Since the 1950s, humans have been able to make synthetic diamonds. Yet, consumers demand “real” diamonds for their jewelry, but at what cost? The diamond industry has been marred with numerous ethical issues. From child labor to a company controlling the global market, diamonds have had a phenomenal economic, social, and political impact globally. The image of the diamond is critical because the diamond does not have any intrinsic value. For more than half a century, humans have been able to develop synthetic diamonds that are used in industrial settings. Diamonds are carbon based, so they are one of the strongest substances known to man. Before the invention of synthetic diamonds, manufacturers bought diamonds on the open market to be used as drill bits and cutting tools. However, when General Electric developed the world’s first synthetic diamond, there was no longer a viable need for natural diamonds. Diamonds were then delegated purely for cosmetic reasons. Thousands and thousands of people have died, been maimed, or been displaced from their homes because of a mineral that sparkles as a piece of jewelry.

The Challenge of Conflict Diamonds

Conflict or “blood” diamonds are diamonds that have been mined in a country that is in a civil war. The United Nations defines conflict diamonds as “diamonds that originate from areas controlled by forces or factions opposed to legitimate and internationally recognized governments, and are used to fund military action in opposition to those governments or in contravention of the decisions of the Security Council.”

   

The release of the movie Blood Diamond starring Leonardo DiCaprio as a diamond smuggler brought the issue of conflict diamonds to the forefront. Blood Diamond was set in Sierra Leone during its civil war and showed brutal images of murder, kidnapping, and mutilation. Some scenes included having children selecting which of their limbs would be amputated by the rebels to ensure children obey the commands of the rebels.

Furthermore, additional scenes showed men being forced from their villages and being required to mine for diamonds as “slaves” to the rebels.

One of the reasons why conflict diamonds can be potentially common in funding civil wars is the location of the diamonds. In Western African countries such as Sierra Leone, Liberia, and the Ivory Coast, diamonds are located in marshy areas and riverbeds. The diamonds are very close to the surface of the ground, so it is very easy for anyone to “mine” the fields. In addition, it is very easy for a rebel group to seize control of the marshy area and force workers to mine the area. In other areas of the continent such as Botswana, the diamonds are found inside dormant volcano tubes. This type of mining and removal requires additional heavy machinery and may be closely protected by the government. In addition, if the country believes there is a threat that these mines will be seized by the rebels, the government can order that the opening of the mine be closed using explosives. As a result, countries with marshy, easy to obtain diamonds fields are more likely to have extended civil wars than are countries that do not have these marshy areas.2 For example, in 1999, $200 million in conflict diamonds were smuggled out of Sierra Leone. During the height of the conflict diamonds trade in the 1980s and 1990s, 4% of all global diamond trade involved conflict diamonds. Furthermore, the smuggling of conflict diamonds is a very effective way for terrorists and other criminal organizations to launder money. Illgotten gains from illegal activities would be used to buy conflict diamonds illegally and then the conflict diamonds would be smuggled out of the country and sold legally as conflict-free diamonds. This is one method al Qaeda used to fund its operations. The true tragedy of this illegal trade is the needless loss of life.

Approximately 3.7 million people have been killed in Africa so others could gain access to conflict diamonds, and another 6 million people have lost their homes because of the forced evaluation of rebels mining for conflict diamonds.

Diamonds and the Resource Curse Syndrome

The resource curse syndrome can be described as an imbalance between the positive and negative impacts of a country based on having a bountiful supply of a valuable resource. It is traditionally assumed that a country with abundant valuable natural resources will be able to capitalize on the sale of these resources by increasing the standard of living of the citizens of the country; however, this is not always the case. It has been shown that valuable natural resources can actually result in more negative than positive impacts for the country. Valuable natural resources can lead to corruption, political instability, and potential violent conflict including civil wars.

These results show the ironic impact of natural resources. Therefore, a country like Sierra Leone can be “cursed” in having a large supply of diamonds, which results in the country being among the poorest in the world. Furthermore, Sierra Leone and other resource-rich countries tend to become dependent on the diamond trade. By focusing all their economic activities toward one industry, even if the political and social climate stabilizes, these countries will have unpredictability in the economic climate because the gross domestic product (GDP) of the nation is dominated by one industry. For example, in Botswana, 33% of the GDP is directly related to the diamond industry.

