Inside Israel's diamond trade: a family affair

Alittle dusty, very proud, Moshe Schnit-zer strode into the house in his overalls, a diamond cutter's uniform in the 1940s. His first day on the job was done.

His mother, a cultured Romanian émigré, took one look at him and burst into tears. Here was her son - so bright, for whom she wanted so much - a manual laborer.

But World War II was creating opportunities for Palestine's fledgling diamond industry. Mr. Schnitzer saw beyond the diamond cutter's wheel, though neither he nor his mother imagined how far that vision would take him.

Sixty years later, the barrel-chested patriarch is known affectionately as "Mr. Diamond." His family, now an institution in the Israeli diamond community, along with some other major players, is a driving force behind Israel's transformation from a leading diamond center to potentially the world's most important.

Their story reflects the rise of Israel's diamond trade from humble coffee shop origins to global prominence. It's a tale of grit, talent, and, critics snipe, ruthlessness. Their saga also parallels the arc of the diamond industry's fortunes worldwide, from the 1940s birth of the boom years to the 1990s controversies over diamonds and war, through to today's unprecedented challenges as outsiders try to pry open a trade that has operated for centuries in oysterlike secrecy.

Reports that illicit diamond sales bolstered the fortunes of Osama bin Laden and the Al Qaeda terrorist network have heightened already intense scrutiny of the diamond trade. Even before these revelations, the issue of "blood" or "conflict diamonds" - gems sold to fund wars in Africa - were the subject of United Nations inquiries and Congressional reports. In November, spurred by the possible terrorist connection, the US House of Representatives passed a bill to throttle conflict-diamond trade.

There is widespread worry in the diamond community that the ensuing restrictions could stifle legitimate trade as well, but Schnitzer is seemingly unconcerned.

"It's nothing," he says, dismissing the furor with a wave. Yet it's an issue that touches his family.

His son Shmuel helps lead efforts by the Belgium-based World Diamond Council to cope with conflict diamonds and protect the industry. And the whiz-kid reputation of Schnitzer's grandson, Daniel Gertler, has been shadowed by stories of his willingness to spice diamond deals with military perks.

Beneath a denim-blue sky full of cotton-ball clouds, morning commuters honk their way through the parry-and-thrust traffic at Moshe Schnitzer Square. High above the fray loom the four glass towers of the Israel Diamond Exchange, a thoroughly modern facade for an ancient trade.

The diamond business has endured war, pogroms, an inquisition, and the advent of modern technology, all without much change. It is largely a family business in which traders work on trust, eschewing written contracts, and has drawn Jewish families since medieval times. For a long-persecuted group banned from entering industry in many places, diamonds offered a guaranteed, portable way of making a living.

The trade has expanded since then, but it is still strongly rooted in Jewish communities. Diamond dealers the world over are known by the Hebrew term Yahalom Manin. Deals are sealed with a handshake and the Hebrew words mazal ubracha, or luck and blessing. Gems can be brought or sent halfway around the world for inspection without any guarantee of purchase. In this environment, your good name is worth everything. Disputes are settled internally at peer-review courts. Wrongdoers face a penalty more serious than jail - expulsion from the diamond community.

At the Israel Diamond Exchange, the photos of those exiled from the diamond world are posted in the main trading room, a light-filled expanse divvied up by narrow tables where dealers scrutinize stones and talk money.

The room is the nerve center of the Exchange, hailed as the world's most sophisticated diamond bourse and known far more informally as the house that Moshe built. Schnitzer not only built the industry's fortresslike headquarters, where the octogenarian comes to work every day, but he founded the diamond exchange itself, doing business with friends in a small Tel Aviv coffee shop, then a larger one, until they could afford their own real estate.

Today, the exchange brings Israel $13 billion in imports and exports, and is the country's second-largest industry. Israel buys some 50 percent of the world's rough diamonds, two-thirds of which go to the US.

