The Diamond Conspiracy

South Africa’s association with the Soviet Union began in 1957 when Harry Oppenheimer’s cousin Philip was sent to Moscow to bid for the growing quantity of Russian diamonds that had been discovered in Siberia. He was told to offer a price above the open-market level for the Soviet’s entire production. Despite having just severed diplomatic relations with South Africa, the Russians could not refuse. After the Sharpeville massacre of 1960, however, the deal became a political embarrassment. It was repudiated by Moscow. Harry Oppenheimer announced in 1963 that the arrangement was finished. Other ways had to be found to have it secretly reinstated. One of the principal routes is believed to be through the London merchant bank Hambros and its subsidiary Consolidated Gems. De Beers now buys a substantial part of Soviet production, estimated at 12-20 million carats a year, of which 2.5 million are gems. This accounts for nearly a third of world output.

One of De Beers’ regular buyers, breaking the unwritten code of discretion, has revealed:

One always found a certain amount of rough [uncut] which is of Russian origin. You can tell its origins by its characteristics. So a manufacturer is able to say, this kind of rough came from South Africa. One knows that they are marketing Russian rough.

For several years the British Department of Trade published figures of Russian diamond imports but the practice was stopped in 1980, at which time diamonds accounted for £367 million out of a total import value of £786 million. The present figure is likely to be nearer £500 million. This convenient relationship has regular upsets. In 1984 large quantities of low-priced Soviet gems were again dumped on the Antwerp cutting market. A furious De Beers advised the Russians to get back into line. By the end of the year, Harry Oppenheimer remarked: “The Russians are acting responsibly. They do not want to disrupt the market.”

From its creation on the South African diamond fields in the 1870s by Cecil Rhodes, De Beers has grown to dominate the world diamond business with a cartel that knows no equal. It was quick to organise the chaos of the Kimberley diamond rush into an orderly monopoly of production and sales. As mines were discovered in other countries, the company moved in to control the supply of diamonds reaching the market. De Beers now owns only about a third of the world’s mines, but its marketing arm, the Central Selling Organisation (CSO), in London distributes 80—85 per cent of all rough stones. Integrated into every aspect of the trade, the company excludes competitors, punishes defectors and governs supply with such determination that prices never fluctuate. They just keep rising.

Understanding De Beers’ accounts is not meant to be simple. The cartel has always been notoriously secretive. One London broker has described the experience as ‘like being in a Kafka novel’. De Beers’ slim annual report raises more questions than it answers. It uses section 15a of the South African Companies Act to avoid disclosing income from subsidiaries. Another schedule withholds group turnover. Details of individual mines are masked by consolidation and the figures are given as an aggregate. The 1986 accounts show a profit before tax of 1.5 billion rand. The bulk of the capital is tied up in huge diamond stocks that grew to unprecedented proportions during the depression of the early 1980s and that the company uniquely values itself. The stockpile in the CSO’s four-storey vaults in Charterhouse Street in London was only slightly down from the 1984 all-time record $1.9 billion. Unless De Beers are anxious to pay tax and interest, this figure is likely to be a conservative estimate. No one, however, is in a position to challenge it.

The Johannesburg stockbrokers Davis Borkum Hare commented in their 1983 report on De Beers: ‘It is submitted with respect that both the balance sheet and income statement depend largely on the positioning of diamond stocks within the various companies in the De Beers group and also on policies that are implemented on consolidated.’ – That is financial marketspeak for ‘these figures are practically meaningless’. The way in which ownership of one of the companies in the CSO, the Diamond Purchasing and Trading Corporation (DPTC), is split between De Beers, AAC and JCI is typical — it does not have to be accounted as a subsidiary of any of them.

De Beers’ role as the arch-manipulator and sustainer of the diamond market makes secrecy essential. Above all, the group has to be able to hide the true size of its diamond stocks, particularly when times are hard. De Beers’ customers, the major diamond dealers, are all well aware of how the system works. They know that to keep prices steady De Beers has to buy up surplus supplies of diamonds when the market slumps during a recession. They also know that the worse the slump, the faster the CSO’s stocks build up. While many of its diamonds, such as those that have been in stock for a long time or those from De Beers’ own CDM mines in Namibia, may have cost the group far below their valuation, nevertheless buying up enough diamonds from other producers to maintain stability can be extremely expensive when the market is weak. At such times, even Anglo’s extensive resources may be severely tested, and the biggest danger then facing De Beers is that the diamond dealers should decide that the company will be unable to find the resources to maintain its hold. |

It is only the secrecy over the diamond stocks that prevents the dealers from knowing whether any particular crisis liable to spell the death-knell for the CSO, and it is probably only that secrecy that has allowed De Beers to keep the CSO intact for so long. It is like a game of poker, with the stiff-faced Oppenheimers playing banker against relatively poorer partners, the difference being that in the diamond game the CSO never has to show its hand. So as long as Anglo can and is prepared to raise enough money to keep the CSO intact, it will be able to maintain the cartel.

