Global Policy Forum

Atrocities in African War Zones Threaten Industry, Some Economies

By Lynne Duke

In creating demand for a product, few industries exceed the success of the world diamond business. From a hole in the ground on a farm called De Beers in the South African hinterland in the late 19th century, Cecil Rhodes, the infamous colonial capitalist, founded a diamond empire that would grow into a global cartel controlling mining, distribution and pricing.

Through deft marketing, the De Beers Group created a mystique of rarity and eternity for the diamond and stoked ravenous consumer demand. Launched from Madison Avenue more than 50 years ago, De Beers's "A Diamond Is Forever" ad campaign last year was dubbed the slogan of the century by Advertising Age. A host of other companies and countries now are players in the diamond trade, and their output, along with De Beers's, has doubled global diamond production over the past two decades. The trade is so successful that U.S. diamond sales reached record levels last year, accounting for more than half of the world's $57.5 billion retail diamond trade, according to the Jewelers of America, a trade organization.

But beneath the diamond's brilliance are rumblings that are shaking the industry. Carat, color, clarity and cut, the traditional four C's of judging a diamond, have been joined by a fifth C, conflict. The Campaign to Eliminate Conflict Diamonds, a coalition of human rights groups, is attempting to rouse grass-roots outrage over diamonds from war zones that are being sold on world markets.

Rebel armies in the African nations of Angola, Congo (formerly Zaire) and Sierra Leone have kept their cause alive by seizing diamond territories, setting up mining operations and trafficking in stones to which they have no legal right. In Sierra Leone, especially, the diamond trade has fueled monumental brutality from rebels whose signature act of terror against civilians is hacking off limbs. Easily absorbed into the global diamond market, the stones traded by these groups are physically indistinguishable from legitimate diamonds and have found their way into jewelry stores the world over, including in the United States.

The numbers of "conflict diamonds" are relatively small: De Beers says they account for only 4 percent of the global trade, while activists say they represent as much as 15 percent. But all sides agree conflict diamonds are an insidious pollutant in the legitimate diamond pipeline. At stake, says De Beers, is not only the continued health of the diamond industry, but the economies of such nations as South Africa, Botswana and Namibia, which depend on the legitimate diamond trade, not to mention a host of other mining players such as Australia, Brazil, Canada and Russia.

While diamond councils, the United Nations and lawmakers around the world attempt to create controls to stop the conflict stones from reaching the market, De Beers and others already have begun issuing guarantees that the stones they trade are conflict-free. In the insular world of diamonds, such guarantees are enough, for some. In New York's gaudy, neon-festooned Diamond District, William J. Goldberg, patriarch of a diamond firm that bears his name and specializes in very expensive, large-weight stones, describes it as an industry of honor. "Man to man, company to company, where a word is honored. Lawyers are hardly ever used," he said one day while touring his cutting floor, a room as solid as a vault, where the polishing wheels worked on Goldberg's latest batch of stones from De Beers. Goldberg believes De Beers when it says its diamonds are clean. But his son, Saul Goldberg, scion of the business, says the conflict-diamond issue is unsettling. "A lot of retailers are scared about it," he said. And some "have asked us for letters of assurance."

One such nervous retailer is Michael Kowalski, chief executive of Tiffany & Co. Human rights groups have staged "informational" demonstrations at Tiffany and Cartier shops. And Kowalski has been inundated with thousands of letters that began pouring in earlier this year at the prompting of the coalition. Kowalski answers each with a form letter bearing his original signature. "The thought that a Tiffany product, no matter how indirectly, could be linked to the horrific events of Sierra Leone absolutely and figuratively makes us lose sleep," Kowalski said in an interview.

Also stoking the industry's fears is legislation introduced last month by Rep. Tony P. Hall (D-Ohio) that would prohibit the U.S. importation of loose diamonds without proof of their non-conflict origins and would limit diamond jewelry imports to countries that are part of a proposed certification regime. The World Diamond Council, created last year to deal with the conflict-diamond controversy, supports a different bill that would carry less severe penalties. Neither Hall nor his human rights colleagues are calling for a boycott, but the threat of such action is implicit in their rhetoric. "Any human being knows that if this butchery continues, American consumers, who are the primary source of rebels' funds, will recoil in horror," Hall warned last month on the House floor. "The whole industry is peculiarly vulnerable to public opinion because the stone is absolutely without value but for its sentimental associations, and it doesn't take much to damage the sentimental associations," said Holly Burkhalter of Physicians for Human Rights, one of the key groups in the campaign.

