Bribery, corruption and fraud are just a few of the predicate money laundering offenses which are patently illegal in virtually every part of the world. The impact of trillions of dollars of dirty money, derived from many types of illegal activities, produces a litany of harmful outcomes that devastate scores of economies mostly in weak governance regimes in developing or transitional economies. That much of this corruption is taking place in diamond source countries is seen by most of us as merely a regrettable and truly unfortunate coincidence; the industry’s resolute response – led by De Beers – was the creation of a plethora of Best Practice Principles. Having those principles is tantamount to saying “you see, we don’t do any of these repugnant things in our industry.”

Ultimately, as sellers of a luxury product universally associated with treasured sentiments of love, devotion, value, commitment, beauty, endurance and the like, we need these Best Practice Principles to continuously demonstrate the consumers of our product’s integrity – and we are even inventing special brands and symbols (Forevermark etc.) to deepen the trust and confidence of the consumers in diamonds. Whenever global compliance issues are raised (corrupt governments, etc), some will comment that the world is basically an ugly place; it is not up to the rather small diamond business (valued at some $16 billion a year in polished wholesale prices) to become the conscience of the world. There are things which are beyond our controls.

Indeed, on bribes in producer countries there are different opinions. Some call it “facilitation payments” and, as recently as a few months ago, a British government minister spoke out in favor of these illegal practices, provided it was necessary to advance British commercial interests abroad; she later retracted her statements.  The main diamond producers, De Beers, Rio Tinto, BHP Billiton and some others have followed a pragmatic approach, marked by tolerance and willful blindness or, maybe, genuine ignorance in dealings with problematic countries. Isolated specific problems (mostly caused by NGO’s or UN reports) are dealt with on an ad hoc basis – with remarkable success. With possibly one (temporary) exception, I am unaware of any rough supplier that has taken off a client from its client list because of violations of Best Practice Principles [and in this respect, the performance of the diamond industry financing institutions scores higher – but they, of course, have loads of regulators watching over their shoulders.]

As long as consumer confidence is maintained, protected, safeguarded, enhanced, and ensured – as long as no tsunami-size event is lurking on the horizon that may severely impact consumer confidence – we keep quiet.

Right? No, absolutely wrong.

In the face of  mounting anecdotal evidence of alleged massive fraud in certificates – mostly (and maybe solely) in the certification of stones in excess of three carats which are few in numbers but enormous in value – we don’t talk about it, we shut up, we keep quiet – and, mostly, we don’t write about it. [Most members of the trade press are either scared, or vulnerable to pressures, or they may even be implicated. I can sympathize with most of my colleagues – especially those who have their 30 years of career still before rather than behind them.]

If ever there was a time in which the producers and the downstream players should show that Best Practice Principles are worth more than the volumes of papers on which they are printed - it is today. There is a great temptation all of a sudden to hide behind legalities. A few years ago a principal in a DTC Sightholding company was convicted in a court of perjury, of lying to the court, and some other niceties. Anyone wanting to see an angry judge ought to read the judgment. I asked the DTC if this isn’t a “reputation issue” requiring the DTC to act under its Supplier of Choice allocation system. The answer I received: “Chaim, this involves a divorce case – it has nothing to do with diamonds.” The precedent was set: a person can have one reputation personally and another one in business. The DTC preferred the narrowest definition.

When in India some Sightholder companies were suspected of (indirect) involvement in the (unfortunate, probably unintended) murder of a non-paying diamond buyer, this was also not considered pertinent – though De Beers managing director Gary Ralfe did, in a speech to Mumbai clients, intimate that such conduct is not something the Best Practice Principles tolerate.

The Risk: Loss of Consumer Confidence

Now, however, we have a situation which demands immediate, forceful and proactive measures by the industry – led by the producers and by others who either claim to enforce or to adhere to Best Practice Principles. Companies like to hide behind legal arguments – as if they can only act if and when there is a legal conviction. This is a cop-out. But mostly it is morally and ethically wrong. Waiting for a conviction – if there will be convictions – is postponing a decision for three to five years, a period in which the consumers will see a daily dose of bad publicity. Waiting for a conviction makes a joke of Best Practice Principles (BPP). “Reputation” is not a legal term. It refers to someone’s name in the market, it reflects the conduct and behavior of a company, and it reflects the trust and confidence of colleagues and clients in a person or company. It is the perception that counts – and that also influences consumer behavior.

The first paragraph in the De Beers’ BPP reads: “To maintain and enhance consumer trust in, and the reputation of, the gem diamond industry, the Diamond Trading Company and the De Beers Group are committed to combating dishonesty and fraud in all business transactions. The BPP require Diamond Trading Company Sightholders and their contractors to make identical commitments.” The BPP then gives a list of what seems like the BPP’s “capital” offenses, which specifically includes: “Any trade misrepresenting the color, clarity, caratage, cut and provenance of a diamond.”

The worst thing about the industry-wide silence around “Certifigate” is that it exacerbates the seriousness of the problem. Any bona fide honest and decent diamantaire who has purchased certified diamonds that he holds in his inventory of large stones owes it to himself and to the future owner of these diamonds (i.e. his customers) to get a second opinion on his certificate. The legal implications of selling a stone with a certificate that may have been fraudulently acquired by a previous owner of the stone are enormous. As you know now that there may be a problem, you might be considered (in a future law suit) negligent for not having checked the inventory.