As well as the profits to be made from the diamond mines, and the huge stock profits from the cartel when times are good, Anglo has another good reason for risking large sums of money on De Beers. This is De Beers’ unique position, in that its large and relatively liquid stocks of diamonds and funds in London and elsewhere outside South Africa provide what probably amounts to the largest ‘free’ foreign currency reserve of any South African corporation. The company does, of course, have to obey South African exchange control regulations like any other business based in that country, but the regulations were not drawn up to control the financial activities of an organisation such as De Beers. It is the only organisation trading internationally in a commodity that only it can value, and the South African government depends on that organisation for practically all its revenues from diamonds; it is apparent that the tail wags the dog. The South African government may make the foreign-exchange regulations, but it can do little more than trust De Beers to adhere to them in its fashion. From Anglo’s point of view, with an eye to the unstable political future facing its South African base, this gives the diamond business a very special appeal, and it is fiercely protected.

When the British Inland Revenue investigated the possibility of taxing the main diamond profits in London rather than in South Africa, the CSO threatened to move its operations to Switzerland. Only recently have some of the inner workings of the CSO been revealed — and, as we shall see, they show that the bulk of the diamonds are conduited through paper companies registered in Bermuda to minimise taxes.

But first let us examine the nature of the jewel. Diamonds occur the world over, but the most significant deposits are in southern Africa, the Soviet Union and Australia. The industry has created one of the wonders of the modern industrial world, the Big Hole at Kimberley. De Beers owns the Kimberley, Finsch, Premier and Namaqualand mines in South Africa, the CDM mine in Namibia and, jointly with the government, the Orapa, Letlhakane and Jwaneng mines in Botswana. Together these mines produced 23,945,041 carats in 1986. Through a management company, Management and Technical Services, it also runs the diamond mines in Angola where, despite implacable political differences, De Beers has a 1.5 per cent stake in the government diamond concern, Diamang. Synthetic industrial diamonds are manufactured at De Beers’ factories in South Africa, Ireland and Sweden. The group’s other interests, which in 1985 account for 23 per cent of the company’s profits, are in many of Anglo’s South African and international investment companies.

Diamonds consist of pure carbon that has been subjected to intense heat and pressure. They are usually found in ‘pipes’ of kimberlite ore, the roots of ancient volcanoes up to two kilometres in diameter and extending deep underground. They are also found on river-bed courses and at the mouths of rivers that have swept the diamonds, known as alluvials, down from unknown pipes to the sea. Every diamond is different and its value depends on its size, shape, colour and the clarity of the crystal. Most mined diamonds are of insufficient size or quality to be turned into jewellery and are classified as ‘industrial’. Because of their extremely hard quality they are used in tooling and electronics, or are crushed into abrasive pastes. Increasingly, ‘synthetic’ industrial grades are being manufactured by a laboratory process. Their trading is more akin to other industrial commodites and De Beers’ control in this area is less heavy-handed.

It is the remaining stones, the gems, which account for about one-sixth of world output (89 million carats in 1986 — a carat is 0.2 of a gram), that De Beers has made so valuable. A white diamond is considered to be the most valuable, though they come in many shades, including orange, pink, red, green, blue and black. Cut properly, the stones have a brilliance achieved by the high reflective and refractive qualities that can produce the separate colours of the spectrum. Every gem must be sorted and graded — a highly specialised skill in which De Beers claims to have an unparalleled superiority. When there are 2,000 categories and the difference between one and the next may be $30 a carat in value, it is little wonder that De Beer’s profit figures are essentially meaningless.

The company’s secrecy ensures that no producer can know the price that dealers are prepared to pay for their output. And the select 250 or so dealers who are invited to buy from the CSO at the five-weekly ‘sights’ in London have to accept the company evaluation. There is no bargaining, and those who complain or refuse to buy the selection of gems offered in a box may not be invited again.

At Oranjemund on the Namibian coast, De Beers’ wholly owned subsidiary, Consolidated Diamond Mines (CDM), presides over the largest civil-engineering project in the southern hemisphere. It is also the world’s richest source of gem diamonds. The diamonds, carried out to sea by the Orange River from inland pipes, have been deposited along the beach on a series of marine terraces. Abraded by their long journey, the larger stones are the only ones that remain. High-quality gems make up 95 per cent of CDM’s output. In 1985 the mine contributed 13 per cent to De Beers’ net diamond profits of 779 million rand. Security is especially intense. The town of Oranjemund, built by De Beers in the middle of the desert, exists only to serve the mine and to house some 8,000 employees. The mine itself lies in a Sperregebiet or forbidden zone – 200 miles of desert controlled exclusively by CDM and enclosed by a barbedwire fence. The beaches are patrolled by helicopter and Alsatian dogs. There is only one way in and, to prevent temptation, no vehicle or piece of equipment ever leaves. Instead it is left to rot in an enormous scrap yard. Visitors and employees are surveyed by a central computer and high-technology X-ray units as they pass through the mine’s ‘Personnel Control Centre’.