On Friday, representatives of industry, humanitarian aid agencies and activist organizations, meeting in Brussels to come up with a certification plan, said governments were not working fast enough to stamp out the conflict-diamond trade, the Associated Press reported. Such meetings have been underway since last May, with the goal of reaching consensus this year.

Stockpile Cuts

To understand the diamond industry, a good place to start is on Charterhouse Street in London. In a building filled with surveillance cameras and security guards, De Beers stockpiles five tons of rough diamonds, uncut and unpolished. That represents a reduction in De Beers's famous diamond stockpile. Andrew Lamont, a London-based spokesman for the company, said De Beers cut its stockpile from $4.8 billion at the end of 1998 to about $2.7 billion last year as part of its effort to reduce its role as the industry's custodian and become, instead, more of a retail player. De Beers is to diamonds what the Wizard was to Oz: the entity behind the curtain, pulling the strings.

De Beers markets two-thirds of the world's rough diamonds and produces about half the total world supply from the 20 mines it operates in South Africa, Namibia and Botswana. More important, though, De Beers has served as custodian of the diamond industry for several decades by buying up excess diamonds on the market to maintain price stability. In the 1990s, when an explosion of diamonds from Angola burst onto the world market and threatened a glut that would reduce prices, De Beers mopped up those diamonds.

Those Angolan diamonds were from the illicit mines of the UNITA rebel movement, which had seized rich diamond territories and quickly began making billions -- to buy arms and continue a war that has raged for 25 years. In Angola, as in many of Africa's other diamond regions, diamonds are plentiful in alluvial deposits along riverbanks and not nearly as difficult to reach as underground or kimberlite deposits. And alluvial stones often are of the highest quality.

Global Witness, the British human rights group that outted the Angola diamond frenzy in a groundbreaking 1998 report, "A Rough Trade," estimates that UNITA earned $3.7 billion for its diamonds during the 1990s, before U.N. sanctions came to bear in 1998. Explaining why his company bought a product it now condemns, Lamont said in e-mail, "Up until this date [1998], there was no international law/resolution in place prohibiting the trade of any commodity other than arms from Angola." Indeed, until 1998, UNITA politicos even held positions in a shaky coalition government while their generals and mercenary allies mined billions of dollars of diamonds. Since then, De Beers has stopped buying Angolan diamonds directly. But other firms do buy them, and there is no telling which stones are legitimate. The Angolan government issues certificates for the legally mined production it controls, but that government is notorious for corruption and fraud.

In Congo, warlords in 1998 began mining illegal diamonds, too, adding to the chaos of the Congolese diamond industry. On Africa's west coast, the same illicit trade unfolded in Sierra Leone, through the Revolutionary United Front (RUF), whose macabre handiwork with the machete received chilling news coverage. Diamonds had become a rebel's best friend -- a commodity able to move into the legitimate diamond pipeline undetected. Dealers, ranging from multinationals to individual miners, even smugglers and rebels, send their stones to the world's main cutting centers at New York, Tel Aviv, Bombay and Antwerp, Belgium, where the diamonds are mixed and sorted according to quality, then exported to manufacturers and retailers around the world.

In the tightly controlled De Beers network, scores of diamond cutters, manufacturers and dealers from around the globe gather at De Beers's facilities in London every five weeks to receive black and yellow lunch-box containers filled with rough diamonds, and a printed "guarantee" that the stones are from conflict-free countries. But unless a fraud-proof certificate of origin is slapped on a rough stone from the moment it is extracted from the earth, its provenance may not be knowable, diamond experts say. There is no technology available to reliably trace the regional origin of a diamond. "Under the current world system, it is impossible to unequivocally guarantee the source of diamonds," Kowalski said. Tiffany, which is a De Beers customer, tells consumers (if they ask) that it is "doing everything feasible to bar conflict diamonds from its inventory." That means Tiffany is part of the diamond council's attempt to regulate the trade. So far, that has been enough. Tiffany's sales were up 13 percent last year.

