By Martin Rapaport
Posted: 11/4/2005 7:54 PM
(Rapaport…November 1, 2005) The diamond industry has the right to know: What has been going on inside the Gemological Institute of America (GIA) laboratory?
Have diamond graders and/or supervisors been taking bribes to upgrade GIA diamond grading reports? How long has this been going on? When did it stop? How many graders and stones have been involved? Who are the bribers? What is the GIA doing to clean up its mess?
Before going on, we at Rapaport have a few full disclosure statements of our own to make. Rapaport Group Companies in Israel, Belgium, and India operate GIA take-in windows whereby we accept diamonds for grading by GIA. We handle shipping to and from GIA laboratories, customer service and payments for lab services as well as marketing and promotion of GIA laboratories. The scale of our operations with GIA is large and financially significant for the Rapaport Group.
Furthermore, this writer firmly believes in the values that GIA has supported these past 74 years. GIA’s implementation of diamond grading standards, supported by a grading laboratory and educational system, has done more for diamond quality and pricing transparency, fair trade and consumer confidence than anything else in the history of the diamond industry. GIA’s education and research protects the industry from fraud as it raises the technical, professional, ethical and moral standards of our community. The GIA I respect, “calls it like it sees it” no matter where the chips fall. It is more interested in “doing the right thing” than protecting its money or saving its reputation.
I believe in the GIA, not because of the buildings, the laboratories or our business with them, but because of the shared values that it supports. This belief in the GIA and our relationship with the GIA is not unconditional. Should the GIA move away from its core values, then we will no longer support or represent them.
So let me make it clear. We at Rapaport define integrity as an unconditional commitment to core values. Our core values include honesty, full-disclosure transparency, fair trade and meeting commitments. Our Group’s commitment to integrity means that we are willing to lose money, reputation and everything or anything else in support of our core values. