GIA Certifigate: Phase Two

The two-day Plumb Club Forum, held earlier this week in New York, was one of the most remarkable industry events I have attended in many years. If there was one compelling message, one common denominator gluing all the presentations together, it was that trust, integrity, transparency, good governance, honesty, accountability and fairness have become the essential imperatives of diamond jewelry business conduct in general – and of relations to the consumer in particular. To the manufacturers and retailers who attended the Forum, this is both axiomatic and self-evident, as is the realization that in the absence of these imperatives, there would be no justification to stay, nor any chance to succeed, in this luxury product business.  

The conference, entitled “The Changing Landscape of the Jewelry Industry”, was a meeting of minds of prominent, optimistic and forward-looking people, profoundly believing in our industry’s future. In this memo, I don’t want to review the various presentations, but, rather, I want to convey the “feel good” sentiments that the whole conference exuded. It was a happy event, a celebration of the promise of tomorrow.  

Looking out from the podium, I wondered if these jewelry executives in the audience had a contingency plan on how to act if, a few years down the road in the coming recession, some consumers wanted to sell some of their diamonds in order to improve their households’ cash flow, only to find out that their grading reports had overstated reality, and that the color grade was lower, or that the natural stone was really treated. Who would be liable? Who would pay? What would the salesperson tell the customer? Would one or more reported case trigger an avalanche of more people either selling or checking their certificates?

Consumer Backlash?
Is this a likely event? There are those who are counting for such scenario never to happen and who are suggesting that people like me and my U.S. colleague Rob Bates should simply shut up and drop the issue. “You are destroying us,” was one of the less kind comments. One can’t help but wonder whether those who would rather forget the possibly thousands or tens of thousands of fraudulent certificates that could be out there can reconcile these thoughts with all the ethical fundamentals espoused at the Plumb Club Forum.

To me, this week presented a new turning point. When I was in New York, I verified that the FBI agent [whose last name is similar to that of the GIA investigative counsel, but there is no relationship] had been taken off the job about six months after the GIA settled the Pincione lawsuit. Though a few days ago I still believed that the U.S. Federal Attorney, Harry A. Chernoff, had not fully closed the case, today I know that he has, in fact, closed it. The Grand Jury went home a long time ago. As one ex-prosecutor, who knows Chernoff, says: “Compared to the enormous serious money laundering and narcotics cases currently being investigated, the GIA Certifigate scandal is only of marginal government interest. So what if someone over-paid for his diamonds.”

Thus, what could possibly be the largest (and probably the longest) consumer fraud ever perpetrated in the diamond business may yet go unpunished, as if nothing happened. Forget about the micro-picture -- on a personal level, businesses got hurt. People went bankrupt. Families were destroyed. If this sounds dramatic, we can write books full of true anecdotes.

We see that the alleged misconduct has been going on for almost two decades – as far as we can document it. While walking in the corridors of the Plumb Club Forum, one merchant recalled that almost 15 years ago a female GIA grader was “marketing her upgrade services” in the office of a diamond company (S., which has since moved from 5^th Avenue to India). For a basic bribing down-payment (signing-on payment) of $7,000-$9,000 one could secure continuous upgrade services on stones in the one- to three-carat range. One of those to whom the services were offered informed the GIA. Instead of appreciating the tip, lab members retaliated against the informer. That may be a minor incident in a long-forgotten past, but we believe it is relevant today.

I want to say this very clearly: we cannot say for certain that things that happened in the past are not continuing today. It isn’t over yet. When I tried to convince one of my oldest and most trusted sources on the Certifigate scandal to share his concrete information directly with GIA’s Donna Baker, Tom Moses or Ralph Destino, he declined. They have demonstrated their unwillingness to really deal with the issue, he commented sadly.

Chairman Ralph Destino truly and honestly believes that under his leadership the GIA has made incredible changes, and that the organization is totally different today than it was less than two years ago. It might puzzle the chairman that there is a genuine perception in a large part of the market that all what management is credited for having done is limiting the damage to the GIA and just covering it up. If the U.S. Attorney doesn’t return any indictments and if no trial is to take place, which is something the GIA says it cannot do anything about, market perception will still be that the GIA didn’t want anything to happen. Strangely, it may well be in the best interest of the GIA that the U.S. Attorney would indict some bribers and bribe recipients.

