Competitive Intelligence

DeBeers Diamond Monopoly Poised to Re-Enter U.S. Market, Faces New Scrutiny in Europe

De Beers signaled last year it might agree to plead guilty and pay a fine to settle allegations that date back to shortly after World War II when the Justice Department alleged that it fixed the price of industrial diamonds, which was followed with another suit in 1994.

"We have outstanding legal issues with the Department of Justice and the European Union, and we're working to resolve them," said Lynette Hori, the spokeswoman for DeBeers's diamond trading company. "The U.S. is the biggest market for diamond jewelry - accounting for 50 percent of global retail jewelry sales - and we would really, really like to resolve these issues," she said.

I'll bet.

After 10 years of inactivity in the case, the court in January scheduled an arraignment and plea hearing for March 11th. DeBeers and General Electric were indicted in 1994, accused of fixing prices in the $500 million industrial diamond market. Federal officials alleged that GE and DeBeers, which at the time controlled about 80 percent of the market, told each other about price increases in advance.

A federal judge dismissed charges against General Electric in December 1994, saying the government had failed to prove its case. The suits were filed in Columbus because GE's industrial diamond business was headquartered in the Columbus suburb of Worthington. Industrial diamond is sold to diamond tool manufacturers, who use it to make cutting and polishing tools used in a variety of manufacturing and construction applications.

But, prosecution of DeBeers has proven difficult for the past decade because U.S. officials have no jurisdiction over the company, which is based in South Africa.

That hasn't stopped DeBeers from becoming one of the world's best-known brands and one of the biggest advertisers in the U.S., relentlessly linking diamonds to engagements, weddings and anniversaries with its "A Diamond is Forever" campaign. But DeBeers hasn't had a retail presence in America and its executives are subject to detention if they enter the country. DeBeers only has its own retail stores in London and Tokyo.

DeBeers's 1994 charge is still pending in U.S. District Court in Columbus, Ohio, where the Justice Department is looking for a guilty plea, which might be forthcoming, that a unit of DeBeers was part of the global price-fixing conspiracy with GE. Prosecutors said that they hadn't been given access to needed evidence overseas.

DeBeers's efforts to get the charge dropped were rebuffed by the Clinton administration and, initially, by the current Bush administration. But late last year, the company signaled that it might agree to plead guilty and pay a fine to end the suit, and those discussions are now at an advanced stage, according to people close to the talks.

U.S. officials over the years haven't been eager to help DeBeers because of its history of harsh labor conditions and support for South Africa's apartheid regime. But Justice Department officials apparently have concluded that - having lost their case against DeBeers's co-defendant GE in 1994 - they have little leverage to continue to exclude the company from the U.S. if it is willing to plead guilty, unconditionally, to the 10-year-old charge.

Meanwhile, the European Union is investigating sales tactics of the world's largest diamond dealer, even as its relations with U.S. regulators may be improving. Prompted by complaints of retail jewelers, the EU is probing DeBeers, which controls two-thirds of the world's rough diamond market.

The complaints arose after De Beers moved into the retail end of the diamond business. With emerging competition in the wholesale diamond business from companies like BHP Billiton and Rio Tino, which produce diamonds in Canada, De Beers has tried to become an upmarket jewelry brand through a retail joint venture with French luxury goods company LVMH. EU investigators are studying DeBeers's "supplier of choice" system, in which gems are sold only to a select few.

- Arik

Posted by Arik Johnson at March 2, 2004 01:26 PM | TrackBack