The Kimberley Process

In response to diamonds being sold in conflict areas, the United Nations developed the Kimberley Process certification scheme. The process is based on having the governments of diamond-producing countries certify that the diamonds being traded did not come from a conflict zone. This certification process included having a certificate that demonstrates the country of origin of the diamonds. To be a member of the Kimberley certification process, the country must pass legislation that monitors and certifies the diamonds based on the criteria established by the Kimberley certification process. To ensure that conflict diamonds are not included in the trade, Kimberley members are required to only deal with other members in the buying and selling of diamonds.

The origins of the Kimberley process started in 1998 when the United Nations adopted a resolution that banned the export of diamonds from Angola. Angola was in the midst of a bloody civil war. The resolution did not stop the flow of conflict diamonds into the marketplace. In 2000, the United Nations developed a preliminary version of a policy related to conflict diamonds that would become the foundation of the Kimberley Process. The Kimberley Process resulted partly from the pressure from the nongovernmental organization (NGO)

Global Witness. Global Witness provided evidence to the public showing the direct link between conflict diamonds and arms dealing. The initial meeting of member countries occurred in Kimberley, South Africa, which happens to be the birthplace of De Beers, the world’s largest diamond-producing company. After the completion of 3 years of negotiation, the final agreement was approved in 2003 and was endorsed by the UN General Assembly and the UN Security Council. Since 2003, the members have met annually to discuss any issues related to the certification process. In the past, members have been forced to withdraw their membership from the Kimberley Process. In 2004, the Republic of Congo lost its Kimberley Process membership when it could not explain its sudden significant increase in diamond exports. One way in which smugglers in conflict zones can bypass the trade ban is to smuggle the diamonds from a conflict zone to a conflict-free zone. As a result, conflict diamonds will be certified as “conflict free” from a Kimberley Process member even though the true origin of the diamonds is from a conflict zone. One way to monitor this type of smuggling is to evaluate whether there has been a sudden jump in exported diamonds without a corresponding jump in new diamond mine discoveries. In 2007, the Republic of Congo rejoined the Kimberley Process when the country demonstrated the improvement of monitoring and control system for diamonds being traded in their country.

In September 2009, the Zimbabwe government was allegedly guilty of murder and human rights violations by its army and police pertaining to diamond mining. Zimbabwe is a Kimberley Process member. A Kimberley Process representative visited Zimbabwe and found evidence of killings and forced labor in the diamond fields. The team recommendation was that Zimbabwe suspend itself from membership in the Kimberley Process.

As expected, smugglers in Zimbabwe searched for an outlet for their potential “conflict” diamonds. They found an outlet in Zimbabwe’s neighbor Mozambique. Although Mozambique does not have any diamond fields or mines, a significant market for rough diamonds developed. The diamonds are sold in Mozambique and shipped to another country to be cut and polished and then sold as “conflict free.” Although no one knows exactly how many diamonds are being smuggled out of Zimbabwe, in the previous year, 2008, 59% of Zimbabwe’s diamond product was not exported through official commerce channels. On the black market, conflict diamonds can sell anywhere from $1 to $4,000 per carat depending on the quality of the stone. In addition, buyers of conflict diamonds in Mozambique can earn as much as $100,000 a month buying and selling diamonds.

In November 2009, the Kimberley members decided not to suspend Zimbabwe despite the evidence their own team collected on alleged human rights violations and murder. The members concluded that the military in Zimbabwe did have organized smuggling organizations and did use extreme violence against illegal miners.

However, Kimberley Process members decided that instead of sanctioning, they would send a monitor to determine whether future exports from the disputed areas in Zimbabwe could be certified as conflict free.

Human rights organizations and other NGOs voiced their complaints pertaining to the decision made by the Kimberley members, stating that the lack of sanctions proved that the Kimberley Process does not have the power to stop countries from committing illegal acts and human rights violations on its citizens. Global Witness, the NGO that started the pressure on the industry to develop the Kimberley Process, stated that the decision by the Kimberley members sets a bad precedent in which violations of laws and the requirements of the Kimberley Process agreement will result in no real punishment. In December 2011, Global Witness withdrew from the Kimberley Process because of its continual non-action related to the alleged human rights violations in Zimbabwe. Global Witness stated that the Kimberley Process had failed and that its members should now be considered accomplices to diamond laundering.