De Beers is stripping the entire beach at Oranjemund. A sand dam 45 feet high and up to 60 feet thick holding back the sea has to be replenished by a fleet of lorries working round the clock. The exposed area behind the dam extends up to 200 yards offshore and must be continuously pumped out. Three hundred earth-moving vehicles and a $4.2-million caterpillar-tracked excavator the size of a football pitch shift 60 million tons of sand and gravel every year. The result is one million carats of diamonds worth more than 200 million rand. Working alongside these machines are black migrant labourers who sweep the exposed bedrock by hand to recover remaining gems.

The irony of such great investment and hard labour is that the value of diamonds rests on a number of assiduously cultivated myths. The first is that diamonds are special. Industrial diamonds are manufactured in laboratories throughout the world. De Beers was not the first to patent the process, and it had to fight a long legal battle with the United States’ General Electric Company (GE) for the licence to produce synthetics in South Africa and market them in Europe. GE remains the world’s largest producer. In 1970, GE announced that it had perfected a process to make synthetic gem diamonds of more than one carat in unlimited quantities. It decided not to proceed. As one GE executive explains: ‘We would be destroyed by the success of our own invention. The more diamonds we made, the cheaper they would become. Then the mystique would be gone and the price would drop to next to nothing.’ The USSR, a big producer of synthetic industrials, has from time to time, been suspected of manufacturing gems. In 1983 the Sunday Times of London carried a story suggesting that the CSO was in fact purchasing such gems from the Soviet Union, a suggestion that did not go down well with De Beers. Once the brilliant illusion is shattered like so much cut glass, the whole edifice could come crashing down.

The second myth is that diamonds are scarce. Quite apart from the spectre of unlimited synthetic gems, the world markets are already glutted. De Beers’ number one problem is a situation of chronic over-supply which is stretching even its vast resources. By 1981, in the face of a worldwide recession, De Beers was stockpiling up to 60 per cent of its production, and output in South Africa was cut back. In an unprecedented move, the De Beers dividend was cut for the first time since 1944. From being bankers to the Oppenheimer empire with its huge cash reserves (1.38 billion rand in 1978, falling to 127 million 1982), the company had to borrow 200.6 million rand from Anglo. Profits, once twice as much as Anglo’s, were down to 754 million rand, compared with Anglo’s 982 million rand. Servicing and maintaining this stock requires huge resources, and Harry Oppenheimer admitted that it was the worst recession 1n the business since the 1930s, when all South African diamond production had to be suspended. Despite record jewellery sales in the two big markets of America and Japan, the stockpile in 1984 remained the same, and only began to drop in 1986 when the gem market began to pick up. The scarcity value had been tenuously preserved, but the myth has suffered.

The price of diamonds to the dealers and cutters has also been maintained — the central tenet of the cartel. But the idea that a diamond is for ever, that it maintains and increases its value, has taken a severe battering. Before the high US interest rates of the 1980s’ recession, diamonds looked a good hedge against inflation. Gem stocks outside of De Beers’ control flooded the market. In 1980, the price of the rare and beautiful 1-carat D flawless stood at $63,000. Two years later, it had collapsed to $15,000, and by 1985 the market for larger gems was still sluggish.

‘Diamonds are as precious and unique today as they were when worn by princes and kings,’ according to De Beers’ promotion. To believe this requires a certain amount of mental agility, since there are now an estimated 500 million carats of gems in the hands of the public. This accumulated stock — the ‘overhang’ — is equivalent to about fifty times annual gem production. It must at all costs be prevented from becoming supply and interfering with the delicately crafted market. Since the mark-up between wholesale and retail is about 50 per cent, a piece of diamond jewellery will have to be held for a long time before it can be resold at even the price for which it was bought, as Elizabeth Taylor found to her cost. In 1969 she and her then husband Richard Burton paid $1.1 million for the world’s fifty-sixth biggest stone, a pear-shaped pendant weighing 69.42 carats. A few days earlier, it had been sold within a minute at public auction to Cartier of New York for $1.05 million. Ten years later, Elizabeth Taylor put it up for sale with a $4 million price-tag. There were no takers. She finally sold it in 1980 for $2 million, thereby sustaining, with inflation and insurance payments, an enormous loss. Jewellers are extremely reluctant to buy secondhand pieces, and the prices they offer bear no comparison with the original selling price. One of the largest buyers is Empire Diamonds in New York City, which gives no more than 60 per cent of the wholesale price.

The diamond myths for public consumption are sustained by a $90 million worldwide advertising budget that has created one of the most potent double-sided images of modern times. One is safe and the other is sexy, dividing women into the patriarchal categories of wife and whore. The two most familiar catchphrases perfectly capture the idea. ‘Diamonds are forever’, the official De Beers slogan, was invented in 1948 by its New York advertising agency N. W. Ayer to promote the engagement ring as a symbol of enduring love. But when in the 1950s Marilyn Monroe immortalised the song ‘Diamonds are a girl’s best friend’ in Gentlemen Prefer Blondes, sparklers became the price of a mistress or a sugar-daddy’s way of paying the rental. The Ayer campaign was initiated by Harry Oppenheimer in 1938 to restore public interest in diamonds after the Depression. “There was no direct sale to be made,’ one Ayer executive said. “There was no brand name to be impressed on the public mind. There was simply an idea — the eternal, emotional value surrounding the diamond.”

