The Gem Trail: Diamonds - From Angolan mine to third finger left hand

Wars are fought over them and fortunes made trading and smuggling them. Alex Duval Smith traces an extraordinary journey

From the outside, nothing much glistens at 17 Charterhouse Street, one of the more unprepossessing office entrances in London EC1. The brass door handles on the headquarters of De Beers are polished only by wear. The building oozes the kind of understatement known best to the truly rich. In here, each year, more than $3bn worth of uncut diamonds change hands.

Some of the more modest stones eventually end up around the corner, in the shop windows of the mainly Jewish Hatton Garden, one of Europe's oldest jewellery streets. Traded, cut, polished and certified, they are set in rings, brooches and pendants by craftsmen toiling in poky workshops. Prices range from two digits to tens of thousands of pounds.

A diamond is forever. Karen Fulton, 34, and Chris Packer, 28, like the rest of us, have heard the slogan. They are getting engaged and have come to buy a ring in Hatton Garden. At number 11 the brightly lit display of Arlington & Co pours a dazzling light on to the dark winter pavement. Karen is taken with a ring of three brilliant-cut diamonds set in yellow gold. Karen and Chris, who are lawyers, discuss with the manager, Stephen Berman, the possibility of having the stones set in platinum instead. "We came to Hatton Garden after looking at styles in Bond Street," says Karen, whose wedding is in September. "What we have seen in Hatton Garden is very similar to what is on offer in Bond Street but here you get more diamond for your money and you can negotiate the price."

Whatever the couple end up spending on the ring, it will be a sum figuring only in the dreams of Godfrey, in Caripande, eastern Angola, on the border with Zambia. He has arrived here after walking 350km through minefields, along bombed roads and across rivers whose bridges have been blown up during 25 years of war. The journey has taken him one month.

At a meeting in a mud-brick hut, attended by his English-speaking "agent" - a barman from a Zambian village - and a western missionary who has a diamond-testing machine, Godfrey produces a crumpled piece of newspaper from his jeans pocket. It contains six small, rough, yellowish diamonds. Godfrey is known as a garimpeiro - a Brazilian term for an illegal miner that is also used in Portuguese-speaking Angola. In fact, this father of two is merely a mule. The stones he is carrying have been passed to him by miners in Lunda Norte, northern Angola. The miners stole them from their workplace. "They are worth about 1.6 million kwatcha [pounds 600]," he says, but this is a vast overestimate.

"I can also sell you emeralds, gold-dust and six tusks of ivory," he adds, "I will sell what I can and return to my friends with the proceeds. I know three grades of diamonds - A, B and C - and the missionary can verify them for me. Once that is done, the agent will call one of his buyers who will travel here from Lusaka [the Zambian capital] or from Namibia. Many of the buyers are South African," explains Godfrey.

In the event Godfrey's stones are not of high quality. Despite the talk of millions of kwatcha, they are unlikely to fetch more than $150, enough to feed his family and friends for a few months. The diamonds come from mines controlled by Unita (the National Union for the Total Independence of Angola), a pseudo-Maoist organisation formerly supported by apartheid South Africa. Unita is at war with Angola's government, which is controlled by the MPLA (the Movement for the Liberation of Angola), which used to be backed by the Soviet Union. At the heart of the war, strategically, are the diamond mines in the Unita-controlled east and the oil reserves in the government-secured west of this vast territory. As a result of an abortive peace deal in 1997, Unita's control of some mines was recognised, allowing it to set up joint operations with De Beers and other companies. Unita has used this diamond money to re-arm.

It is not only Angola where diamonds are associated with conflict. The current war in Sierra Leone also centres on control of diamond areas. This west African country, around the size of Scotland, is a prospector's dream. Like the diamonds found hundreds of years ago in Indian riverbeds, Sierra Leone's gems (including the much-prized "fancies" - coloured stones) are alluvial. No need here for expensive open-cast mining.

There has been a diamond rush in the former British colony ever since Valentine's Day 1972 when a local engineer found the 968.9 carat Star of Sierra Leone. The size of a hen's egg, it was the world's third largest diamond gem, surpassed only by two South African stones, the Cullinan (in the British crown jewels) and the Excelsior (cut into smaller gems). The diamond was sold at De Beers in Charterhouse Street to a New York dealer for several million dollars. It was finally cut into 17 gems - 13 of them flawless - totalling 238.48 carats. The second largest of them, a 32.52 carat emerald-cut ring, was sold in October 1988 at Sotheby's in New York for $3,520,000.