"I consider my story the story of diamonds in Israel," says Schnitzer, whose name means "to cut" in Yiddish.

In many ways, his story also dovetails with the history of Israel. Sent by his parents to British Palestine in 1934, he was one Romanian 13-year-old among boatloads of immigrants looking for a better life.

In a few years, he was part of the Irgun, a militant group that fought for a Jewish state. They smuggled in immigrants; bombed Arab buses and markets; attacked the British; and were involved in an infamous massacre of up to 250 Arab men, women, and children. Schnitzer is tight-lipped about his time with the group, which veterans call the "fighting family."

Blunt and imposing, he is every inch the patriarch, but the gritty toughness required by the Irgun is masked by a charm that colleagues say is his greatest weapon.

When Schnitzer turned his energies to building the new state, his charisma helped convince dealers that building a diamond center in Ramat Gan, beside Tel Aviv, was not a mistake. "It was a desert here in the 1960s, not one building then," he chuckles, a laugh that is equal parts gravel and thunder. "People said we were crazy."

Those were hardscrabble times, but even then, even here, diamonds were an international business.

Shmuel Schnitzer's strongest childhood memory of his father is of his absences, travelling. The trade has been global for centuries - stones can be mined in Africa, polished in Europe, and sold in Asia. That internationalism is at the root of some of the industry's modern problems: It makes oversight difficult, just as the trade's clannish, family-based nature does.

For centuries, this hasn't mattered. The DeBeers company under its founder, Cecil Rhodes, could dynamite South African tribes off their land to access diamonds in the 1800s, and no one was the wiser.

But the world is more interconnected now. We hear of abuses that once would have gone unnoticed: smuggling, corruption, the use of diamond revenues for the savage civil wars that have devastated central Africa for over a decade now.

In the 1990s, the United Nations and private advocacy groups began examining conflict diamonds, which the industry says account for only 4 percent of total trade and watchdog groups say is closer to 15 percent.

Remembering the backlash against fur coats, countries that produce, manufacture, and purchase diamonds began working on a plan to monitor themselves, called the Kimberley Process.

Unpolished, diamonds resemble coarse chunks of broken glass. Indeed, their real value isn't much greater. Chunks of carbon transformed by great heat and pressure, diamonds aren't rare at all. The DeBeers company, which controls 65 percent of the rough-diamond market, keeps prices artificially high and availability artificially low.

Once a diamond has been shaped by the cutter's wheel, its origin is difficult to determine. But under the system proposed by the Kimberley group, all diamonds will come with certificates outlining their origin. Under the new US bill, passed a day before the Kimberley group reached its agreement, countries that refuse to issue such certificates will be open to sanctions.

As vice-chairman of the World Diamond Council's committee on conflict diamonds and current president of Israel's diamond exchange, Shmuel Schnitzer is well acquainted with the issue. "We didn't volunteer for this," he says. "But we have to do the utmost to solve the problem."

It isn't certain whether the new US legislation, the Kimberley Process agreement, or even the revelations of Al Qaeda ties to illicit African diamond trade will lead to greater openness. The diamond industry has kept its cards close to its chest for centuries.

At least one industry watchdog, the London-based Global Witness, has already criticized the Kimberley Process plan for lack of verification or monitoring measures.

But with UN ratification of the Kimberley Process expected in the next month and greater scrutiny from the US, which buys two-thirds of the world's polished diamonds, some change is likely. "We can't avoid it," says Shmuel.

It chafes some diamantaires, as dealers are called, that Moshe's son occupies the president's seat at the Exchange. "Some people think the family has too much power," says one of the Exchange's administrative officials.

Smooth, smart and likable, a lawyer by training, Shmuel is seen as the family diplomat, though he rejects any talk of dynasty. "There was no real separation between diamonds and family life," he recalls of his childhood. "[But] in Israel there's no place for dynasties. We're just people working in diamonds, trying to do our best."

Few dealers would buy that just-getting-along description, especially as applied to Shmuel's nephew and Moshe's grandson, Mr. Gertler.