De Beers's Strategy

Diamonds from the De Beers network are everywhere in American jewelry stores; always have been. And sometime next year, De Beers diamonds will be branded and sold retail here in a joint venture giving the global luxury group LVMH rights to the De Beers name. Its lobbyists or allies swarm over Capitol Hill, hoping to shape new diamond legislation. Its marketing arm, the London-based Diamond Trading Co., maintains a public relations office in New York at J. Walter Thompson, De Beers's ad agency.

Not bad for a firm that remains under U.S. criminal indictment for a 1996 price-fixing case and whose executives do not set foot on U.S. soil for fear of arrest. But that's long been De Beers's history: squeezing out of tight spots, confounding critics. (The U.S. Justice Department refused to comment on the status of the De Beers indictment.) Even during the years of South African apartheid, a system of racial repression from which De Beers benefited greatly because it ensured cheap black labor for the mines, the company staved off threats of international diamond boycotts. And in 1994, when South Africa went democratic, De Beers executives emerged with reputations as white reformers for having spoken out against apartheid.

De Beers manages the potential conflict-diamond crisis in a similar fashion. It has wrapped its anti-conflict-diamonds campaign into a broader corporate overhaul, including a buyout that will take it private, a step intended to make the company more competitive. And although its reach once made it the world's most prominent trader of conflict diamonds, the firm has emerged as the industry's leading proponent of reform.

Led by South Africa, the African governments that mine in conjunction with De Beers created the "Kimberley Process," named for the South African town where De Beers was founded. The Kimberley group, which met in Brussels last week, has proposed a global diamond regime whereby all rough diamonds would receive certificates of origin from the time they are mined, so that dealers will know conflict diamonds by the absence of official documentation. The United Nations has endorsed this approach, but diamond mining nations have yet to iron out the particulars.

To fight Hall's bill, the diamond council hired Akin, Gump, Strauss, Hauer & Feld, the Washington law firm and lobbying powerhouse, to craft a competing bill that now is in search of a sponsor. The industry bill would exclude diamond jewelry from certification restrictions -- a loophole Hall and his backers say is dangerous. The legislation, the industry asserts, would be less disruptive of the global diamond supply chain. "The great concern among the diamond producing governments such as Botswana, South Africa and Namibia is that either the legislation will go so far as to interrupt legitimate supply, which is the livelihood for an awful lot of people over there, or that there will be no legislation to the satisfaction of the NGOs [nongovernmental organizations], who will then mount consumer campaigns that will disrupt supply," said Ted Sorenson of Kennedy administration fame, who is representing Maurice Templesman, chairman of the diamond firm Lazare Kaplan International. Templesman was a key player in stopping diamond sanctions against South Africa during apartheid.

So concerned is Botswana that it has hired Hill & Knowlton to press its case. Botswana's Debswana diamond mining company is the world's third-largest producer of high-quality diamonds and is owned jointly by the state and De Beers. Linah K. Mohohlo, governor of the Bank of Botswana, takes issue with the growing perception "of diamonds as a commodity which is a source of conflict." To the contrary, she wrote in a statement, Botswana is a peaceful, conflict-free society whose mines produce what she called "prosperity diamonds" that have made Botswana an economic success story. Minerals account for half of Botswana's revenue, with diamonds comprising the bulk.

Even Nelson Mandela, the former South African political prisoner who became the nation's first democratic president, warned in 1999 of the "damage" that could be done to the diamond industry by an international campaign on conflict stones. It all comes down to the image of the diamond and the threat to its market. "When [diamonds] start to become associated to any degree in the public mind with the uniquely cruel abuses that the RUF has made its signature -- rape and amputation -- you couldn't dream up a crueler or more jarring context for a stone that is a symbol of love," said Burkhalter. "And no one knows that better than the diamond industry."