Such sums are what make the diamond business secretive, ruthless and often deadly. President Laurent-Desire Kabila, currently fighting a civil war to stay in power in the Democratic Republic of Congo, a minerals-rich country the size of western Europe, is effectively using diamonds to buy allies, giving Congo minings rights, for example, to a nephew of President Robert Mugabe of Zimbabwe. Seven of the DRC's neighbouring countries are now involved in a war begun last August. Of course many diamond-producing countries are relatively peaceful - Botswana, Russia, South Africa, Namibia, Australia and Brazil, for example. Yet it is not far-fetched to argue that diamonds are forever associated not with love, but with conflict, death and suffering.

Diamonds - the crystallised form of pure carbon - are the hardest of all natural minerals. They were formed as the result of volcanic activity three billion years ago. Once thought only to be found in rivers in India, they were known as "the tears of the gods". The word diamond comes from the Greek adamas - "unconquerable". They finally became a precious love token after Archduke Maximilian of Austria gave one to Mary of Burgundy in a betrothal ring in 1477.

In the 18th century diamonds were discovered in Brazil. Then, in the 1870s, they were found in South Africa, at a place which became known as Kimberley, on land owned by two brothers called De Beer. Suddenly it was clear that diamonds, like gold, could be mined in large quantities, and were not so rare after all.

The brothers, Johannes Nicolaas and Diedrick Arnoldus, sold up to a company based in Port Elizabeth, disgusted at the flood of prospectors who invaded their farm. A young Englishman, empire-builder Cecil Rhodes, next entered the scene and, together with his partner, Charles Rudd, bought up huge tracts of land around Kimberley, including the De Beers property. Finally, in the early years of this century, Ernest Oppenheimer - grandfather of the present De Beers chairman, Nicky - scooped up Rhodes's company when the latter overstretched himself in his empire- building.

Two companies are now involved in the diamond operation, the mining group Anglo-American, and De Beers. The two are umbilically linked, making them impregnable to corporate raids. Some reshuffling has gone on of late but not much has changed: De Beers owns 42 per cent of Anglo- American and a similar share of its capital is owned by the mining group. Anglo-American takes more minerals out of the earth than any other company. (The recent reshuffling of the companies has come about in part because Minorco - a Luxembourg subsidiary set up by De Beers and Anglo-American to evade anti-apartheid sanctions - is no longer needed.)

To maintain the value of the diamonds as supplies increased, they had to be made artificially scarce. The company created the "single channel marketing system", which is to this day the world's most unquestioned cartel. Through its Central Selling Organisation at 17 Charterhouse Street it sells up to 80 per cent of the world's uncut diamonds - those it mines itself and those extracted by other companies. Zaire pulled out of the CSO in 1983 and so did Russia, three years ago. But both were forced to admit defeat - they could not sell their output - and returned to the fold.

To maximise control of the market, the CSO buys up any loose stones in circulation, whether from small-time traders in Angola or dealers on the markets of London and Antwerp. The idea is to bring as much of the trade as possible under the De Beers umbrella, even when that inevitably involves buying stones which may have been stolen from its own mines. The CSO system involves 10 sales a year to 160 selected dealers who are each presented with a small box of uncut stones. The CSO decides what it sells at the sales, which are known as "sights". It also determines how much the secret boxes will sell for.

One Hatton Garden diamond dealer, a veteran of Sierra Leone, who did not want to be named, says: "The CSO is very secretive, especially in their pricing system. That makes it hard for the rest of us. Nevertheless, if De Beers did not control the market, diamonds would be worthless objects because there would be so many of them. Everyone needs the cartel."

So powerful is De Beers's control of the market that for many years the company did not bother to put its name to its own advertising. Today it spends $200m a year on print adverts in 21 languages. They use the slogan, A Diamond is Forever, dreamt up for a Reader's Digest advert in 1948.

