Flawless: Inside the Largest Diamond Heist in History (40 page)

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the hardest substance found in nature:
“In nature” is the key phrase here. Aggregated diamond nanorods, which are man-made, are harder. As this book was going to press, research came out that two natural substances, wurtzite BN and lonsdaleit, appear to be harder than diamonds as well. However, these substances are just simulations, as both are too rare in nature for this research to be tested at this time. Zicheng Pan et al., “Harder than Diamond: Superior Indentation Strength of Wurtzite BN and Lonsdaleite,”
Physical Review Letters
(February 6, 2009), 102(5).

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almost a billion . . . 4.25 billion years:
“About Diamonds—The De Beers Group,” available online at
http://www.debeersgroup.com/en/About-diamonds/
(accessed October 2, 2009).

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Other carbon materials aren’t nearly as strong:
In 1812, Friedrich Mohs came up with a scale of relative mineral hardness, so any minerals could be compared. If one mineral can scratch another, then it is higher on the scale. While one form of carbon, graphite, scores near the bottom of this scale, another form, diamond, scores a ten for most hard. Jessica Elzea Kogel,
Industrial Minerals & Rocks: Commodities, Markets, and Uses, 7th Edition,
(Littleton, Colorado: Society for Mining, Metallurgy, and Exploration, 2006), 508, 1175.

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be broken by another diamond:
Diamonds can still easily shatter or burn. They are not indestructible, just impossible to scratch or polish with any natural material other than another diamond. It’s important to remember that hardness is not the same as toughness; this is why diamond polishers can cleave a diamond but if they drop one, it could break into pieces.

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For thousands of years . . . source of diamonds:
Borneo also had a small number of diamonds, but there is no evidence that any of these stones ever reached Europe. George E. Harlow, ed., “Following the History of Diamonds,”
The Nature of Diamonds
(Cambridge: Cambridge University Press, 1997), 139.

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geological debris of kimberlite:
The rest of the chapter talks primarily in terms of kimberlite pipes, as the vast majority of gem-quality diamonds originate from kimberlite. Lamproite pipes containing diamonds deemed worth mining commercially are found only at the Argyle Mine in Western Australia. The Crater of Diamonds State Park in Arkansas also has a lamproite source.

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not all kimberlite contains diamonds:
Around one out of two hundred kimberlite pipes contain gem-quality diamonds. Scientists have learned ways to determine which kimberlite pipes likely contain diamonds without having to mine the pipes, by focusing on certain indicator minerals that are known to accompany diamondiferous kimberlite pipes.
See, e.g.,
Matthew Hart,
Diamond: The History of a Cold-Blooded Love Affair
(New York: Plume, 2002).

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as far down as men can dig:
Diamonds contained beneath the surface in their original pipes are known as primary sources. The elements eroded away the above-surface parts of the ancient volcano so that what once was a mighty volcano could now be a flat field with its diamond pipes covered by surface dirt.

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80 percent of all diamonds pulled out of the ground:
Microsoft Encarta Online Encyclopedia
, s.v. “Diamond, VI: Industrial Uses,” available online at
http://encarta.msn.com/encyclopedia_761557986_2/Diamond.html
(accessed on July 29, 2009).

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a diamond-mining boom there:
In 1866, a fifteen-year-old Boer shepherd found a pretty yellow rock along the banks of the Orange River, and thought it would make a nice gift for his younger sister. The little girl didn’t own it long; while she was playing with it in the street, it caught the eye of a passerby who thought it might be a diamond. The children’s mother gave it to him and learned only later that it was a spectacular 21.25-carat yellow diamond; it was appropriately called the Eureka.

The stone, however, was dismissed as an oddity. Some even proposed that it had been carried from far away by ostriches. No one suspected that the South African soil was practically exploding with diamonds. A second find of nearly 9 carats generated some interest and prompted the discovery of other, smaller stones.

Three years later, they found a whopper, an 83.5-carat diamond the size of a lump of coal that was dubbed the Star of South Africa. That discovery opened the floodgates, as prospectors from around the world stampeded to stake their claims along the Orange and Vaal river valleys.

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the foundation of De Beers Mining Company:
Rhodes cofounded this with the lesser-known Charles Rudd. The name “De Beers” came from the farmers Johannes Nicholaas De Beer and Diederik Arnoldus De Beer, who used to own the land that was ground zero for the diamond rush. They sold their property early on for £6,300. Although they no longer had ownership of the land, one of the two main mines dug out of the property was named after them. The De Beers Company in turn took its name from this mine—these two Afrikaners had nothing to with the business itself. In 1888, De Beers Consolidated Mines Limited was formed when Rhodes and his main competitor, Barney Barnato, merged their interests.
See, e.g.
Martin Meredith, Diamonds,
Gold, and War: The British, the Boers, and the Making of South Africa
, (New York: PublicAffairs, 2008), and Stefan Kanfer,
The Last Empire: De Beers, Diamonds, and the World
, (New York: Farrar, Straus, and Giroux, 1995).

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almost three metric tons of diamonds:
This open-pit mine, known as “the Big Hole,” had 2,722 kilograms of diamonds recovered by miners using only picks and shovels, starting in 1871 with individual claims and ending in 1914 under the united control of De Beers. Twenty two and a half million metric tons of dirt and rocks were excavated in the process. “Welcome to the Big Hole, Kimberly,” available online at
http://www.thebighole.co.za/VisitorsCentre.htm
(accessed October 2, 2009).

