After having dealt with specific problems that were discovered in its four-month investigation, the Board of Governors of the GIA devoted a three-day board meeting to making the necessary decisions to restore the industry’s confidence in the organization by setting new standards of integrity, ethics and accountability.

 

Ralph Destino, until now Chairman of GIA’s Board of Governors, has been persuaded by his colleagues to assume the executive leadership of the Gemological Institute of America. Effective immediately, Destino has been appointed to the newly created position of Chairman of the GIA – a full-time executive post, which basically makes him the company’s chief executive officer. The current president of the GIA, Bill Boyajian, will keep his position, but from now on will report to Destino.

 

This is but one of a whole range of decisions designed to restore public and industry confidence in the GIA and to reassert the company’s position as the leading grading laboratory. There had been many calls for the resignation of Boyajian, as under his leadership (or lack of leadership) the institution was allowed to develop a corrupt culture based on favoritism, fraudulent activities and a weird buy-honor-for-money environment. But the board decided that the enormous contribution made by Boyajian over many decades, and his unique skills as a researcher and educator, justified his continued employment by the GIA, albeit at a reduced role. Destino, who previously served as Chairman of Cartier, will establish his office at the GIA’s laboratory building at 58th Avenue in New York. He’ll remain a member of the Board of Governors; no new chairman has yet been named.

 

A number of major decisions were taken which will dramatically change the GIA’s culture for the better. As of January 1, 2006, the “membership” structure will be discontinued. Under this structure, some 2000 privileged clients, who were paying an annual fee, enjoyed a reduced certification rate and preferred access to services (and people). At their annual dinner, members would also contribute to “presents” to be distributed among the graders.

 

By abolishing the membership structure, the GIA is able to introduce a “one price policy” -- everybody will pay the same price for the same service. Destino informed us that his staff is now working out the precise pricing arrangements. He expects that some clients may pay slightly more than they had up to now, others will pay less. “It may not be realized that the GIA actually hadn’t changed prices for some 17 years,” explains Destino, stressing that the new structure will not represent price increases. “Actually, as we add now a cut grade at no extra charge, our clients will get more for their money,” he says, suggesting that the preferred prices hitherto charged to members, represent the level to be applied to everybody. By this decision, the GIA choose to ignore the calls made by many – including us – for a significant reduction in certitification prices. Though the abandonment of the membership structure had been on the cards for a long time, and was not an unexpected announcement, the move will help to reduce the GIA’s “favoritism” environment that had prevailed for far too long.

 

No More Donations by Diamantaires

Though Destino stressed that there had been no improper links between those who made donations and also used the laboratory services, he stated “we recognize that there may be an undesirable appearance of impropriety which we must avoid.” Therefore, it was decided that no donations would be either solicited or accepted from diamond industry stakeholders who would also be users of the laboratory’s certification services. GIA President Boyajian had recently gone on record that donations represent less than 5 percent of the organization’s total revenues, so the financial impact had always been limited – certainly not worth the reputational damage associated with the “purchase of honors”.

 

The decision will be greatly welcomed by the industry and may well had become inevitable, as, in the ugly environment of the past few months, many of the donors (League of Honor members) were unwittingly and probably unjustifiably associated with the corruption that had become the subject of the four-month internal investigation.

 

No Monopolies for Drop-Off Windows

Some of the harshest criticism of the GIA’s procedures has been the rather unexplained (and still unexplained) monopoly it had granted to Martin Rapaport to operate “submission drop-off windows” around the globe. By using Rapaport, those seeking grading reports would receive them often substantially faster than by direct submissions. “As of January 1, 2006, we will adopt an open concept of consolidations”, says Destino. “Every company or individual that meets certain criteria, to assure the integrity of the process and the level of service to the clients, will be allowed to operate a drop-off window on a non-exclusive basis. There will be no monopolies,” he adds.

 

At a fair level playing field, those providing the convenience of consolidation (which should reduce the shipping and handling costs) will compete for such services, though it is expected that with the removal of the ‘preference factor’, many companies will decide to submit their goods directly for grading certification.

 

The Board of Governors, who made this decision unanimously, still owes it to its clients to provide a fuller explanation as to why the monopoly had been granted to begin with, and what benefits had accrued to the GIA throughout the years. Just as in the area of donations, “appearance” is of great importance, as it is in this instance.

 

Addressing Certifigate “Head-on”

Ralph Destino confirms that all the names of individuals and companies who were found to be implicated in Certifigate have been given to law enforcement officials. The relevant companies involved have been informed that they cannot any more submit stones for grading and have been stricken from the GIA’s list of clients. No names will be released for the time being in order to avoid hampering the police investigations.

 

Reports from Antwerp suggests that BHP-Billiton Diamonds, in order to comply with Belgium’s anti-money laundering diamond industry compliance laws, has asked each of its clients to confirm in writing that their companies (or associated companies) have not received such notification from the GIA and that they are not involved in the Certifigate scandal. The DTC is expected to take a similar action.

 

Incidentally, when we learned recently that GIA president Bill Boyajian was planning to visit London to brief the DTC about Certifigate, we advised the GIA that we would raise strong editorial protests to any attempts by the GIA to share the names of the implicated companies on a preferential basis.

 

Each and every diamond stakeholder has a legal (PATRIOT Act; national legislations) and a moral obligation to conduct due diligence on clients and suppliers. The bribing companies are clearly in violation of AML/CFT laws and diamond companies (and banks) must review their commercial relationships with these companies. We believe that the GIA owes it to its stakeholders to release these names – and the faster the better. In any event, we will consider any “preferential release” by the GIA to some, but not all, stakeholders as probably illegal (“tipping off”) and certainly immoral, as it will enable some companies to adhere better to AML/CFT laws than others.