Not yet out of his 20s, Gertler electrified the industry in 2000 when he obtained exclusive rights to diamonds from the Congo, an arrangement that lasted eight months, until shortly after the assassination of the Congolese leader Laurent Kabila.

It was a staggering deal, valued at around $600 million annually, and all the more riveting because its broker was so young.

Gertler insisted he impressed Mr. Kabila with his bona fides, but a mining magazine reported that he had sweetened the deal with the promise of military training for Kabila's troops. Gertler and the Congo denied the rumors, and a Congolese official who had echoed them was quickly jailed on unspecified charges.

At the time, Kabila was ensnarled in Africa's largest civil war, which still rages after 3 1/2 years and tens of thousands of lives. International groups were just pulling out their microscopes to examine the role of diamond and oil companies in funding these conflicts.

One major issue for advocacy groups is that foreign firms and local officials make millions, while ordinary Africans never see benefits from the spectacular natural wealth of their countries. Both the UN and nongovernmental groups were concerned that Gertler's monopoly was encouraging smuggling, and thus depriving the Congo of tax revenue. On the contrary, said Gertler, the deal benefited the country.

For the self-contained diamond world, with its premium on discretion and trust, outside scrutiny is unusual and uncomfortable. Certainly, Gertler doesn't enjoy it.

The young entrepreneur has his grandfather's vision, drive, and name - Daniel was Schnitzer's nom de guerre in the Irgun.

But in some ways, Gertler is as rough-edged as the unpolished diamonds he deals in. In an interview, he is alternately evasive, mocking, fidgety, and sullen. He refuses to be quoted directly or explain how he started out on such a large scale.

Asked about the reports about military aid and the Congo deal, Gertler mockingly says he put together a consortium involving the FBI, the CIA, the Russian secret service, and the Israeli police, army, and foreign ministry, adding that he controls the last three. Pressed on the issue, his voice rises to a shout. His philosophy, he yells, is never to hide anything.

Sitting behind a kidney-shaped desk covered in papers and diamond packets, Gertler continually invokes his grandfather, whose larger-than-life photograph hangs behind him.

Israel buys some 50 percent of the world's unpolished diamonds, but Schnitzer wants it to become an even bigger center for rough stones. This would effectively elbow Antwerp, Belgium, from its top spot as the world's traditional diamond capital. Gertler is helping out as the first family member to venture out of polished stones and into the rough diamond business.

Even without the Congo monopoly, his company is still the leading exporter of Congolese gems. Last year it sold 50 percent, or $99.9 million worth, of the Congo's official diamond exports, according to Africa Intelligence magazine.

The Congo monopoly wasn't Gertler's first foray into ambitious if murky deals. The Israeli newspaper Yediot Aharonoth chronicled his ties to an Israeli arms dealer named Yair Klein, who is still wanted by the US for training Medellin drug-cartel militias in Colombia.

Israel convicted Mr. Klein in 1991 for his involvement with these groups, which targeted and assassinated Colombian politicians, journalists, and law-enforcement officials.

By 1999, Klein was in a Sierra Leone jail, facing charges of arming and training the country's rebels, whose brutal calling card was to amputate the hands of civilians.

Yediot Aharonoth outlines Klein's role at this time as an in-the-field representative for Gertler and some others in Sierra Leone and Liberia, both torn by bloody civil wars.

"The idea ... was the possibility of providing the 'friendly' groups in the two countries money, weapons, and military training," the Israeli paper reports. "In exchange, if their leaders come to power, they would give the Israelis ... power over the diamonds in their countries."

Today, Gertler will say nothing about his dealings with Klein or his early attempts to put together a deal in the Congo with the Russian Military Brotherhood, a group of retired Russian generals whom Gertler will only describe as good friends.

