Amid all of the emotions and sensitivity of the Gemological Institute of America’s (GIA) Certifigate scandal it is occasionally worthwhile to take stock of the state of affairs and to reflect on where we are now and, most importantly, where we are going. Should it be the objective to bring to justice a large part of my list of 25 bribers and several bribe recipients? Do we want the GIA as a certification institution to collapse and match Enron, Arthur Anderson, and WorldCom in the speed of its demise?

Or do we want all want to work jointly and tirelessly to restore the GIA’s standing as the integrity standard of diamond paper? Do we want a worldwide recall of all GIA certificates of one carat and above issued prior to 1995? Should we be concerned about the consumer finding out or should we become proactive in informing consumers? Where is it all heading?

These are important questions. It is my guess that if one would conduct an opinion poll in the diamond industry, the large majority of the players would probably prefer that we stop writing about the subject so that it could simply be forgotten. These include people who are struggling in a difficult market and have been greatly hurt by the scandal but who just want to move forward and make a living. Then there are some mid-size and mega-companies throughout the value chain that have greatly benefited (and have grown enormously) and, therefore, would also prefer to keep a low profile on the scandal and to just let it pass. The pressure to have justice done comes from a small but rapidly growing group of people to whom ethics, decency and justice mean a lot.

The reason we recently put it so clearly back on our agenda was mostly because of the reports that U.S. Federal Attorney Harry Chernoff has closed the file. I’m not the only one that believes so. We should not forget for a second that the Certifigate scandal covers a wide range of fraud, corruption, bribery, and forgery. We are talking about serious offenses. Whoever recognizes these basic elements has the answer to where we are heading: criminal matters must be dealt with and resolved in a court of law. It is just that simple.

There is an unfounded feeling in the market that the U.S. Federal Attorney Chernoff seems softer on the bribe-recipients than on the bribers.  That public perception may be the result of the repeated statements by the GIA that it is fully cooperating with the U.S. Attorney’s office on a continuing basis, passing loads of information to it. In all fairness, that is the way every involved or affected party ought to act; one must cooperate with law enforcement. If all parties that have hard information or evidence on the misconduct had shared it with the U.S. Department of Justice, there might have been no need today for urging the government to expedite the investigation.

One has to be careful not to develop conspiracy theories. We must assume that the FBI and the U.S. Attorney's Office know how to conduct a criminal investigation and, most assuredly, that they do not take direction or advice from the GIA as to what investigative steps they should or should not take.  We must assume that if the U.S. Attorney’s Office determines there is sufficient evidence to bring an indictment, it will take the necessary steps to do so; if sufficient evidence is lacking, it will not.  Nevertheless, there are too many unanswered questions.

For instance, one of the “certified bribers” moved abroad. Why was there never an extradition request? It is, however, most telling that some 10 months ago he moved back to New York, apparently not at all worried that he might be arrested or face trial. It is his return to New York that has given added impetus to the belief that the U.S. Attorney has closed the files.

Industry Leaders Voice Concern

Ronnie Friedman, the president of the Diamond Manufacturers and Importers Association of America (DMIA), really gave the right answer to the above-mentioned questions at the organization’s annual meeting earlier this week.  He expressed frustration at the slow pace of the wheels of justice. His displeasure with the U.S. Attorney’s office may be best demonstrated by his public announcement that the DMIA has been writing letters to the higher-ups in the U.S. Justice Department, such as Chernoff’s boss, Michael J. Garcia, the U.S. Attorney for the Southern District of New York.

“We are concerned that the investigation of this affair by your office may have been prioritized by other investigations,” wrote Friedman to Garcia. “If that is indeed the case, we hope this letter will impress upon you the significant harm to our industry which has resulted from the alleged criminal misconduct. In our role of responsible leadership for our industry, we strongly encourage the prosecutions of any and all criminal wrongdoing.  In simple terms, if members of our industry have engaged in criminal acts such as bribery, fraud, etc., it is imperative that they be exposed and prosecuted for profiting from illegal conduct and prevented from continuing to destroy the image and reputation of our industry and our product,” wrote Friedman.

We have reasons to believe that other trade and industry leaders will also become more vocal on this issue in the months ahead – and that is a welcome development.