Even the British Royal Family were drawn into the act as part of the Ayer plan. On a royal visit to South Africa in 1947, 3-year-old Mary Oppenheimer presented a 6-carat brilliant to Princess Elizabeth and a 4!/-carat gem to Princess Margaret. Three days later, on Princess Elizabeth’s twenty-first birthday, General Smuts presented her with eighty-seven flawless diamonds which had been matched for a necklace.

The campaign has had a phenomenal success, first in America and then around the world. For the post-war generation in Europe and America, a diamond engagement ring was considered to be a necessity. During the 1960s the campaign received an extra fillip with the invention of the ‘eternity ring’ for married women. This was a wholly artificial idea, designed to soak up the huge number of small Soviet diamonds that De Beers had agreed to buy. Instead of emphasising the size of a diamond, the campaign switched to promoting cut, colour and clarity. In 1968, 5 per cent of Japanese couples bought a diamond ring; now 70 per cent have succumbed to the romance. Jewellery sales in the United States in 1984 reached a record level, while advertising reached new heights of fantasy: “The diamond has been the traditional symbol of love since the Middle Ages. The very word “diamond” comes from the Greek “adamas” meaning the eternity of love.’ A more recent campaign has created another need: the anniversary ring, ‘a band of diamonds that says you’d marry her all over again’.

Sustaining the myths has been easier than maintaining the cartel, which has been periodically threatened by independent producers, Israeli cutters, African governments and smugglers, and most persistently by the United States Justice Department. Over four decades, the anti-trust division of this department launched a series of investigations and indictments against the De Beers cartel, effectively keeping Harry Oppenheimer out of the country for several years.

The group’s uneasy relations with the United States government began at the start of the Second World War, when Washington was anxious to build up a strategic stockpile of industrial stones. Documents released under the US Freedom of Information Act, some passages heavily censored, reveal an extraordinary tale of pressures and threats and political manoeuvring on both sides. De Beers survived it all.

A Justice Department memo sets the scene:

On July 15, 1940, Sir Ernest Oppenheimer met in Washington with representatives of the British Embassy, the National Defense Council… with a view to assisting the United States government in its rearmament program.’ Sir Ernest offered a deal. He would sell the government $3 millions’ worth of selected industrial diamonds if the anti-trust division allowed him to open a ‘New York Corporation, [the] diamond Syndicate’. Although tempted, Justice officials decided that the proposal was plainly illegal. Instead, the American government decided to put pressure on the British, then in receipt of US war materials. In 1941, after the supplies were formalised under the Lend-Lease Act, the department unofficially told the British government that there would be no more warplanes without the diamonds. A Justice official, writing to assistant attorneygeneral Thurmond Arnold, complained that the stockpile was only 14 per cent completed: “The diamond syndicate will not sell us a stockpile because it will not tolerate large stocks outside its monopoly control.’ He stressed the importance of the matter in adding that ‘Hitler’s war machine would have collapsed had he not had diamonds from a stockpile started as soon as he came to power’. Pressure on Britain, however, was not proving very successful: “The diamond section of the government and the syndicate seem to be the same.’

By 1944, an agreement was worked out whereby De Beers would supply diamonds from its own stockpile in Canada. Even then the Americans were unhappy. Assistant attorney-general Wendell Berge, writing in January of that year, remarked that the cartel was hoarding the better stones and driving prices up. What was more, ‘it is now moving to secure control of South American [diamond deposits] to forestall increased production there’. Berge recommended legal action ‘to split up the combine and to prevent the carrying out of restrictive covenants’. The action was filed in New York in 1945, but it fell for lack of jurisdiction over a foreign company, although De Beers formally agreed to refrain from operating in the USA.

The Justice Department returned to the offensive in 1957 (the year in which Sir Ernest died and Harry took over), when the Federal Bureau of Investigation’s director J. Edgar Hoover was asked to investigate anti-trust violations of the diamond grinding-wheel and tool industry. The FBI looked at three companies that bought plentiful supplies of diamonds from De Beers during a time of a worldwide shortage. It took three years before the FBI decided that the US companies were victims rather than conspirators: “The facts are that the syndicate has an absolute monopoly. … [The US companies] are offered diamonds on a take-it-or-leave-it basis.’

Harry Oppenheimer, meanwhile, had not been idle. An intriguing 1974 FBI memo refers to a Maurice Templesman, one of Jacqueline Kennedy’s escorts after the assassination of her husband. It said:

Templesman was the man who arranged the meeting for Harry Oppenheimer with John Kennedy when Kennedy was President-elect [between November 1959 and January 1960]. The meeting was held at the Carlisle Hotel. [Unnamed informant] had informed us several months ago that the De Beers organization is a large contributor to both political parties and that should this investigation get to a stage where cases were actually filed that we would probably receive much political pressure.