He stops there, saying that his detractors are jealous and that interviews simply give them gossip fodder. There is a faint echo of his grandfather's business smarts in those words. "Money doesn't mean anything," the senior Schnitzer likes to say. "The most important thing in this industry is your name. Lose that, and you have nothing."

In America, diamonds represent love. In Asia, they connote wealth and success. And in the Persian Gulf, elegance and beauty. For Marilyn Monroe, perhaps our most famous diamond devotee, they were a woman's best insurance policy against the vagaries of male affection.

For ancient Roman criminals, the stones meant something far more precious: freedom. Those who could smash a diamond with a hammer and anvil won their release from jail. "All diamonds," reported Pliny the Elder in his "Historia Naturalis" in AD 1, "made the iron rebound and the anvil split asunder."

Why do diamonds fascinate us so? Chunks of carbon that have been forged deep in the anvils of the earth, they aren't rare or even particularly valuable. In their raw, unpolished state, they resemble nothing so much as a cloudy pebble. And yet centuries before Roman convicts staked their futures on these gems, people were already drawn to them in reverence, fear, and awe.

Today, thanks to decades of aggressive advertising, a diamond ring is seen as a necessity for engaged women. But our fascination with diamonds can be charted for almost as long as we've been keeping historical accounts.

The earliest beginnings of the diamond trade start in India, where experts believe the stones were mined as early as 8 BC. They were called vajra, Sanskrit for thunderbolt, and Indian lore is rich with stories about diamonds protecting their wearers from all danger, including snakes, thieves, water, or witchcraft.

In an early echo of the way diamonds are used to reflect earning power and social status today, ancient Indians believed different types of diamonds symbolized various social groups. The purest stones represented high-caste Brahmins.

By AD 1, India was exporting its production to Rome via the Silk Road. When describing the stones, Roman writers started using the Greek word adamos, which conveyed a sense of untamable indestructibility. From the beginning, myths flourished.

As early as 4 BC, Plato mused that diamonds were the most precious and purest quintessence of gold. After Alexander the Great conquered Persia and pushed into parts of northern India, he brought back tales of the impenetrable Valley of Diamonds, guarded by vultures and snakes. Sheherazade herself told a version of the story, which spread to Asian cultures as well.

Europeans of the Middle Ages also thought that diamonds protected their owners. Though diamonds were written about in this period, they fell out of favor in Europe as their past links to Roman talismans and Indian magical symbolism alienated Christians.

The Renaissance, with its emphasis on ornamentation, started a diamond revival among the wealthy. By the 1870s, with the opening of diamond mines in South America, the gems were more affordable and therefore more accessible to Europeans and North Americans.

Diamond myths persist today. Several large and impressive stones - the Hope diamond among them - are reputed to bring bad luck to their owners. And DeBeers, the giant of the diamond industry, cheerfully admits that one of its main goals is to promote modern diamond myths.

Derek Palmer of the Diamond Trading Company, a DeBeers subsidiary, says the company's marketing does not stress a diamond's physical attributes. "You could get cubic zirconium that sparkles," he says. Instead, the stress is on the stones' "emotional value ... love, status, mystique," Mr. Palmer says.

DeBeers has been working to plant that idea in the popular consciousness since 1938, when it hired an advertising firm to popularize the idea of diamonds as an integral part of romance.

The US ad agency, N.W. Ayer, created a powerful, often subtle, campaign that used Hollywood movies and photos, and classroom lectures to high school girls across the country. In 1948, N.W. Ayer crafted the phrase that has been DeBeers slogan ever since: a diamond is forever.

We may no longer believe that diamonds protect us from danger, but we still invest the stones with a powerful symbolism. Long after Audrey Hepburn had breakfast at Tiffany's, we still pay homage to those images of love and sophistication.

And 52 years after it was created, the DeBeers slogan was voted the best of the century by Advertising Age magazine. Today, that symbolism has helped make the US the world's largest diamond market, accounting for 60 to 65 percent of world trade estimated to be as high as $7.5 billion. "We sell dreams, not products," says Palmer.