All of the publicity and public appeals for action will not result in a possible loss of public confidence in diamonds and the diamond industry. No, to the contrary. Loss of public confidence will come about as the result of the lack of action by law enforcement officials. U.S. Attorneys on all levels, including the U.S. Attorney General in Washington, must recognize that if they don’t issue indictments in Certifigate the resulting turmoil in the diamond jewelry market will be enormous. In light of the abundance of evidence of wrongdoings, the option of no prosecution should not exist.

In recent weeks, I have disclosed many isolated examples of Certifigate wrongdoings to highlight and illustrate how the scam operated in practice. More examples will follow in future publications. This week, through journalistic investigative channels, I have been able to satisfyingly verify that virtually each incident I have reported so far was also discovered by GIA’s internal investigator Tom O’Neil quite some time ago. I’ve also been able to ascertain that all of my examples had already been forwarded by the GIA to the U.S. Attorney’s office. So details on our “case studies” are on Chernoff’s desk. Whether he followed up on them is a different matter – many of those initials mentioned should have had visits from FBI agents, to say the least.

It remains exceedingly troubling that the U.S. Attorney is perceived as sitting on his laurels and allowing some of the evidence to become useless while the statute of limitations runs out. Friedman was courageous in singling out the visible lack of progress of the U.S. Attorney’s office (which he has visited) as presenting a serious predicament for the entire industry.

The GIA’s Investigation

Through many interviews, I have become more aware of the width and scope of GIA O’Neil’s internal investigation. He thoroughly questioned key players including the organization’s ex-president Bill Boyajian, ex-vice president Tom Yonelunas, and also existing key executives including Tom Moses, Donna Baker and Ralph Destino. O’Neil reports directly to the GIA’s Board of Governors and has a mandate to do and investigate anything he pleases. And the results of the investigation have been passed to the U.S. Attorney.

I admit that I am among those who have expressed doubts about what – if anything – the GIA had passed on to the authorities. However, as an investigative journalist in an ongoing and evolving story, I owe it to myself and to readers to keep an open mind and to change previously expressed positions or views whenever the facts warrant it. Wherever these facts take us.

Any failure by the GIA to present all the facts that it has discovered would make it subject to obstruction of justice charges. It only makes common sense that the Board of Governors will not allow this to happen. In response to our views that the GIA should be the U.S. Attorney’s main target, as its name and logo are on the questionable certificates, GIA President Donna Baker commented that the “GIA cooperated fully and completely with the criminal investigation so that it would NOT become a target itself. If the government had reason to believe GIA's cooperation was less than complete or candid, our status would indeed become that of target.” We must give the GIA a lot of credit and respect for being the only involved party in the scandal that is truly and fully cooperating with the authorities. We have anecdotal evidence of diamond dealers which went to the authorities to tell them about wrongdoings they were aware of – but when asked to sign an affidavit to this effect they were not willing to do so. In contrast, the GIA has been literally going extra miles to bring the information the U.S. attorney.

However, cooperating with the U.S. Justice Department isn’t the same as cleaning up house. On that score we believe there are still serious shortcomings. [There are those in the market that tell us that some of the old practices are still taking place today. We are investigating, following up leads, and for the time being, we have not seen firm evidence of any continued wrongdoing.]

The Complexity of Evidence

One should not underestimate the complexity of building a legal case that would lead to convictions. My (limited) understanding of the U.S. justice system is such that a prosecutor will hesitate to go to court if he doesn’t have comfort that he’ll win and get convictions. One of the main reasons that it is so difficult to substantiate some of the charges in the Certifigate scandal is that in many cases the right grade was obtained fraudulently. In the books of the GIA, it is hard to trace those instances – one must show that money passed hands, the bribery, the laundering.

Allow me an example that took place in 1999. A very honorable and respectable diamond dealer had a 20-carat stone on which he got a D-VVSI. The diamantaire believed that the stone was a D Flawless, and he argued with the GIA for almost two years – to no avail.  Then, through a middle man, he was advised to reduce two points of the stone after which the diamond was submitted a member of the community of bribers [identity is known to this writer.]. The stone then got a D Flawless within days. Also, the make was moved from “Very Good” to “Excellent.”