 

Ralph Destino (and the GIA) has coined a nice phrase for the bribers – they are individuals who “violated the GIA’s rules of ethics.” There can be no legal reason for the GIA not to release names of companies which, in its view, have violated its code of conduct. There is no need to shield behind the legalities of not accusing companies of criminal activities as long as they have not been convicted – as the GIA only talks about ethical violations, doesn’t it?

 

Destino refuses even to provide the exact number of companies that have been put on notice. Market rumor talks about a range between four and seven. We would consider the latter number to be the more realistic. And there is probably more to come.

 

Whistleblower Hotline

Ralph Destino notes further that two hotlines have been installed through a third party company, EthicsPoint, to provide clients, as well as students, employees, and vendors, a means by which to openly and safely communicate cases of potential misconduct anonymously and confidentially with GIA’s management and Board. “Even you can avail yourself of that service,” said Destino in a telephone conversation. [The toll-free phone number in the U.S. and Canada is 866-295-2625. Outside the U.S. and Canada, please contact a local operator to place a collect call to the following U.S. phone number: 503-726-2269 (only an operator can place the collect call). Multilingual support is available, and lines are open 24 hours a day, seven days a week.]

 

David Childers, the President and CEO of EthicsPoint, informs us, in reply to our questions, that his company “serves hundreds of clients in the corporate, higher education and non-profit sectors.  We are also an approved government provider and support a number of municipalities, counties and school systems with a valuable suite of services. Our client list includes a significant number of the Fortune 500 but is not published.” Childers, further says his “system and service exceeds all of the guidelines established in the Sarbanes Oxley Act and the recently revised Federal Sentencing Guidelines.”  He stresses that the “core of our services is a confidential and anonymous reporting mechanism.”

 

“Candidly,” he says, “this service is designed for the protection of the “whistleblower” and not for the client. Whistleblowers who may utilize our system are not limited to just employees but also vendors, clients, suppliers and spouses.  Numerous studies show that without a secure and respected means to report, issues of misconduct go unreported. EthicsPoint is very well respected in the hotline/helpline industry and by the stakeholders that utilize our services.”

 

Destino has great praise for EthicsPoint. [We are still awaiting some clarifications from David Childers on how the company will deal with information suggesting patently illegal activities. We’ll report his replies as we receive them.]

 

GIA Laboratory Head Tom Moses has gone some giant steps beyond “whistle blowing” – and makes it obligatory for staff.  Revising the existing GIA Code of Conduct and Professional Ethics Policy, GIA staff is now required to report Code of Conduct violations that they may witness or of which they become aware, and failure to do so will result in dismissal. This is akin to the mandatory suspicious activity reporting in the jurisdictions of some major diamond markets.

 

Clients have also been put on notice and reminded of GIA’s current Code of Conduct, which prohibit employees from soliciting or receiving compensation in any form from lab clients, including cash and/or non-cash gifts, or entertainment. “There are no exceptions to this rule, and any violations will result in immediate dismissal, while any laboratory clients who fail to respect this rule will be stricken from GIA’s client list,” notes Moses.

 

Free Verification Services

As we had already said above, Destino confirms that a no charge verification service has been established through which each holder of a GIA grading certificate can submit his/her stone for verification. This service has an unspecified life (“we haven’t decided yet anything in regards to the duration of this service”) but it will be given certainly for more than six months.

 

Moses guarantees that these verification requests will receive the highest priority and be returned within a three to four day time span. Industry sources have serious doubts whether anyone – especially consumers – will be motivated to find out whether his/her certificate is fraudulent and is “overstated or upgraded”. “Who truly wants a downward correction?” says an Antwerp dealer. When an obviously upgraded certificate is found, this raises a host of legal questions which we don’t want to address at this time.

 

[In an unrelated story, in Israel earlier this week, a diamantaire saw a stone with a certificate that was familiar to him – it was a copy of a certificate of one of his own stones kept in Hong Kong. It appears that copies may be passed on as “originals” applied to “similar” stones. A complaint was filed with the police.]

 

Establishment of Operations Review Committee

Destino further informed us that an Operations Review Committee has been established to establish procedures that will facilitate complete anonymity of the owners of the stones in the grading process. Stones will be randomly handed out to graders. Needless to say this is a “great decision” – though one would have thought that, by now, this would have been standard operating procedures. Other labs, such as the HRD certification services, have had such rules in place already for many years.

 

We had expected that the Board of Governors would have also taken some decisions affecting the board itself. We would argue that the genuine efforts by Ralph Destino and his colleagues would get a much greater degree of public acceptance and credibility if, first, the board admits to having failed their stakeholders. That it did not do its job. We think that if the Board had functioned properly, this “mess” would have never been created. Destino says that “no changes in the Board of Governors are contemplated. The terms of office of each of the governors is spelled out in our bye-laws. In 2007 some three governors will step down, followed by some four to five in 2008,” he says.

 

Though many of the decisions taken by the Board of Governors should (or could) have been taken six months ago, or even earlier, it should be recognized that they reflect a major change – and a major change for the better. As we have been one of the severest critics of the GIA’s conduct in recent months, we are greatly encouraged and “feel quite good” reporting about these recent developments. They will go a long way in shaping a “new”, better, and trustworthy institution. The Board deserves to be congratulated – but we are still expecting more. If I may add on a personal note: “Ralph, releasing a simple list of names will do wonders to restoring faith and confidence in the GIA. Just a few names will do….”