Mystique has done the rest of the work for De Beers, and plenty of free marketing. F Scott Fitzgerald wrote A Diamond As Big As The Ritz and Audrey Hepburn wore a stunning gem in Breakfast At Tiffany's. In 1966, Richard Burton stole the headlines when he bought a 69.42 carat pear-shape jewel for Elizabeth Taylor which she later sold for $5m to benefit a Botswana children's home.

According to a source in Hatton Garden, there is a plan to raise money for the Diana, Princess of Wales Memorial Fund. The project will, if seen through, involve a diamond being bought from the Angolan government. The stone would be known as the Diana Diamond, cut by Tiffany's in New York and sold to raise money for the fund. "The British intermediary is already in contact with all parties," said the source. However, the fund denied knowledge of any deal.

Nicky Oppenheimer, De Beers's chairman, admits that "diamonds are intrinsically worthless, except for the deep psychological need they fill". In Hatton Garden, the need is more than psychological. This is a mini-economy. After the "sight holders" have shopped at the CSO, they have their stones cut. Then they sell them, through dealers, at the Hatton Garden, Antwerp, Tel Aviv or New York markets.

The buyers might in turn sell directly to a shop, such as Arlington & Co or the recently merged Asprey & Garrard. The shops then commission designers who create work for mounters, goldsmiths, setters and polishers. Eddy Brown, whose B&B Setting workshop is near Hatton Garden, has had some extraordinary commissions, such as the "bonking boxes" made for a prominent Far Eastern customer. "They were real pieces of engineering, in gold and enamel mostly, with hinges, miniatures of human body parts and the works. He gave them to his women to indicate what he wanted them to do in bed," says Brown.

At some point in an average Hatton Garden week, most people end up in The Nosherie, in Greville Street, which serves traditional Jewish fare such as salt beef on rye sandwiches. Others go to The Sisters, a cafe in St Cross Street where Deena and Mari serve mushroom omelettes, chips and tea for pounds 2.50. The clientele ranges from men in dark suits and homburg hats to "runners" dressed in jeans.

Conversations centre on carats, cuts and price tags involving many noughts. Mr John says he has just seen a 5.5 carat heart-shaped diamond costing pounds 7,000 a carat. Charlie pops in for tea and mentions an amazing ruby he has just seen. No one asks how the jewels got to London - everyone assumes there is a certain amount of smuggling.

Back in Africa, companies such as De Beers devote an inordinate amount of energy to preventing miners from concealing gems in the heels of their shoes or in their pockets. X-ray machines can pick up the most audacious smuggling techniques, including the most dangerous, swallowing. Last year, South African fraud police uncovered a racket at the Oranjemund alluvial mine in Namibia, the world's biggest such operation, where pigeon fanciers had been enlisted by the smugglers. The scam involved miners taking homing pigeons into the mine in their lunchboxes, strapping diamonds to their feet, then releasing them.

In the later years of apartheid, the Oppenheimers were often criticised for growing rich on underpaid migrant workers who were housed in grim hostels. A triumvirate of directors, including Nicky Oppenheimer, appeared in November 1997 at a hearing of the Truth and Reconciliation Commission. Anglo-American De Beers submitted a 30-page report which was widely perceived as bland and superficial. It apologised to the commission for "many missed opportunities and many mistakes made in Anglo's corporate citizenship", including failing to house workers with their families, to desegregate workplaces and promote blacks.

In its final report last October, the TRC suggested to the South African government that it should consider claiming reparations or imposing a wealth tax on South African businesses which colluded with the former regime. Anglo-De Beers would be a prime candidate. But the new South Africa needs diamonds as badly as the old one did. Nicky Oppenheimer says he is not interested in politics, but enjoys good relations with the African National Congress government. Oppenheimer is on the board of President Nelson Mandela's Children's Fund and he has signed a number of black empowerment deals.

It is hard to imagine how the world would be if the diamond market was less controlled. On one hand, diamonds would seem less desirable and, it could be argued, some wars would not be worth fighting. Last month, Zainab Bangura, who heads Sierra Leone's Campaign for Good Governance, said, "If we could get all our diamonds out of the ground and throw them somewhere, all our problems would be solved." On the other hand, the hunger for diamonds brings jobs and investment - not just to places such as Botswana and Namibia, but also to Antwerp and Hatton Garden. And for couples such as Karen Fulton and Chris Packer in London, it brings happiness - at a price.