These new investigations had begun in 1972, when the anti-trust division began separately to examine the diamond abrasive and diamond drill business. A grand jury was empanelled and in late 1974 an indictment was filed against De Beers and two US abrasive companies for conspiracy to fix prices and allocate customers. The two companies had combined diamond grit sales of $14 million out of total De Beers sales worldwide of $47 million. In April 1975, the companies pleaded no contest and were fined $50,000. De Beers, however, failed to appear or plead, and Justice officials recommended seeking a contempt judgment with a running fine. In the event, it proved unnecessary, for the action was transferred from De Beers to its Irish marketing subsidiary, which agreed not to enter into arrangements that amounted to a restraint of trade. The attack on the diamond drill monopoly never reached the courts, although it had a major impact on Anglo’s future relations with the USA.

The two companies concerned were Boart and Hard Metals Products, wholly owned by AAC, and its 50 per cent owned subsidiary, Christensen Diamond Products. In 1973, both companies agreed to sever their joint stock interests in order to comply with anti-trust legislation. Their decision was prompted by a Justice Department subpoena to yet another Anglo company, the Engelhard Corporation, which made diamond abrasive wheels and was already under investigation as the leading United States user of Anglo’s huge platinum exports. Unlike De Beers, AAC had felt it safe at least to have an office in New York. But news of the subpoena, according to a Justice Department memo, forced Anglo to close this office down and hurriedly move to Toronto. Engelhard was thrown into disarray. A 1974 Justice Department memo records:

At the last meeting of Engelhard Minerals & Chemical, Blake, chairman of Engelhard, told the board of directors that the Engelhard directors who were also members of Anglo American Corporation were not at the meeting because of our investigations. The general counsel for Engelhard had a fit when Blake said this and spent the rest of the meeting explaining that Blake didn’t really mean what he said. In any case, the next meeting of the board of directors is going to be held in London so that the Anglo American directors who could not attend the last meeting will be able to attend and also so that Oppenheimer can attend.

Unable to mount a case against Engelhard, the Justice Department finally admitted defeat and in October 1976, the year of Soweto, Oppenheimer visited the United States. Before that, he admitted, ‘I was just a little afraid they might throw me into a dungeon.’ There was no longer any fear of that. In November 1977 he was back addressing the Foreign Policy Association in New York. The South African Department of Information, then at the height of its covert and open propaganda war, took out a large advertisement in the New York Times to publicise his speech. It was headed: ‘One man, one vote in South Africa. It’s not the answer — Harry Oppenheimer.’

In other parts of the world, attempts to secure the De Beers monopoly were pursued with rather more ruthlessness which, at one time, did not stop short of murder and hired mercenaries. In the early 1950s, Ernest Oppenheimer believed that up to 20 per cent of diamonds reaching the cutting centres were smuggled from Central and West Africa. One major route was from Sierra Leone, where the stones were easily found on river banks, to the Lebanese traders in Monrovia, the capital of Liberia. Tens of thousands of peasants were involved in the diggings. To stem the flow, Ernest Oppenheimer hired Sir Percy Sillitoe, the retired head of Britain’s counter-espionage agency, MIS, to lead his newly formed International Diamond Security Organisation.® In Sierra Leone, Sillitoe hired a group of mercenaries to ambush the diamond caravans. According to one account: “Many of the ambushes were bloody affairs. A caravan of a dozen or so tribesmen would emerge from the jungle and head for the bridge across the Mao River into Liberia. Suddenly mines and flares would be detonated around them. Then the mercenaries would open fire with hunting rifles.’? Within three years the traffic had ceased and De Beers’ agents were set up in small corrugated-iron huts to buy the stones direct from the diggers.

In the diamond boom of the late 1970s, De Beers was able to crack the whip with equal effectiveness. The company found that some of its clients were reselling their boxes to cutters in Tel Aviv for double the price. The Israeli stockpile, financed by huge bank loans, began to match that of the CSO. There was the possibility of either an Israeli panic and a flooded market or even a rival selling organisation. Forty clients who had been selling their stocks were denied further consignments. The CSO insisted that all clients must cut and polish their stones. The buyers got the message.

In June 1981, frustrated by De Beers’ low prices and its 20 per cent sales and sorting commission, the government of Zaire, the world’s largest producer of industrial diamonds, announced that it was pulling out of the cartel and refused to renegotiate its contract with the CSO. Middlemen, it said, would be done away with and the diamonds would go straight to the market. This was a challenge that De Beers could not ignore. The profits from Zaire’s modest ‘boart’ grade industrials were not so important; it was the possibility of other, more damaging defections that was worrying. At first Zaire’s prospects looked good. Three dealers in London and Antwerp agreed to buy the entire production for five years at prices higher than those offered by De Beers. The dealers planned to set up a cutting business in Kinshasa, and the Zaire government hoped to attract foreign investment to modernise its fifty-year-old and largest mine at Miba.