The exercise cost the diamantaire close to $30,000 and he ended up getting the grade he had deserved to begin with. [This case has also been discovered by GIA investigator O’Neil and passed on to the prosecutor.] What the government needs is proof on how this money passed and to whom, something which might move the focus of the government’s case to an all-out money laundering investigation.

I’d like to differentiate between aspects of Certifigate that affect the consumer (such as upgrades or deficient certificates that fraudulently omit information such as HPHT or fluorescence) and issues of traders being defrauded by their peers in cahoots with some bribe-recipients at the GIA. We have seen examples of trade-partnerships in large stones that first got the grades they rightfully deserved. Then one partner bought out the others -- and subsequently got himself an upgrade. His honest co-partners in the stone lost out.

We also have examples of people who were out of favor with certain GIA graders and who believe they were intentionally downgraded. We are also aware of GIA graders “tipping off” outside parties by telling them that Mr. So-and-So has submitted such-and-such stone. The graders would tell the outside parties to go and buy that stone and then get a better grade.

We have seen evidence where brokers would show a stone to a potential client, who would note the number on the certificate and would then find out from an inside GIA source who had submitted that stone. This would enable the potential client to purchase the stone directly from its owners and bypass the broker. Or, how about the scenario in which HPHT diamonds were not checked for this treatment – is that “an accident” or intentional omission? Federal agents must be able to judge a variety of different suspicious scenarios.

Certifigate and the Patriot Act

Some major rough suppliers and other players in the diamond industry have various codes of ethics or best practice principals. These companies can move the benchmarks of their standards any time they please. And they do. But they may have lost sight of the fact that the regulatory landscape has changed since 9/11. But no company is above the law.

The U.S. Patriot Act and FinCEN’s Jewelry Rules, UK anti-money laundering legislation, the FATF standards, and European Community law all clearly state that bribery and forgery are predicate money laundering offenses. These are serious criminal offenses in virtually every jurisdiction where rough suppliers and their clients operate.

The laws which govern the diamond business in New York and elsewhere require dealers and suppliers to conduct adequate AML/CFT due diligence of trading partners; require the reporting of suspicious transactions; and prohibit one to accept moneys that were derived from illegal activities (i.e. any payment for rough by fraudulent client). Moreover, anyone’s non-performance in following the laws may make one unwittingly a corroborator to money laundering. The laws don’t require anyone to have legal proof. The mere presence of suspicions is enough for one to take actions.

In this very confusing Certifigate situation, one should be guided by law. Members in the diamond community who actually do a serious due diligence on their trading partners in accordance with the applicable AML/CFT regulations are violating the law if they knowingly deal with companies or individuals suspected of money laundering and bribery. The mandatory AML/CFT program of diamond merchants requires dealers to “develop procedures for identifying transactions involving potentiality illegal activity, and procedures setting forth actions that a dealer will take in a response to such transactions.”

FinCEN’s Jewelry Rules allow the diamond dealer considerable discretion in determining “whether a transaction should be refused or terminated” which “must be based on the facts and circumstances relating to the transaction and the dealer's knowledge of the customer or supplier question.”

The publication (by GIA or others) of the names of the suspected bribers may leave any industry player – including upstream suppliers and downstream jewelry chains – with an implied obligation to sever business ties with these companies. As so much anecdotal information has become available in recent years – including a court case – and in the absence of a clear determination by the U.S. Attorney, those who wish to play it safe should also view Certifigate through the lenses of their own internal AML/CFT programs.

The spate of the recent articles on Certifigate have contributed to an industry-wide wake-up call, or, more precisely, to the awareness that the industry cannot remain complacent on the issue. Referring once again to Ronnie Friedman’s call to U.S. Attorney Garcia: it reflects the industry’s overriding need for “closure” – to end these lingering uncertainties and to restore tranquility to the trade. His plea deserves the widest possible industry support and the heads of other trade organizations should go on record and publicly endorse these views.

Pleaded Friedman to Garcia: “If your office’s investigation of this matter is currently ongoing, we implore you and the members of your staff as well as other law enforcement agencies, to devote your full time and attention to bringing this investigation to an expeditious conclusion.  If any member of our industry is found by you to have been actively involved in criminal conduct, you may be assured that we will welcome news of their indictment, arrest and prosecution for said conduct.”

Well done, Ronnie – and have a nice weekend.