not suspect him; he noted that the
work he was doing was highly dangerous on the Burmese side.




6. (SBU) The danger of smuggling directly from the mines has
grown in recent years due to GOB efforts to control the gem
trade, according to Burmese smugglers and Thai traders at Mae
Sai. Consequently, a second smuggling route is developing
through which gems flow from the mines to the Rangoon auction
via official channels, then are smuggled out by those who bid on
the gems at the auction. A Thai gem trader described the
process as follows: Burmese cronies or government officials
will purchase rough gems in bulk at the annual Rangoon auction
for a certain price (presumably having competed with foreign
bidders). Those domestic buyers then divide up their bulk
purchase into smaller rations, which are then sold off (at
higher marginal prices) to smugglers who will carry them into
Thailand for trading. Thus, the consequence of the GOB
crackdown on Burmese gem supply is not so much a decline in the
level of smuggling but rather that the revenue from smuggling
goes to individual Burmese regime officials as well as to
independent Burmese traders. In Mae Sot, on the other hand,
smuggling revenue ends up in the pockets of smaller traders with
no connections to the regime (ref a).




7. (SBU) In the case of high-end rubies, sapphires, and jade,
Thai traders do not trust these smuggling methods. (Jade is not
often smuggled in raw form due to its weight and bulkiness; it
is sold at the auctions in 100 kilo pieces.) According to Thai
gem traders in Mae Sai, if a Thai consumer (such as a Bangkok or
Chantaburi-based jewelry retailer) identifies a certain
high-value gem available in the Burmese market through hear-say
or photos, that consumer will travel directly to Tachilek, Burma
(adjacent to Mae Sai) to purchase the gem and carry it back
himself, without declaring the gem to Thai or Burmese customs.
This is particularly common in the Wa-controlled area of Burma
which borders Mae Sai and reportedly hosts lawless trade of gems
and other goods (see para 11 and ref d).




8. (SBU) Both methods contribute to the significant portion of
smuggled gems that enter Thailand via Mae Sai. According to gem
retailers in Mae Sai, they are not concerned about the fact that
their supplies enter Thailand illegally. One high-end,
Thai-owned retailer told us that when suppliers (i.e.,
smugglers) come to their shop to show their products, the
company does not ask whether the goods entered Thailand
illegally or not. Company contacts said that the concern of
retailers, polishers, and jewelry makers in Mae Sai is not how
the gems arrived in Thailand but the quality and resale value of
the gem itself. They told us that because most of their goods
are not for export (but for purchase by foreign tourists or

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wealthy Thais),they are not concerned about acquiring
certificates of origin, for example. In contrast, a gem dealer
in Chiang Mai told us (ref a) that an increasing number of
American tourists have asked for certificates of origin over the
past two years.



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In Mae Sai, Informal Financial Services for Gem Smuggling

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9. (SBU) Gem smuggling in Mae Sai has led to the development of
informal Thai-owned financial services for Burmese gem
smugglers. One Thai businessman who offers such services
explained that, officially, his business provides retail space
to Burmese and Thai traders to meet and negotiate prices.
Beyond that, however, the business serves as an informal bank
for the Burmese gem smuggler. When a smuggler enters Thailand,
for example, with about $30,000 worth of rubies strapped to his
body (as was the case with the smuggler we spoke with there),he
sells the gems at the shop and returns to Burma empty handed.




10. (SBU) Instead of carrying the money he earned back to Burma,
he passes the cash to the Thai businessman who owns the trading
market and who holds the money for him. Simultaneously, this
Thai businessman also functions as an exporter of goods that are
illegal to export to Burma (such as soft drinks and instant
noodles). In Burma, traders who purchase these illegal imports
from him then pay for the goods to the Burmese gem smuggler
whose money is being held back in Mae Sai (and his balance there
is deducted accordingly, along with a commission to the Thai
business owner). This cross-border financial services system
closely resembles that used by Burmese migrant workers to remit
wages back to their relatives in Burma (ref e).



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High Value Gem Smuggling and the Drug Trade

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11. (SBU) Another sector that has potential links to gem
smuggling is narcotics, according to one American jewelry
retailer in Mae Sai. This retailer told econ staff that he is
reluctant to purchase Burmese gems (he said most of his supply
is from Africa, Australia, and North America) because he
believes purchasing such gems provides financing to the region's
drug trade. This retailer, who has been living in Mae Sai for
over 40 years, said that middle-grade gems that are smuggled
into Thailand via Mae Sai and which make up the bulk of the
trade volume probably have no affiliation with drug traders.
However, revenue from high-value smuggled gems, which can be
purchased from the Wa by Thais traveling to Burma, financially
supports the narcotics trade, he asserted. (Comment: We note
that the Wa's 20th anniversary celebration book, released
earlier this year, contains pictures of the Wa mining and
polishing gems. We have no hard evidence that links the Wa
directly to gem smuggling, though the Wa and other armed groups
in Shan State are key customers of consumer goods exported from
Thailand to Burma via Mai Sai.)




12. (U) This cable was coordinated with Embassies Bangkok and
Rangoon.
MORROW