War on blood diamond trade loses its lustre in age of digital smuggling

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The diamond industry stands at a crossroads. The Kimberley Process, a scheme designed to certify that diamonds are “conflict-free”, is under pressure to reform. Once regarded as a landmark agreement between industry, governments and NGOs, it has been attacked for widespread shortcomings. Can it restore confidence in the industry and can consumers be sure of what they are buying?

For years, the diamond business was dominated by mining house De Beers, which controlled global prices by buying and selling rough, unpolished diamonds from its rivals. But the turn of the century brought profound change. Facing antitrust pressure in the US, De Beers abandoned its cartel system, paving the way for the rise of Russia’s Alrosa, now the biggest producer of diamonds by volume, as well as a host of smaller players.

At the same time, producers have been forced to face up to the widespread trade in so-called “conflict” or “blood diamonds”. These, according to the founding statement of the Kimberley Process, are rough diamonds used to finance conflicts against governments, such as the civil war in Angola, which ran from the Seventies until 2002.

A solution was needed and, in 2000, a group of industry participants, government officials and observers met in Kimberley, South Africa.

The result, in 2003, was the establishment of the Kimberley Process Certification Scheme (KPCS), backed by the UN. Three years later, the issue of blood diamonds came to global prominence with the Leonardo DiCaprio film of the same name.

Today 81 countries are signatories to the Kimberley Process – including nations that mine diamonds, such as South Africa and Botswana, and those that are the biggest consumers, including the US, China and India. Diamond-producing countries can earn KP certificates to prove the origin of their goods. But critics have argued the process does not go far enough.

Last year, industry maverick Martin Rapaport shocked guests at a conference by labelling the process “bull—-”. In December, Canadian NGO Impact quit the process, claiming it had lost “legitimacy” and that “consumers are being sold something that is not real”. It joined campaign group Global Witness, another founding member of the KPCS, which resigned in 2010. Critics’ fundamental complaint is that the definition of a conflict diamond under the Kimberley Process is woefully inadequate.

Ian Smillie, one of the campaigners who helped establish the scheme, says: “In the beginning we needed a definition of a conflict diamond. So the definition was good enough for our purposes. We didn’t foresee that a government who was a member of the Kimberley Process would use violence to enforce it, but that’s what happened with Zimbabwe.”

A report by Human Rights Watch found that the Zimbabwean army, under the orders of the Mugabe government, killed 200 people when it seized the Marange diamond fields in 2008. Yet, despite a push from some members of the KPCS to expel Zimbabwe, it was allowed to continue exporting its diamonds.

In the diamond trade, the majority of gemstones flow from producing areas in Africa, Russia or Canada to the world’s biggest centres of cutting and polishing, India and Israel, often via hubs in the Gulf. A system of warrants provides an audit trail of each diamond shipped for export. But many argue that a point-of-origin certification scheme simply can’t be made to work.

De Beers' biggest mines today are in Botswana

Few industries, if any, can guarantee the audit trail of goods. The fundamental problem with diamonds is their high value-to-weight ratio: few other items on the planet are worth so much yet are so small and easy to transport. “A diamond will pass through a lot of hands before it gets into a shop,” says Smillie.

“All smugglers need to do is find a weak link in the supply chain,” explains Michael Gibb of Global Witness. He cites the example of stones from the Central African Republic that are “passed off as being from neighbouring countries”.

Critics say it is too easy for diamonds to be smuggled over borders and mixed up with KPCS-certified boxes, or to be issued with fraudulent certificates altogether. Muddying the water further is that the KPCS itself issues “mixed origin” certificates, so that a consignment of diamonds can come from more than one country.

Now a new generation of agile smugglers, using encrypted apps and social media, are able to shift goods and enrich themselves, while starving their countries of much-needed taxes.

“The Kimberley Process was a tremendous achievement and continues to do important work,” Gibb says. “But it can’t deal with all these issues by itself.” Kieron Hodgson, a diamond industry analyst at Panmure Gordon, agrees: “In its day the Kimberley Process was brilliant, but it has fallen behind what is relevant for consumers and retailers, as well as producers and investors.”

The $80bn (£57bn) a year diamond jewellery business is no different to other luxury markets such as watches or iPhones, he adds.

A diamond is polished in Botswana

“If they are not abiding by the highest ethical framework, from a retailer’s perspective, you’re at risk. Ultimately, you’ve got to give consumers what they want. And no one wants to buy a stone that was sourced by child labour.”

Indeed, the process has little to say about human rights abuses in the supply chain, or artisanal mining, which accounts for around 15pc of the diamonds on the global market. An estimated 1.5m people in Africa and some parts of South America are engaged in this form of mining, supporting another 10m dependants. These people often work informally, in unsafe conditions, and under threat of violence, digging up diamonds from river beds and valleys.

“These alluvial diamonds are very close to surface and scattered over many hundreds of square miles,” explains Smillie. “They are an obvious source of income for very poor people: all they need is a shovel and a strong back.” Smillie has set up the Diamond Development Initiative, which is dedicated to improving standards for artisanal miners at the bottom end of the supply chain, and whom he feels are ignored by the Kimberley Process.

In recent years the diamond industry has been battered by falling prices and the growing threat from synthetic, lab-grown stones. But it is alert to the problems in its supply chain and the reputational threat these hold. At last year’s plenary in Brisbane, the Kimberley Process itself agreed to look seriously at changing its definition of conflict diamonds and how its rules are enforced.

This year the European Commission takes the chair of the process. In her opening letter, Hilde Hardeman, the EU representative, says 2018 will be a “crucial year for the Kimberley Process” as it works towards ensuring that it “remains fit for purpose”.

The World Diamond Council, which represents the industry, is backing reform. Stephane Fischler, acting president of the WDC, points out that on its narrow definition of a conflict diamond, the KPCS has been remarkably effective, attaining a success rate of close to 99pc. But he says: “We need to broaden scope of the Kimberley Process.” He backs calls to establish a full-time secretariat for the KPCS, which would “professionalise” the body, and introduce more rigour to the peer-review system, whereby countries scrutinise each other’s adherence to the regulations.

Artisanal mining accounts for 15pc of the world's diamonds

The rules of the Kimberley Process are written into the laws of each member state, making it hard to enact rapid change. Likewise, decisions require unanimity, rather than a majority vote.

Fischler admits these structures can be “frustrating”, but adds that “consensus also builds very strong buy-in”. He says a “serious outline” of how the KPCS will change – including its approach to artisanal mining – should be ready by the end of 2018.

The use of new technology could also play a big part in the future of certification, with De Beers pursuing a scheme that might adopt blockchain, the digital ledger technology underpinning Bitcoin, to track diamonds. “That’s to their credit,” says Hodgson. “They’re not just sitting there waiting for the Kimberley Process to say ‘maybe we should do this’.”

However the process evolves, Gibb argues that the “objective is not to discourage consumers from buying diamonds from certain countries”.

“Some high-risk countries can supply clean diamonds,” he points out. “It’s more about how it was traded than where it comes from.”

Fischler, meanwhile, lays down a challenge to the “civil society” groups who have quit the process: “Yes, it’s difficult, but what is the alternative? Let’s not forget this is a governmental process with 81 countries. I don’t think walking away is a solution. We have an obligation to stay.”

SOURCE: telegraph