A 'major loophole' is allowing Russian seafood and diamonds to bypass US sanctions, causing retailers to enforce their own bans

• Russian diamonds and seafood are legally skirting sanctions due to a "country of origin" loophole.
• Once a Russian product is "substantially transformed" in another country, it can bypass Western bans.

Despite the Biden administration's ban on Russian seafood and diamonds, both products are still making their way into the US — legally.

The simple sanctions work-around is thanks to a policy called "substantial transformation" — a trade rule that states once a product is significantly altered in another country it can claim that region as its place of origin — which experts say has created a "major loophole" in US sanctions strategy following Russia's invasion of Ukraine.

Take fish sticks, for example. After pollock is caught in Russia, it's sent to a factory in China to be processed into stick-form. Once it undergoes that transformation, it's no longer legally considered Russian seafood, meaning US sanctions no longer apply.

The same goes for diamonds. Approximately 30% of the total volume of diamonds produced worldwide hail from Russian mines. Many of those rough diamonds end up in India, the world's top diamond manufacturer, where they are cut and polished. Once that transformation takes place, the diamonds are labeled as Indian instead of Russian.

This means Biden's ban on Russian diamonds was "basically worthless from day one," Marty Hurwitz, CEO of The MVEye, a jewelry industry market research company, told Insider.

"With that loophole in place we really can't effectively ban all Russian seafood," Dr. Marla Valentine, Oceana's illegal fishing and transparency campaign manager, added. "Just Russian seafood that isn't processed in foreign countries, which is a very small amount."

How the loophole is forcing retailers to take control of their supply chains

Instead of taking advantage of the loophole, major jewelry retailers like Tiffany and Signet have chosen to go beyond the law and ban purchases of Russian-mined diamonds outright. This means thousands of vendors are now required to disclose where their diamonds are mined, or risk losing the business of the industry's two largest buyers.

Last week, a bipartisan group of 11 congress members wrote a letter urging the Biden Administration to "reconsider" the country of origin loophole, arguing that its has generated "profit for the Russian government."

A similar discussion took place between lawmakers and advocates at an oversight hearing held last week by the Subcommittee on Water, Oceans, and Wildlife.

"Despite the good intentions to strike an economic blow to Russia after its unprovoked invasion of Ukraine, this ban will not work without full seafood traceability, and real information on the origin of the catch," Sally Yozell, an environmental security director at the Stimson Center, a non-partisan research organization in Washington, DC, said in a testimony.

At the end of the day, this loophole has significantly dampened the impact of some US sanctions. But due to high consumer standards, many retailers have chosen to go further than legally required by demanding a level of transparency from suppliers that was previously unheard of.

"The diamond industry is on the slippery slope of legitimacy," Martin Rapaport, founder and chairman of The Rapaport Group, told Insider. "The key issue here, what's underlying everything, is the need to identify your supply chain. That's what it's all about. Everything's pointing to the same direction."

It all comes down to shoppers and what they're willing to pay

According to Rapaport, there are three types of diamonds currently in the global supply chain: "Good diamonds" with origins known to be outside of Russia, "bad diamonds" — or illegal gems mined by a sanctioned company — and the rest are "unknown."

A diamond with unknown origins has likely traveled hand-to-hand for years. It might have been mined in Russia, polished and cut in India, shipped to Belgium, and sold to stores in New York — all the while being mixed together with thousands of other unknown diamonds along the way.

It's a supply chain convoluted by design. Until very recently, a diamond's value was derived by its appearance and quality, not its origin.

Now, Russia's war on Ukraine is proving a theory that has long been scoffed at by the jewelry industry: shoppers are willing to pay upwards of 15% more for a "good diamond," whose journey was mapped from mine to market, MVEye estimated.

"Fundamentally it's all about money. People will pay more for diamonds if they know the source," Rapaport said. "Therefore people are going to start documenting and auditing and providing more information about the source."