By Joe Bavier

KINSHASA, Oct 18 (Reuters) - The diamond industry's Kimberley Process is failing due to a lack of accountability and follow-up, paving the way for an illegal trade that could see a return of conflict stones to world markets, campaigners said.

The certification scheme, designed to eliminate the trade in so-called "blood diamonds", was set up in 2003 in the wake of devastating civil wars in Angola, Sierra Leone, and Liberia, which were largely financed by the illicit diamond trade.

Before its implementation, conflict stones made up about 15 percent of the world market. Though they are believed to account for less than 1 percent of stones bought and sold today, millions of carats produced annually remain untraceable.

"The only thing they really need to be able to do is to track diamonds in Africa, in countries coming out of conflict, and they simply can't," said Ian Smillie, co-author of an annual review of the industry.

The report, published by Partnership Africa Canada (PAC) this week, highlights, among other examples, the case of Democratic Republic of Congo, the world's second largest producer of diamonds by volume.

From 1998 to 2003, dozens of armed groups, rebel movements, and armies from neighbouring countries fought over the vast central African nation, in a conflict fuelled by the pillage of natural resources, including timber, gold, and diamonds.

An estimated 5.4 million people died in the war and lingering violence and humanitarian catastrophe continues today.



LACK OF PRESSURE

The Congolese government is a member of the Kimberley Process, but, despite recommendations to improve traceability, a lack of internal controls has created "the world's most perfect system for laundering dirty diamonds," the report said.

In 2008, Congo produced more than 33 million carats, accounting for around 20 percent of the world diamond market. However, the study found that nearly half of the country's exported stones were untraceable.

"The case of Congo is absolutely emblematic of the problems plaguing the Kimberley Process," said Elly Harrowell, a campaigner with conflict resource watchdog group Global Witness.

"This has been going on for some time, and no action has been taken," she said.

Deputy Mines Minister Victor Kasongo said Congo remains in compliance with the Kimberley Process.

"If the issue is a big issue, all the members pressure other members. If the system in place shows shortcomings, the peer countries must raise those issues," he said at the weekend.

Under the Kimberley Process's consensus system, however, everyone must agree, and efforts to tackle thorny issues or pressure governments to comply with the certification scheme can be blocked by a single member.

For example, in 2008, in a move recognised and accepted by fellow members, Venezuela officially suspended diamond exports for at least two years while it reorganised the sector. But visits by watchdog groups have confirmed that the trade continues, meaning that Venezuela's entire diamond production is now off the books and illegally smuggled.

For now, the lack of controls in many countries and an absence of pressure from Kimberley Process members has not yet led to a return of conflict stones, largely because of the end of conflicts in diamond-producing West Africa.

Still, in Congo, where armed groups continue to finance themselves through more profitable tin and gold trading, campaigners say that could potentially change, and the Kimberley Process is ill-prepared to cope.

"Diamonds could very quickly again be at the centre of a very major problem," Smillie said.

"It's not impossible to self-correct, and, until they feel enough heat, they won't do anything. But leaving it to continue like this is a mockery. (Editing by Daniel Magnowski and Jon Hemming)