In all fairness to the GIA, it seems to be addressing the problem. But what are the other industry players doing? By being proactive now – not by waiting for more weeks or months to see what the GIA might or might not do – we all protect the consumer and his faith in our product. When the “bad news” comes out, the industry should be able to say that there are no “infected” certificates in circulation any more. Without exception. The consumer (and the retailers and jewelry manufacturers to whom the large stones are sold) would then easily be reassured that he buys with confidence. So far – no player has done anything; the silence is deafening. It must be realized that the most elegant statements of social responsibility and corporate ethics matter little if we only pay lip-service to them and allow our actions to undercut or even nullify these public statements and principles. Credibility and trust are like virginity – after it is lost, one never gets it back.

Who Cares about a Decline in Trust?

We have written on this subject before. We would have expected that the GIA itself – which has been dealing with this problem for almost six months – would have issued a call on owners of certificates of large stones to submit their goods for a second opinion (and at no cost I must add). It is not too late to do so.

Actually we don’t understand the protracted silence. We are writing this article reluctantly – after waiting in vain for many months for the GIA to come with some kind of explanation, some kind reassurance, with anything. The only thing sources close to the GIA are willing to say is “Be prepared for great changes – soon.” That’s not enough. That is not enough to stop the wild rumors of fraud figures ranging from a few hundreds of millions to a $1 billion scaring the markets. These rumors are probably grossly exaggerated – more fuelled by the high damages demanded in a civil court case.

The GIA is investigating and has informed law enforcement officials that it is conducting an investigation. That was a long time ago. Nothing was done (as far as I know) to reassure the markets.

The problem is not the GIA. It is still the highest rated and most respected gemological laboratory in the market, or, in deference to other labs, it remains first among equals. Rotten apples can occur in any organization – but management carries a heavy and ultimate responsibility. There are credible reports – and the GIA Board of Governors is privy to these reports – that more than five years ago top management was alerted to the suspected fraud. [People who had sold stones with a certain certificate subsequently discovered the trading of these stones with an upgraded certificate.] Even if something was done (and we don’t know that), it certainly wasn’t enough.

The practice apparently continued for years and years. There is too much anecdotal evidence of malfeasance for the GIA to hide behind the time-honored defense of “borderline cases” or “subjective process.” There is nothing “borderline” or “subjective” about giving money to exchange a certificate for a better one. The GIA is supposed to have a computer system that even takes into account an intentional change (causing light weight changes) to detect such practices. Thus the present management cannot escape responsibility and should be held accountable by the Board of Governors.

But my issue is with the perpetrators. There is no bribe without a briber. The issue goes far beyond the court case which is presently taking place in New York. It is so easy – and so convenient – to dismiss these allegations as legal issues, waiting the legal process to play out. A rapist caught in the crime is only a rapist if convicted? What nonsense. There is this (Eastern European) lady that has decided that she is not going to jail just to protect some big fish in New York. She and others are talking. To the GIA, the facts should be clear by now. As far as I know the dismissals haven’t started yet.

There is also another aspect. The new AML/CFT compliance rules, which are now going into full force in the United States, require diamond dealers to conduct a due diligence on their suppliers and customers. A company that bribes in order to get a fraudulent diamond certificate which, in term, will enable him to defraud his customer and the final consumer – is that someone who may be viewed as committing a financial criminal offense? Accepting money from a company that has illegally enriched itself - isn’t that accepting money which is the proceeds from a financial crime? Is this a money laundering offense by definition? Is that an AML/CFT compliant dealer? Is anyone doing business with such company not guilty of failing his own due diligence? 

Silence. We did a very unscientific survey. We made a dozen phone calls and asked diamond and jewelry dealers whether they knew the names of parties implicated by what we call Certifigate. With one exception they all cited half a dozen names. There were at least four names which appeared on every one’s list. Even if these companies are innocent (something we hope for them and also for all of us), they have already suffered reputational loss. Any name in business has a reputation attached to it.

 In a corporate context, a reputation is based on perceptions of the characteristics, performance and behavior of a company. Reputation implies a value judgment about the attributes of a company and is usually established over time. The risks to reputations are huge - and Best Practice Principles are some of the tools to mitigate risks and enhances corporate reputations. Provided, however, that they mean something. The financial impact of reputation loss can be catastrophic – in a worst case scenario (in which consumers of large stones lose the trust in our industry) it will lead to loss of revenues, it will lead to asset value depletion of loss in the “brand” names involved in Certifigate.

One industry participant accused me of not understanding the business. “Chaim, those who were smart enough to make money on certificates are seen as heroes….” I pray this man has it wrong.

This article would have never been written if the key players in Certifigate would have communicated clearly to the market whether there is a problem, how it is being curtailed, and what is being done about it. If there would have been a convincing “innocent explanation” for Certifigate, we would have been informed by now. The continued silence (justified by all kind of excuses which don’t hold water) exacerbates the problem. What might have been contained to being an issue involving some individuals, will become an issue of companies, of groups of companies, and, ultimately will affect the entire industry.

The ultimate price of the inaction by all players – including the dominant supplier – will unnecessarily be inflated to uncontrollable proportions. The real tragedy is that this could so easily have been avoided. It still may not be too late.

Have a nice weekend.