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from $14 to $3.75 by 1885:
Interestingly, as noted in the same article, “this fall in price is not only due to overproduction. It is estimated that 10 to 15 percent of the fall is due to the sale of stolen diamonds.” “Diamonds in South Africa,”
Manufacturer and Builder: A Practical Journal of Industrial Progress
no. 9 (September 1, 1885), 17:204.

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increase the price of diamonds by 50 percent:
Hart,
Diamond: The History of a Cold-Blooded Love Affair
, 46.

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most successful monopolies in the history of human commerce:
The history of De Beers can be broken down into four main periods. The first one was a true monopoly when the company controlled all of South Africa’s production, and thus the vast majority of world diamond production. In its second stage it was a monopsony (single buyer) combined with a cartel structure. De Beers no longer controlled all of the world’s major diamond mines; instead it set up exclusive deals with those who did. Such outsiders sold their rough to the Central Selling Office, which in turn carefully controlled the supply of stones to the cartel of major diamond polishers and traders who made up its Sightholders. The third stage involved a shift from deals with private companies to the equivalent of treaties with nations. For example, when the Soviet Union discovered diamonds in Eastern Siberia, the CSO had an agreement with them in place within a year of the start of their mining operations. The fourth stage began with the hiring of outside management consultants for the first time in the company’s history. De Beers retained Bain & Co. to help them adjust to the new realities the company faced coming into the twenty-first century. De Beers is still a major player in the world diamond market and is making adjustments to its business practices—away from a “custodial” role to one of “preferred supplier.”

As De Beers increasingly lost control of the world’s diamond supply, it came to realize that its old ways of doing business no longer worked. Large quantities of diamonds now come out of areas beyond their direct control such as Australia, Canada, Siberia, and countries in Africa no longer beholden to them. Its own mines now produce only 40 percent of the world’s rough diamonds by value, although through distribution deals the DTC “currently sorts and values about two-thirds of the world’s annual supply of rough diamonds by value” according to their official Web site.

Even without outright agreements, other diamond producers may understand that their interests now dovetail with De Beers—to maintain a stable, high price for diamonds. As such, they would be foolish to flood the markets and watch their own product’s value fall. It helps that only five diamond-mining companies control between 85 and 90 percent of the market, making this an oligopoly. These are Alrosa, BHP Billiton, De Beers, the Lev Leviev Group, and the Rio Tinto Group. Even with all the changes in the industry, the DTC still managed to raise prices twice in 2005—altogether increasing them 9.5 percent over the year before. “DTC Reports Sales of $6.54 Billion in 2005,”
Israel Diamonds Magazine
(Ramat Gan, Israel), April 1, 2006.

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“I am [the] chairman . . . in the business”:
De Beers Chairman Nicky Oppenheimer’s Speech at the Harvard Business School Global Alumni Conference, Capetown, South Africa, March 1999. De Beers later issued a disclaimer to accompany copies of this speech stating that it was “an off-the-record speech prepared for a closed audience of HBS alumni. Speaking as a private citizen, Mr. Oppenheimer made his opening remarks intentionally dramatic and provocative, as suitable for a keynote address. This speech should in no way be construed as an official statement of the De Beers Group.” Debora L. Spar, “Forever: De Beers and U.S. Antitrust Law,”
Managing International Trade and Investment
, (London: Imperial College Press, 2003), 220.

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market-driven supply-and-demand model:
After World War II, the U.S. Justice Department took a strong interest in De Beers’s activities and their potential violations of our antitrust laws. The Justice Department filed criminal indictments against De Beers in 1945, 1957, 1974, and 1994 for price-fixing and anti-competitive practices.

As a result, De Beers’s executives avoided travel to the United States and did their business there indirectly. The company was careful to avoid having assets in the United States for the government to go after. These cases did not go anywhere until De Beers decided to change its business strategy. The issue was not whether the company was in violation of our antitrust laws—it clearly was—the problem was whether they were subject to the jurisdiction of the courts here. This came down to the question of whether De Beers did business in the United States as the legal system then understood it. Because of the company’s careful dealings, it did not.

When De Beers came to understand that its custodial role, as it euphemistically referred to its control of the diamond market, had come to an end and it needed to change its business tactics, the growing strength of European antitrust enforcement may have had something to do with this. While De Beers was beyond the reach of U.S. law enforcement, it was vulnerable to the EC Competition Commissioner, Mario Monti, with his increasing aggressive enforcement of competition law. Reportedly, when the De Beers managing director entered the commissioner’s office, Mr. Monti told him that “it was very wise of you to come and see me; it would have been a matter of a few months and we would have come to you!” Chaim Even-Zohar, “An Industry Facing Uncertainties,”
IDEX Magazine
, no. 195, July 1, 2006.

In June 2004, the company pled guilty in the United States to the criminal price-fixing of industrial diamonds and paid a $10 million fine. In December of 2006, De Beers settled a major class-action lawsuit that had been filed against it on behalf of U.S. consumers, jewelry makers, and retailers who bought diamonds from the start of 1994 to the settlement date. The complaint alleged that the company had artificially boosted the price of diamonds through false advertising and restraint of trade though control of the supply of rough diamonds. The settlement did not come cheap, though: the price tag added up to $250 million—roughly twice the low-ball estimate of what the School of Turin had stolen from Antwerp three years before. De Beers also agreed to follow U.S. federal and state antitrust laws.