Jewellery and junk

Hatton Garden is famous as London's gold and jewellery quarter. Here, Oasis's Liam Gallagher came with Patsy Kensit to buy a wedding ring. In January, the Foreign Secretary Robin Cook bought his girlfriend Gaynor Regan an ornate, 18-carat ring with diamonds, for pounds 600. For generations the betrothed have come here to get their bands of gold, and the canny rich to buy their gems, at prices that would make a Mayfair jeweller's eyes water.

But Hatton Garden has another, secret and more sinister side. In this cash-preferred environment, crime and trade have existed hand in hand beyond living memory. Only last week the area was in the news when the police launched a hunt for a gang of thieves who posed as joggers and stole pounds 200,000 worth of diamonds from a Garden jewel merchant. Organised drugs gangs are using Hatton Garden for a new trade. According to those who work there and are in the know, the Garden has recently become a centre for laundering drug money.

By the early Nineties most of London's criminals had moved into drug- trafficking. The proceeds were enormous, and needed to be laundered. With tightening restrictions in the banks, new avenues have had to be opened. Hatton Garden's economy, built on gold for cash, has been crucial.

"In the last five years it's all become drugs money down here," one insider whispered to me, in one of the local cafes. "It has got very nasty and one has be careful." At the centre of this is one of London's biggest crime families, known as "the A-team". They have bought into Hatton Garden in a big way. According to drugs officers this Islington family controls much of London's drugs trade, extending as far as the Ibiza club scene. Some 20 people are reputed to have been killed by the family, which is at the centre of a long-running special operation by MI5 and drug officers.

Hatton Garden, which occupies a small grid of narrow streets on the western border of the City of London, has been home to many famous names of the jewellery and precious metals trade: De Beers, Johnson Matthey, Sharps Pixley, and the Diamond Bourse. Much of Hatton Garden consists of rows of tall, dingy, late-Victorian buildings. At street level are the jewellers' shops with their garish signs for "discount", "valuations" and "krugerrands". Upstairs are warrens of small rooms, often protected by heavy security doors, where dealers and craftsmen have worked for generations. The manufacturing end of the business is dying off; most jewellery is now imported. But the trade flourishes.

One of the most distinct communities in the Garden is that of the Jewish traders, who moved into the area in the 19th century. Mostly fleeing pogroms in Europe, they came to dominate the Garden's jewellery trade. Nazi oppression brought another wave of refugees - mostly Hassidic Jews. Their descendants still conduct their business on the streets wearing the traditional black hats, coats and breeches that would have blended into the scene in 17th- century Vienna.

The area retains its Jewish culture. On Greville Street is a Garden landmark, The Nosherie, which, despite its brash New York deli sign, is an old fashioned Jewish cafe. Mature waitresses serve salt beef sandwiches and meatloaf in prodigious quantities. Men in camel-hair coats and trilbies still carry out business deals here, taking out small magnifiers for a fleeting inspection of jewels. A familiar figure in Hatton Garden is Michael Hirsch, who has worked for the big gold dealers for 30 years. He is frequently called as a police expert in big cases. As a buyer and seller of precious metals, he probably knows more about gold than most.

"Sometimes people try to fool you. Lead bars dipped in gold are a favourite," he says. "I can tell by the smell, the hardness and handling if something is not right. Early on my boss taught me: 'First, don't look at the gold, look at the person's face'. That's advice that has served me well.

"When I first came to the Garden the diamond dealers would do their business in the street, between 12pm and 2pm each day," says Hirsch. "But of course, you can't do that any more. Business down here has always been based on trust. There is a Yiddish term - 'muzel brocho' - my word is my bond. If someone reneged on a deal, they could never trade down here again."

The Garden has always adapted to new communities. Hirsch says the Indian community are now big buyers of pure gold. "Indian people will buy a gold bar as other people buy a loaf," he says. Recently Afro-Caribbean dealers have settled around Greville Street, to cater for their community's well- known appreciation of gold jewellery.

By the nature of its trade, Hatton Garden has also attracted another distinct group - London's criminal fraternity. Stolen jewellery has always poured into the Garden, sold or melted down and put back into circulation. Lucre from crime has forged links between the less scrupulous dealers and inner London's crime families.

London's working-class criminals have always had a magpie fascination with gold and jewellery, both as an ostentatious statement of wealth and as a readily tradable commodity. In the past I have seen a London villain take off a bulky gold ring to pay for a batch of cheap and probably stolen CDs - thus seizing a business opportunity that might otherwise have slipped away. Stolen jewellery is surprisingly hard to trace. If caught with stolen gear Garden traders will say they bought the haul "in good faith". Gold once smelted cannot be identified. Hatton Garden's greatest attraction for criminals is its cash economy.

The ease with which stolen jewellery passes through the Garden was shown in 1994, when some items stolen from Prince Charles turned up. The jeweller concerned, 39-year-old Geoffrey Mann, said he had unwittingly bought the four pairs of cufflinks and a tiepin within hours of the burglary at St James's Palace. Mann saw the pictures of the missing items in a newspaper and contacted Scotland Yard. They were returned, and the Prince thanked Mann. The jeweller had paid pounds 450 for the pounds 10,000 haul.

The relationship between the Garden's criminal underworld and dishonest traders led to one of the most remarkable episodes in recent criminal history. By the Seventies, certain traders in the Garden had become known for their skill in VAT frauds. Then they had a stroke of luck.

One of the first acts of the Thatcher government in 1979 was to scrap VAT on gold coins such as the South African krugerrand. VAT was kept on bullion gold and the rate was raised from 8 to 15 per cent. This was a "golden opportunity", as it were, for the more devious minds in the Garden.

The scam worked like this: traders would go into banks such as Johnson Matthey and purchase, say, pounds 100,000-worth of gold krugerrands. They would then melt them down. The bullion would later be sold back to the banks, where the traders would receive pounds 100,000, plus the 15 per cent VAT. Every time they went past "go", they would get 15 per cent. The VAT was then legitimately claimed back from the tax authorities by the banks. But the VAT money passed to the fraudster was never paid back. Millions were made, effectively from the taxpayer's pocket.

At the same time, a number of armed robbers who hung around the Garden heard about the scam. By the early Eighties armed robbery had become a dangerous business. The supergrass system was thinning their ranks, and being caught with a sawn-off shotgun could result in an 18-year jail sentence - all for a few thousand pounds. The VAT gold fraud had a beautiful simplicity and made millions - and, if caught, all you could expect was a two-year sentence. Suddenly, the Garden was awash with gold fraud gangs.

Customs & Excise did not take long to realise that there was a problem. Legislation was passed to stop the frauds. But the criminal minds of Hatton Garden found new loopholes. Denis Graham says: "Then there was the 'missing trader' scam. When it came to paying VAT the trader had 'disappeared'." Often these were in fact front companies, often run by "patsies" - small- time criminals who would be paid to take the rap.

"The problem, for the Government, was how not to pass legalisation that restricted legitimate trade," says Graham.

Since 1979 Customs and Excise has played cat and mouse with gold fraud gangs. Each time a new restriction has been put in place, the criminals have thought of new ways to get round it. When VAT was put on krugerrands, fraudsters started smuggling them in from the Continent where they carried no or little VAT. Over the years, these frauds have attracted every major criminal group, including the Mafia and the IRA. Hundreds of people have been jailed for these offences, but an estimated pounds 1bn worth of VAT money has fallen into criminal hands.

The VAT frauds were an education for London's criminal elite, who had thus learnt how to smuggle, conduct fraudulent transactions and turn "dirty" money into clean money. They taught them the skills they needed for their current lucrative business in laundering drug proceeds.