Two years later, a humbled President Mobutu was signing a two-year exclusive contract with the CSO. It did not pay to buck the monopoly. De Beers’ strategy had been a simple piece of muscle-flexing, together with clever exploitation of Zaire’s endemic smuggling. De Beers flooded the market with industrials, dramatically reducing Zaire’s exports, and placed several dealers across the border in Brazzaville in the Congo to buy the 50 per cent of smuggled small gem production at higher prices. Harry Oppenheimer was indiscreetly blunt about putting Zaire on the rack: ‘I can’t pretend we are pleased that anybody breaks away. It’s a bad example. I think you will find that over the period ahead people who looked at the thing carefully may come to the conclusion that the Zaire experience should be looked upon as a warning rather than as an example.’!°

Zaire’s return to the fold was also influenced by another serious threat to the De Beers monopoly, the opening of the world’s largest and richest diamond mine at Argyle in Western Australia in 1983. In its first year Argyle yielded 6.2 million carats and after 1986 was expected to produce between 25-30 million carats a year. (In that first full year of production the expectations were more than met with an output of 29.2 million, three times South Africa’s output.)
The quality of the stones, however, was poor, with industrials making up 60 per cent. But its ore grade of seven carats per tonne was five times the world average. De Beers had made its pitch long before the mine came onstream, but the political climate was distinctly unfavourable. Both the federal government and the Australian Labour Party, in opposition, resisted De Beers’ approaches. In 1981, the Australian Prime Minister, Malcolm Fraser, said he could see no advantages in ‘arrangements in which Australian diamond discoveries only serve to strengthen a South African monopoly’.’! There was talk of Australia going it alone, and the Indian government’s Metals and Minerals Trading Corporation offered to outbid the CSO for 20 million carats each year for its small gem-cutting industry.

De Beers meanwhile launched a high-profile publicity campaign that included a three-week, all-expenses-paid trip to South Africa for Australian journalists and a resident public-relations officer in Melbourne. Whatever the impact of this, by February 1982 the Deputy Prime Minister Doug Anthony was proclaiming that the CSO was the only organisation capable of marketing Argyle’s large deposits. Even the Labour Party, then in government, seemed to agree. Their treasurer, who had warned previously that Australia’s diamonds were to be ‘raped by the South Africans’, conceded: ‘Given the central role of the CSO in marketing . . . there is no real commercial alternative.’ On 8 February, it was announced that a basis for marketing arrangements with De Beers had been agreed. The CSO was to take 75 per cent of Argyle’s industrial output and 95 per cent of its gems.

The De Beers Australian coup can be explained not simply in terms of the group’s overwhelming power and expertise in the market. Not all the Argyle owners were happy with the deal. The mine is controlled by three companies through Ashton Joint Venture (AJV). Ashton Mining has 38.2 per cent, CRA owns 56.8 per cent and 5 per cent is held by Northern Mining. In 1980, AJV had commissioned a marketing study, which recommended that negotiations be immediately opened with the CSO. Only the minority company, Northern Mining, disagreed. It leaked an internal report which expressed concern that ‘it was clear at the time that the marketing group more or less confined its enquiries to the CSO’. Only on Northern Mining’s insistence were other buyers approached.

An examination of the share interest helps to explain the disagreement. Northern Mining is an Australian company owned by the Western Australian government. CRA is a subsidiary of the London-based Rio Tinto Zinc (RTZ), in which Anglo had a 4 per cent stake through Charter, and Anglo’s Sidney Spiro, as director of De Beers, was on the board of RTZ. Ashton Mining’s parent company is Malaysian Mining, in which Charter had a substantial minority interest. With this web of stock ownership and boardroom ties, De Beers was not short on influence or friends. As the diamond market picked up in 1986 and 1987, Argyle’s gems were given the full De Beers marketing treatment. The pinks have become the mine’s hallmarks and the yellows and browns are being sold as ‘champagne’ and ‘cognac’. Even on home ground, attempts to investigate the De Beers organisation have come up against a patrician wall of silence. In 1982, a commission of inquiry was set up in Namibia under Judge Pieter Thirion of the Natal Supreme Court, to investigate allegations of corruption and official incompetence in the Namibian administration. To De Beers’ dismay, the inquiry turned in 1984 to examine the state controls exercised over the mining industry, and in particular the methods by which tax from mining companies was assessed. Thirion approached the subject with high principles. ‘A country’s mineral wealth,’ he declared, ‘is the heritage of the people and the investor or exploiter of the minerals is entitled to no more than a reasonable return on his investment.’’* Unlike South Africa, mineral rights in Namibia (Thirion throughout refers to the country as South West Africa — SWA) are vested in the state, and Thirion spelt out the state’s duty to the people of the country to see to it that those rights to the minerals are dealt with in the best interests of the people’.’* He went further: ‘The state also has an interest in the benefication [sic] of the minerals before export so as to create job opportunities. At present by far the largest proportion of the minerals mined in SWA is exported without any benefication.’’* Allegations were made that De Beers had over-mined the richer and easier deposits in the boom 1970s, shortening their life by fifteen years, and had indulged in transfer pricing to avoid tax payments. If this was proven, the inquiry threatened to drive a coach and horses through Anglo’s proudest claim, enunciated by Ernest Oppenheimer and _ constantly repeated since: the aim of the company, he said, was ‘to earn profits for its shareholders, but to do so in such a way as to make a real and lasting contribution to the welfare of the people of the countries in which it operates’. Or, to quote Harry Oppenheimer in successive De Beers annual reports, the CSO monopoly ‘protects not only the shareholders of diamond companies, but also the miners they employ and the communities that are dependent on their operations’.

