Secrets in the Garden: Forever looks a bad bet for the closed world of the diamond industry in London's Hatton Garden, undercut by recession, smugglers and the Ratner row. Gail Counsell investigates

PEEL BACK the lid of an obscure corner of London called Hatton Garden, and underneath is a world that should have disappeared long ago, its anachronistic way of doing things laid to rest alongside the famously defunct Lloyd's coffee-house and the British motorcycle industry.

It does its business the old way, anywhere and any time; in the seedy offices which resemble abandoned sets from a Philip Marlowe movie, or on the streets, as the opportunity presents itself.

It is not uncommon to see Levantine-looking men whispering in dingy doorways, slipping packages surreptitiously from hand to hand. The uninitiated might think they were drug dealers. But this is the Garden and the substances involved are harder than heroin; more often than not they will be diamonds.

For more than three centuries Hatton Garden has been at the centre of the international trade in rough diamonds, yellow, glass- like lumps which have to be cut and polished into gems.

The connection dates back to the 16th century, when Jews with diamond-cutting and trading skills arrived in London, fleeing the Inquisition. Thanks to the monopolistic power of the East India Company, they found their supplies assured - for centuries India was virtually the only source of the stones. But Hatton Garden achieved pre-eminence with the 19th-century rise of De Beers, the powerful South African mining corporation whose solidly blank-faced headquarters stand at one corner of the Garden.

De Beers is the hub around which the world trade in rough diamonds circulates; its power is enormous. A highly effective price maintenance system, which dates back more than 50 years, means De Beers is responsible for selling more than 80 per cent of the world's production of rough gem diamonds, even though it mines only around a quarter of them. Hatton Garden is virtually its only shop window. Here, 10 times a year, De Beers offers rough stones to selected trade customers.

Around this core has grown up a mish- mash of related businesses, most of them small firms or one-man bands, many obscure. Shops, tacky and (occasionally) exclusive, jewellery manufacturers, diamond dealers, traders in gems such as diamonds, or 'coloured stones' such as sapphires or rubies; pawnbrokers and precious metal suppliers, all are to be found in the run-down houses and (almost invariably) tatty Fifties offices that line this unfashionable quarter, stuck between the serious money of the City proper to the east and the glitz of the West End.

This is a closed society, a small, suspicious community. Like the Mafia, it has its rules and one is silence in the face of the outside world. Any unknown caller is met with prevarication and suspicion. 'We don't like publicity. We won't want to talk,' said the woman at the London Diamond Bourse, one place the dealers meet to inspect each other's wares and do deals, in what was to be the first of many such brush-offs.

Ostensibly the dislike of publicity is based on fear of theft; in truth it has much more to do with distrust. Here everyone knows everyone else and outsiders are suspect. Like the City before Big Bang, it has to be this way; otherwise it could not operate as it does.

The casualness with which stones worth thousands of pounds are sent out to other traders, on a sale-or-return basis, is almost frightening. They are simply slipped into envelopes and consigned to the ordinary postal system. Ask Alex ('no names please'), a jewellery manufacturer, what precautions he takes and he pauses. 'Well, if I'm sending them to another jeweller - 'Bloggs Jewellery Limited' - I leave the word Jewellery off so as to make it less obvious.'

Indeed, the Gem Testing Laboratory, which will certify the grade of gem diamonds and reckons to handle virtually every diamond of any quality offered for sale in the UK, has only recently started bothering to give receipts for the valuable stones consigned to its care. Ken Scarratt, who runs the laboratory, has been working in and around Hatton Garden for more than 20 years. 'The level of trust here is utterly incredible. If I want to borrow anything, I just ask.'

Security against outsiders looks tight enough; there are locks within locks on most of the offices, and no matter how decayed the building, wall-mounted video cameras keep careful check on who goes in or out. But within the community the degree of self-regulation is remarkable. No one who wants to do business again breaks the rules. To do so is to risk ostracism around the world.

At the London Diamond Club - where they did let me in, but only on a 'no-names' basis - they say those who try to break the rules are swiftly dealt with. Most diamond dealers are associated with one of the 20 diamond clubs and bourses around the world which operate under the flag of the World Federation of Diamond Bourses. They form a stiff little community which, like the Stock Exchange of old, can blackball those who fall foul of the rules with surprising ease.

'If anything does go wrong, it's all over the world in a matter of minutes, what with faxes these days,' says one determinedly anonymous individual. 'If anyone is late paying their bills, that gets round pretty quickly too. And then they don't do business again.'

Housed in a run-down Georgian building half-way along Hatton Garden, the club acts as a meeting place - and sometimes trading centre - for diamond dealers. It performs a similar function to the Diamond Bourse, though here, trading, such as it is, tends to be in rough diamonds, while in the Bourse it is more likely to be in the finished article.

Most of its 350-odd members are Jewish, but there is a growing contingent of Asians - India is now the world's biggest centre for cutting small diamonds. (Virtually no cutting now takes place in the UK: most cut diamonds on sale here have been imported rough, sold, exported for cutting and re-imported.)

There was no dealing taking place at the Club the day I visited. There was a service underway in the synagogue on the top floor and a handful of members eating what looked suspiciously like school meals from formica-topped tables (they double as dealing tables) in a big room on the first floor.

But then business is bad in Hatton Garden at the moment. Very bad. Wherever you go - when they will talk - people say: 'Business is bad.' The recession has caused problems for everyone, from the mighty De Beers to small jewellery manufacturers, and sales are sharply down. Last year assay offices (almost all precious-metal jewellery has to be hallmarked before it is sold in Britain) stamped nearly a fifth fewer pieces than in 1990. Margins - which may be 5 per cent for a dealer but 50 per cent for a retailer - are being squeezed with a vengeance.

