North of 60 Mining News - The mining newspaper for Alaska and Canada's North

Eastern European organized crime could take the sparkle off the Northwest Territories' diamond industry by smuggling diamonds from global war zones into the Canadian production life, warns Canada's spy agency.

An intelligence report obtained by the Canadian Press news agency said the potential exists for criminal elements, notably syndicates in eastern Europe, to "fraudulently market (conflict diamonds) as bona fide Canadian stones."

It said that would put Canada in contravention of the Kimberley Process Certification Scheme, which aims to stamp out the circulation of smuggled diamonds, tainting the industry's image at a time when it is the world's third largest producer and "jeopardize the projected wealth of the industry," said the Canadian Security Intelligence Service.

Canada produced almost 15 percent of the world's diamonds in 2003, with output reaching 11.2 million carats worth a total C$1.7 billion.

The report said that diamonds are easily smuggled and exchanged for cash and are "practically untraceable once cut and polished."

The conflict diamonds come largely from western Africa, where the gems are sold to provide the cash for bloody civil wars.

There have also been allegations that the al-Qaeda network has converted US$20 million into conflict diamonds from Sierra Leone.

The Northwest Territories government has taken steps to protect the integrity of its industry by issuing certificates of authenticity that the diamonds were monitored through the production process.

But the vulnerability of the region was underlined in late 2000 when 63 people arrested in Yellowknife were alleged to have links to organized crime rings involved in weapons and drug smuggling.