Diamonds are Namibia’s second largest export-earner after uranium, so the impact on the economy of tax avoidance would be considerable. De Beers denied the allegations, and agreed to let its senior management give evidence before the commission but only if 1t was heard in private. Thirion rejected this. He described a document presented to the inquiry by Doug Hoffe, CDM?’s chief executive, as ‘an insult to even the lowliest form of intelligence’. As the evidence mounted over the following months, De Beers was reduced to sniping from the sidelines through press releases claiming their aggrieved innocence. Thirion’s eight-volume report, published in March 1986, told a story of plunder. De Beers, he concluded, had been operating uninhibited by the law for over twenty years. He found the allegations of over-mining and tax evasion proven and he accused the company of deliberately doctoring reports to state officials who were, in any event, incompetent. In one of many caustic remarks he said:

The protestations of multi-national companies that their activities result in bringing prosperity to the host country reminds one of the cynical observations of Jeremy Bentham. ‘I am a selfish man, as selfish as any man can be. But in me somehow or other, so it happens, selfishness has taken the form of benevolence.’ The overriding object of multi-national companies is to make a profit and all other considerations are subordinate to this one.!°

Thirion based his inquiries on the 1923 Halbschied Agreement, which laid down conditions for mining in clause 3: “The CDM when working any area pegged under this agreement shall conduct operations as thoroughly and economically as it does its other mining fields and shall carry on mining satisfactorily to the Administration and not with a view to exhausting the superficial and more valuable deposits to the detriment of the low-grade deposits.’ In theory, CDM’s operations were overseen by the Diamond Board of South West Africa, which advises the South African-appointed Administrator General. However, he discovered that the board never had physical possession of the diamonds. All inspections and supervisions were done on its behalf by CDM employees, who parcelled up the diamonds and dispatched them to the Diamond Producers’
Association in Kimberley, where they were valued by De Beers’ officials. Four of the seven members of the Association work for De Beers. More extraordinarily, the man who calculated the tax owing to Namibia, Stanley Jackson, the secretary of the Diamond Board, was also the company secretary of CDM. In castigating the Diamond Board and the Mines Inspectorate, Thirion said:

Despite the trappings and facade of state control, all aspects of the mining and marketing of South West Africa diamonds remains firmly in De Beers’ hands. . . . This naivety and inability to conceive that a multinational corporation could stoop to any impropriety pervades the approach of the State representatives on the Board and is not conducive to the proper discharge of the watchdog functions which they have to perform. The pretence of the multinational corporation that it is incapable of abusing its power, convinces the unwary that there is no need for control!

The commission was presented with a mass of documents by Gordon Brown, a former CDM senior production planner, who worked for the company from 1968 to 1983. They showed that over-mining of the richer grades began in 1963 and reached a peak in the late 1970s. He alleged that a decision was taken in about 1970 to operate a scorchedearth policy on the mine, to get as much out of the ground as possible before the country came to independence.’ (Only in late 1984 did the South West Africa People’s Organisation (SWAPO), the internationally recognised representative of the Namibian people, intimate that CDM might be allowed to stay if it agreed on favourable terms with the state.) An independent Namibia, when it comes, may not have many diamonds left, however. Brown calculated that the life of the mine had been reduced by about fifteen years, with no future beyond 1992. A ‘life of mine’ review by the production manager in 1981 warned: ‘Unless we have a conscious change in strategy effective some time in the future, we will power the mine into the ground and we will be unable to conduct reclamation and clean-up operations which could extend the life of the mine by three or four years. What is required is a stable production platform from which costs, both direct and indirect, and infrastructure can be critically managed.’!® From the documents it appeared to Thirion that CDM was deliberately misleading the state about over-mining. A report by the assistant general manager in 1968 spoke of the ‘excessive’ depletion of large stones due to over-mining. In a company report in 1982 the same sentence is used without the word excessive. !?

CDM’s operating figures supported the thesis which Thirion accepted. At 1986 prices, the company’s profits rose from 262 million rand in the 1960s to 434 million in the 1970s when the demand for gems was booming. The tonnage of ore treated, round the clock for six days a week, rose from 8.5 million tons in 1976 to 16.9 million in 1980. Carat production, almost all in gem stones, jumped from 1.2 million to 2.1 million in 1977. The contribution to De Beers’ coffers was huge. Although CDM’s output represented only 14 per cent of carat production, it formed 50 per cent of declared profits. From 1980, with the diamond slump and reduced production, CDM experienced a decline in declared average stone size and lower ore grades.