Some of the nastiest practitioners of these past practices are still in their jobs at the GIA. A few weeks ago, we noted the initials of partners in a business, who, over a long period of time secured fraudulent certificates. Because of an arbitration where several people were privy to details of the corrupt business relationship, the GIA was genuinely interested in going after those who corrupted its greatness and damaged its brand. Why didn’t the GIA immediately ask the relevant diamond club for further information? Why didn’t the GIA ask me for the full names so it could investigate and decide whether a letter should be sent notifying them of violating the GIA ethics codes, as was done in the past? How come after having issued a handful of letters denying the recipients’ further use of GIA facilities, more such letters haven’t been issued?

The List of the “Dirty-Two Dozen”
On the back of an envelope, based on notes and memory, I compiled a list of some 25 names, which, in my book, are proven bribers. If I could make such a list with relatively ease – and I am probably not the only one – I totally and completely cannot comprehend what either the GIA investigator Tom O’Neill or U.S. Federal Attorney Harry Chernoff have been doing. It has become clear that the industry cannot – or should not - rely either on the GIA or law enforcement to get to the bottom of this. Reluctantly, I conclude that this will become the task of the trade press. From commentators, we are now becoming investigators. It’s not the way I planned to spend my final years in journalism.

As a reporter, evidence mainly comes in anecdotes, which can be cross-checked with various parties. Let me share with you here one such anecdote that happened six or seven years ago, and dozens of people seem to be aware of it. I picked at random one name from my list whom we will refer to as P. He is on the board of one New York’s industry organizations. Another trader, called K, has a good customer in Europe to which, every month, he would sell a certain type of goods. One month he didn’t have the goods and he called his colleague P who provided him with a huge parcel of GIA certificates. K selected some 30 diamonds of one carat and up based on the certificates, and agreed on the price with P. Without ever having seen the goods, K sent the diamonds to his client in Europe.

The deal was closed with a “mazal,” which K had never broken in his life. When his client in Europe received the goods, the discrepancy between the certificate grades and the reality was blaringly blatant – off by several grades. A very upset K called his supplier, P; the latter didn’t seem upset. “Just have him send back the goods and I won’t hold you to your mazal,” P said, not at all surprised. It was only a parcel of 30 stones in the one- to three-carat range.

It would be nasty if I were to go public with just one anecdote. So here’s another one: it involved the sale of a pair of three-carat pear-shaped stones to a private individual. A dealer, also a K, offered a price but the private (non-trade) customer was surprised and upset. He had just bought a similar stone with identical certificate parameters at 25 percent less. K asked to see the other stone and the certificate and compared them to each other. The certificate said H color, though in fact the color was below K, which represents a huge price differential. The seller of this stone was obviously happy to get rid of it to a private [non-trade] client. That seller was P.

Investigators for U.S. Attorney Harry Chernoff know how to investigate and interrogate. They know how to subpoena. They know how to take testimony. Forgive me if I’m naïve, but I believe that the huge majority of our industry is of the same kind as the jewelers attending the Plumb Club Forum. Some misplaced sense of loyalties, partly ethnic and religious based, may prevent people from actually coming forward, but I believe they would tell the truth when legally compelled to do so. People with verifiable anecdotes should come forward.

The Nature of the Fraud
It’s time to put some order on the kind of fraudulent activities that we have identified in the Certifigate scandal. There are four or five different main infringements: 1) upgrades 2) intentional downgrades (and then the GIA person would inform a partner in the market of the availability of the stone) 3) GIA’s intentional ignorance of HPHT (especially in the 1998-2004 period this was highly prevalent) or 4) intentional ignorance of blue fluorescence. A mostly ignored additional illegal practice: a broker showed a stone and certificate to a potential buyer. The potential buyer would note the serial number on the certificate and, using facilitators, call the GIA to find out the name of the principal submitting the stone – and then the broker would be bypassed and the purchase made directly. A lot of brokers lost businesses and deals this way.

At the height of the corruption period the community of bribers may have controlled some 85 percent of the large and large fancy color goods coming from the U.S. market. At the Plumb Club Forum, JVC President Cecilia Gardner noted that not all companies had anti-money laundering compliance programs as required by law. Even those who may have programs are not all acting accordingly. It is worthwhile remembering that bribery is a predicate anti-money laundering offense. Anyone knowingly doing business with a company where the sources of money may have been derived from money laundering activities i.e., from bribery, is failing in his due diligence and is breaking the law himself.

At the end of the day, if the industry cannot rely on law enforcement officials to “clean up” the mess, the industry players will have to do it by themselves. The ethics espoused by the speakers at the Plumb Club Forum should not just be discussed in an auditorium but should be put to practice by everyone in the industry. We can write about and identify some of the practices, but it is up to the industry to decide how this industry will go forward.

Have a nice weekend.