Background of the Diamond Industry Cartel

Cartel is basically association and alliance of rivals in the same sphere of business. In order to dominate the market and earn huge profits, a group of independent market participants collude each other, which is known as a cartel. It is mainly considered as anti-competitive behavior. One of the largest cartel formation that dominates the diamond industry over the past decades is De Beers and the diamond cartel (Cochrane 2017). An international corporation was established in 1888 that operates in diamond mining, diamond exploration, diamond trading, diamond retail and industrial diamond manufacturing sectors, which is named as De Beers Group. The government of United States (US) took legal actions against the formation of the cartel in the diamond industry (Wan 2019). This paper discusses the main issues and regulatory framework implemented in the diamond industry. It also provides a comparison of polices adopted in other countries of the world.

One of the most influential cartel of the diamond industry witnessed artificial diamond scarcity created by De Beers. The company controlled over 90% of the total supply of diamond of the world (Gapa 2016). The British businessman Cecil Rhodes bought new mines in order to control the price of the diamond industry. Another mine owner Oppenheimers also joined with Cecil Rhodes, which strengthen the monopoly presence of the De Beers in the diamond industry. The complex supply chain of the industry was also acquired and controlled by the company through persuasion, coercion and outright threats. The sightholders of the diamond industry were unable to control the price, quality and type of diamonds they are offered. According to the most jurisdiction the formation of cartel in the diamond industry is recognized as the anti-competitive behavior (Newbury 2016). In addition, the cartel behavior in the diamond industry involve various anti-competitive practices such as bid rigging, price fixing and plunge in output. The economic interest led to the formation of cartel in the diamond industry by the individuals. Thus, the business practices of the company De Beers can be analyzed with the help of cartel theory. As the company was accused of being a monopoly that dismantled the competition of the diamond industry. There were many controversies against the company (Cochrane 2015). The main allegations against the company were related to the trust behavior and price fixing. Moreover, the company also stopped releasing the industrial diamonds for the war efforts provided by the US during World War II. In 1890, the company formed the diamond syndicate to keep the prices higher in the diamond industry, which was against the regulatory framework.

Issues with De Beers’ Monopolistic Trade Practices

According to the government of US, the practices related to the fundamental underpinning of capitalism had violated by the De Beers in the US. In 1945, there was an antitrust case filed against the De Beers by the justice department of the US as the company proposed to negotiate through Sherman Antitrust Act for registering a US branch of the Diamond Syndicate Incorporated (Sammut and Chantelle 2020). However, there was false commitment by the company to stockpile the industrial diamond in the US. The legal action against the company was not effective as the company was not operating in the US. Another act named Clayton Act of 1914 was passed to broaden the area of unacceptable behavior and prohibiting illegal behavior that intended to lower the competition and tried to establish monopoly power. The company was subject to US law and under the US detection method, although it had no presence in the US and was run by the nationals of South Africa. As a result, De Beers was prosecuted on various occasions for violating the antitrust law of the US. The monopolistic trade practices of the De Beers hampered the market through abuse in terms of production and sales of diamonds (Press 2017). It resulted in creating profound influence on the economic decision through elimination of competition from the market.

The investigation also ordered against the anti-competitive practices of the company in 1945. The suit of 1945 was failed as bank account was not sufficient to warrant jurisdiction (Munier 2016). Though, there were a wide range of initiatives taken by the diamond council to ensure the entrance of the only conflict free legitimate diamonds into the industry. Over the past decades, the diamond industry of the world suffered from the problems of the conflict diamonds.  One of the key regulatory framework that was implemented by the United Nation (UN) was Kimberly process in the year 2000. The economic rationale behind the initiatives was to free the diamond industry from the conflict diamonds. On the contrary, there was approximately 4% of the total trade involve conflicts diamond of the world in 2000 (Rarick and Arifin 2017).  The effectiveness of the regulatory framework set up by the UN and diamond council helped to scale down the level of conflict diamonds involved in the world trade to lower than 1%. Kimberley process certification system is a detection system for any illegal practices under the diamond industry (Cochrane 2015). An assurance statement on all invoices must be provided by every seller and buyer of jewelry containing diamonds and polished diamonds under this system. Furthermore, all invoices along with written statement must be provided while importing as a guarantee that the sold diamonds are from legitimate sources. As a result, these incentives under this detection system ensure a system of warranties to assure consumers about their diamonds. However, there were a broad range of limitations of the Kimberley process certification scheme, which led to criticism against the initiatives and its shortcomings

Legal Actions and Regulatory Framework

Other countries of the world also adopted policy responses to prevent the illegal practices of the diamond industry. Diamond council and UN took initiatives in order to stop the trading of the blood diamond. It is also termed as the conflict diamond that was mined in the war zone to finance an insurgency. The mining countries related to the blood diamond was mainly undertook in the African countries (Goucher 2015). It resulted in civil war in African countries such as Sierra Leone, Ivory Coast and Liberia. These countries also accused of serious human rights issues even after long years of civil conflict. The civil conflicts in these regions brought consequences including child abuse and child labour. As a result, the policy responses from the Canada and US were applied in order to prohibit the cartel formation and illegal practices under the diamond industry. In order to reduce the violation of law and prohibit the importation of rough diamonds from Sierra Leone into the US, Executive Order 13194 was issued by the president of the US on 18^th January 2001. In addition, another Executive Order 13213 was issued by the US government to ban importation of rough diamond from Sierra Leone into the US on 22^nd May 2001 (Wan 2019). The Diamond Development initiative was adopted by the government of Canada to improve and regulate the legal diamond industry. Diamond rich areas were discovered in Northern Canada during 1990s. Thus, Canada became a key player of the diamond industry.

In 1986, Partnership Africa Canada was developed to aid the crisis of the diamond industry of Africa. The organization related to the partnership was part of the diamond development initiatives. Additionally, Canada also established several laws to reduce the trade of conflict or blood diamond. These laws were related to the transfer and export and import of the rough diamonds. Another significant step of the government of Canada include the Export and Import of Rough Diamonds Act, which was passed in December 2002 (Rarick and Arifin 2017). This law intended to act as a system that helps to control the export, import and transpiration of the rough diamond through Canada. Therefore, it can be stated that the initiatives of the government of Canada and US acted in support of the Kimberley Process. Moreover, it also helped to minimize the shortcomings of the Kimberley Process through more stringent regulations in the history of the diamond industry. The cartel formation in the diamond industry was controlled to a certain level through support from various countries, UN and Diamond council.  

Comparison of Policies Adopted in Other Countries

Conclusion

The diamond industry of the world witnessed the formation of most influential cartel. The company that controlled the major activities of the diamond industry include De Beers. The monopolistic practices of the De Beers prevented the competition in the market. In addition, the illegal practices such as price fixing and trust behaviour (Rush and Elizabeth 2017). There were various allegations against the company for the formation of cartel and undertaking anti-competitive practices. The company was also engaged in the trading and mining of blood or conflict diamond. The company mined in the war zone, where the African countries were also involved. One of the major initiative against the cartel formation of the diamond industry was Kimberley Process Certification Scheme. The US government put Executive Order to ban the transportation of rough diamond from the Sierra Leone into the US. The government of Canada also tried to support the African countries to overcome the crisis through stringent laws.

References

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