Competition from abroad is eating away at market share. In 1975, hallmarked imports were only 5.6 per cent. By last year the proportion had risen to 36.4 per cent.

Laurence Thomas at Johnson Matthey is in an ideal position to monitor the health of Hatton Garden; Johnson Matthey is the main supplier of gold, silver and platinum to London's jewellery producers. It supplies the manufacturers with their raw materials - indeed, Mr Thomas describes its function in the Garden as 'like a steel stockholder on an industrial estate'. It is his job to keep supplies of metal to meet the daily demands of the surrounding jewellery producers.

In the immediate area of Hatton Garden, he estimates, he has around 500 customers, from one-man bands to the biggest jewellery manufacturers - though even then in this cottage industry few places employ more than 15 or 20 workers.

'Times are very tough for the trade,' he observes. 'Some are weathering it OK, but the weaker ones are having a very difficult time indeed. While the top end of the market is holding up tolerably well - demand for 18- carat gold is holding its own - the high- volume, low-cost end most certainly is not.'

Adding to everyone's woes have been the problems of Gerald Ratner and his empire of jewellery shops. The damage done by his now notorious joke that one of his products was 'total crap' helped push the group into near-collapse. As it had around a third of the UK jewellery market, his UK suppliers, some of which had geared up to meet his high-volume, low-price needs, have been hit hard by the subsequent retrenchment.

The disfavour in which he is now held goes much further than lost orders and returned goods, however. Mr Ratner has passed into demonology as the man many love to hate, the debaser of what they claim was the previously upmarket nature of the industry.

A jewellery manufacturer, Jack ('don't use my surname, will you, or the knives will be out'), is one of many contemptuous of Mr Ratner's mass-market 'pile 'em high, sell 'em cheap' approach. 'He took the market down so far into the basement he couldn't have got any lower with a pneumatic drill,' he says.

Alex is also critical of the Ratner approach. 'It's ruined people's expectations of what jewellery should be. It used to be an occasion, buying jewellery, something special. Not at all like - what did he compare it to? - a prawn sandwich.'

Ron Pitman is manager of Bernstones, a Hatton Garden jewellery shop which is one of a chain of 23. 'Before Ratner went in for supermarket-style retailing, buying a piece of jewellery was an occasion. It was all image - people felt they were buying an heirloom.'

Nevertheless, Mr Ratner's comments had a strange effect, he says. 'Initially, after his comments, sales did dry up, but they actually seem to have made people more conscious of buying quality goods. So we deliberately went upmarket, and it seems to have worked.'

Bernstones accordingly eschews a common tactic in the jewellery industry - the mark-down. Because the value of the items involved is so high, objects are frequently offered for a short period at steep prices so that they can be 'slashed', making the customer feel he or she is getting a bargin.

Instead the company has concentrated on presentation, and on educating customers in the art of pricing. Diamonds are graded according to the four Cs - cut, colour, clarity and carat-weight. The price of all stones, but diamonds in particular, varies enormously with quality.

Differences in value according to grade can be stark - a single carat D flawless, the top grade, might cost dollars 12,800 ( pounds 6,500) wholesale. The same stone one clarity rank down (there are 11 recognised clarity grades), might sell for dollars 8,800 (though the cost of the diamond may be as little as half the eventual retail price of the subsequent ring). Half a dozen grades lower, the same size of stone will be worth perhaps dollars 3,000.

Hence the Gem Laboratory, which provides an independent certification of the grade of diamond involved. 'We give gem certificates with all our stones, even though they cost us pounds 50 or more a time,' says Ron Pitman. 'If you are spending several thousand pounds on an engagement ring, then you want to know what you are buying.'

On the horizon is a still greater threat to the health of the industry. Earlier this month, the mighty De Beers sent shock waves through the diamond industry, when it revealed problems so severe that it had to return to a system to limit its own purchases from producers - a tactic last used in the depth of the 1981 recession.

This time around, its difficulties are partly caused by global recession (40 per cent of all gem diamonds are sold to Japan and America) but also, more worryingly, by something which could undermine the system which underpins the value of stones: smuggling.

Like many aspects of the industry, the way in which rough diamonds are sold is steeped in tradition and tightly controlled. De Beers realised back in the Thirties that the industry had to tread a delicate path between maximising sales and destroying the mystique which justified far higher prices for gem diamonds than for industrial stones, and that the key was co-ordinated action by producers - a cartel, in other words.

Nearly all the world's gem diamonds are mined in a handful of countries - Australia (which produces the most, but also the poorest quality), Zaire, parts of the former Soviet Union and Botswana / South Africa.

So the company persuaded the other diamond producers to funnel almost all their sales of rough diamonds through one organisation, the Central Selling Organisation, run by De Beers. The CSO fixes a set price for its diamonds - no matter what their origin - which varies only according to quality, and attempts to match supply and demand to avoid undermining its price structure.

Primary access to the stones is tightly controlled. Diamonds are offered at 10 'sights' or sales a year in London. Only a limited number of 'sight-holders' are invited - as few as 220 names are on the list, though not all will be asked each time.

Sight-holders cannot specify what they will be offered. When they arrive, they are escorted into a room and given a small packet; a sort of diamond lucky dip containing a mixture of rough stones chosen by De Beers. They cannot pick and choose from this selection; it is all or nothing. What they do not want for their own use they must resell.

Now the diamond industry is facing a wave of smuggled supplies from Angola which threatens to upset this careful control of prices. De Beers has attempted to buy in these diamonds and mop up supply. If it cannot stem the mounting tide, prices could go into a tailspin. With gems valued at hundreds of thousands of pounds held even by small shops, dealers and manufacturers, the prospect is a terrifying one. Prawn sandwiches start to look almost attractive by comparison.

(Photograph omitted)