Thirion was also critical of the network of internal CDM companies designed to reduce the taxable income. CDM leased the mine — 3 million hectares of the Sperregebeit — under the Imperial Mining Ordinance of 1905 drawn up for the original German mining companies. The rent was 800 rand a year and it had never changed. De Beers, however, had created a number of subsidiaries that held its mining and prospecting rights, and the fees paid to them were set against tax. One subsidiary, the Marine Diamond Corporation (MDC), leased to CDM several prospecting and mining areas along the Atlantic coast. The agreement stipulated that CDM should pay a rental of 500,000 rand or the equivalent of the annual net profit, whichever was the greater. But the administration’s receiver of revenue was unable to say what CDM’s income was from the areas. Since diamond mines attracted income tax of 55 per cent and MDC only paid the ordinary company tax of 44 per cent, Thirion concluded that the deal was made to save De Beers paying tax. A further tax saving was made because the actual prospecting was carried out by another group company, De Beers Marine, which also was taxed at the ordinary rate. Correspondence from De Beers to the administration merely noted that ‘it is a longstanding principle of taxation in most mineral producing countries that prospecting expenditure is allowed against mining income’. Thirion pointed out that some countries were limiting those concessions because of widespread company abuse, and concluded: ‘It seems obvious that the real motive behind the scheme is the self-interest of De Beers. . . . The drive to find new diamond deposits in SWA is inspired, not so much by a desire to serve the interest of SWA, as by the necessity to maintain the production of its affiliated companies at a high level so as to enable it to keep its monopolistic position as a “swing producer’’.’*°

The commission heard more disturbing evidence from one of its investigators about the way in which the diamonds are marketed. Martin Grote calculated that the export price of CDM stones was 215 rand a carat lower than the 1981 American import price. It emerged that diamonds were conduited through another daisy chain of CSO subsidiaries, which each took a cut of the profits. Two of them are registered in Bermuda. The surprise was the scale of the Bermuda operations, which had been kept secret for twenty years. The commission learned that in the first six months of 1983 diamonds worth US$717 million were channelled through the tax-haven island. At the end of the day, CDM received only 86 per cent of the selling price.

Another practice of mining companies, including CDM, was the export of mineral ‘samples’. The Mining Commissioner who issued special permits for these consignments was never told of their content or value. Sometimes the quantities were huge: one small company exported over 420,000 tonnes of samples between 1978 and 1983. Large quantities of rare mineral samples were exported from the uniquely rich and diverse Tsumeb mine, part of the Consgold-Newmont group. Many of these samples ended up in the Smithsonian Institution in Washington, DC, which boasted 1,147 Tsumeb specimens. CDM and another De Beers company, Tidal Diamonds, both applied for permits for the removal of samples, without indicating the mass or what was in them.

De Beers’ response to the report infuriated Thirion. The company suggested that it could satisfy any ‘impartial’ inquiry that the allegations against it were false. It wrongly claimed (and this was later written into the De Beers annual report) that the commission’s findings had been made without CDM ‘having given evidence or been called upon to do so’. Not surprisingly, given the lack of state control, it was able to argue that the administration in Namibia had never suggested that CDM was not mining in a satisfactory manner. At one point its rebuttal admitted that the rate of production rose to meet market demand. But it rested its case on the assertion that ‘by the introduction of innovative and cost-effective techniques CDM has rendered hitherto unpayable ground payable, and thus progressively extended the life of the mine’.?) The available and persuasive evidence may point in quite the opposite direction, but who in South Africa is going to challenge the mighty De Beers?

An interesting side light was thrown on the distribution of the Thirion report in Johannesburg. Several months after its publication, it was nowhere to be found. The Johannesburg public library had no trace of it. It was not to be had at Anglo American’s sumptuous library in Marshall Street, or at Harry Oppenheimer’s private library at Brenthurst. The Standard Bank, which maintains a prestigious business library, had tried unsuccessfully to acquire a copy for its many enquirers. Academics interested in the mining industry at Witwatersrand University could not lay their hands on it. Finally, De Beers has a library in Johannesburg. The librarian said it was not in stock: ‘It’s not very important, you know. It’s just a very legal document.’

The Nambian administration finally responded to the Thirion report in November 1987 with a white paper which completely exonerated CDM of both over-mining and transfer pricing. It said that the company had always tried to improve its techniques to extract more and more lowergrade ore at a profit. And it suggested that Martin Grote, lacking experience in international metal marketing, had adopted a simplistic approach to the question of transfer pricing. The company agreed, however, to a government request for the diamonds to be sorted in Windhoek with a government-appointed valuator to take over the function of the Diamond Producers Association. Referring to allegations against other mining companies, the paper said: ‘it appears from these replies (by companies accused of transfer pricing) as if the Thirion Commission investigators did not make adequate allowance for the complexities of international metal markets.’ The implication was that the companies know best. Thirion was reportedly unimpressed.

In July 1986, Julian Ogilvie Thompson gave the address at the World Diamond Congress in Tel Aviv with a cheerful report about how the diamond market was beginning to come out of the recession, thanks to the steadfast work of the CSO. The Israeli Prime Minister was guest of honour. Another guest, still keenly overseeing the business, was the director of De Beers, Harry F. Oppenheimer.