In 2011, 75 countries were members of the Kimberley Process and the diamond production from these countries represented 99.8% of the global diamond trade. Although not a member of the Kimberley Process, the United States passed the Clean Diamond Trade Act in April 2003. This act created the Office of the Special Advisor for Conflict Diamonds located within the U.S. Department of State. The Department of State requires all rough diamond importers and exporters who do business in the United States to file annual reports verifying they are not trafficking in conflict diamonds.

A Monopoly Is Born: De Beers

Cecil Rhodes established De Beers in 1888. Rhodes would later be known as only one of a few people in the world to have a country named after him (Rhodesia, which is now called Zimbabwe). In addition, Rhodes is known today as the founder of the Rhodes Scholar program for academically gifted students. The origin of the name De Beers is based on the family name of the owners of the first discovered diamond mine in South Africa. Located in Kimberley, the land was the starting point for the aggressive growth strategy for De Beers.

Rhodes realized that the only way to become more efficient and reduce costs for mining was to acquire large tracks of land that adjoined or was close in proximity to each other. As a result, De Beers quickly bought out numerous landowners in the surrounding areas where they predicted would have additional diamond deposits.

One influential turning point in the early strategy of De Beers was when the company signed an exclusive agreement with the London Diamond Syndicate, which had agreed to purchase all of De Beers’s diamonds. De Beers quickly learned that having a guaranteed buyer was critical for the long-term success of the company. De Beers used this same model when it sold diamonds to dealers through the Central Selling Organization.

The Central Selling Organization

When De Beers became big enough to control the supply of diamonds, it was rewarded handsomely by serving the demand side of the diamond trade. For a large part of the 20th century, De Beers controlled approximately 90% of the diamond supply. This monopoly power allowed De Beers to establish the “single channel marketing” system in which it controlled the supply of diamonds globally. The result is that De Beers also controlled the demand of the diamonds by deciding which customers would be allocated which assortment of diamonds. De Beers justified the single channel marketing system by stating that the system guaranteed stability in the marketplace related to the buying and selling of diamonds.

The single channel marketing system allowed De Beers to control the supply and the demand for diamonds through its “sight holders” system. De Beers invited clients to come to view its diamonds in London 10 times during the year. During each meeting, 125 clients, or sight holders, were allowed to see the diamonds that had been allocated to them by De Beers. These sight holders were required to buy, as is, the lot assigned to them.

There was no negotiation on price, quality, or quantity. The client paid for the diamonds through De Beers Central Selling sales unit. If the client refused to buy the diamonds, the client would not be invited back to a future sight holders meeting, and another client would take that place.

Controlling the Supply of Diamonds

Of course, this system can only work if De Beers controlled the supply of diamonds. This objective was accomplished through two principal means: land acquisition and contract buyers. De Beers continued to buy more and more land where diamonds were located. As a result, it became the dominant player in the diamond industry. In addition, De Beers had standing contracts with independent buyers such that these buyers would purchase whatever diamonds De Beers had available to sell. Therefore, De Beers could establish an artificial “scarcity” by controlling the supply of diamonds. For diamonds that were found in dormant volcano tubes, controlling the supply meant buying the land where the diamond deposits are located. The more difficult task was controlling the supply in the countries in which the diamonds were located in marshy, river areas near the surface of the ground. For these diamond deposits, it was much more difficult to control the supply and mining of the diamonds. To attempt to control the supply during the early 20th century, De Beers allegedly sought and received aid from the British government in controlling the diamond mining operations of countries that were British colonies. The government of these countries used intimidation and brute force to enforce the interests of De Beers.

As African countries broke away from Britain and became independent countries, De Beers shifted its focus to establishing strong relationships with whoever was in power. Therefore, De Beers controlled vast amounts of diamond deposits and used its influence to help control supply of diamonds for those areas that De Beers did not own. However, there was still a supply of diamonds that was not connected directly or indirectly with De Beers influence. For these diamonds, De Beers relied on its contact with the 1,300 independent buyers by offering to purchase whatever diamonds they had to sell. The new result was that De Beers was able to effectively control almost the entire supply of diamonds globally....

Questions

1. How does the diamond industry compare with other industries that have created demand for their products?

2. What are your views on De Beers purchasing conflict diamonds?

3. Does the consumer really care whether diamonds are conflict free? Explain the significance of the term conflict free with respect to diamonds.

4. Synthetic diamonds are now produced. If they choose to sell these diamonds, how would De Beers’s corporate strategy change?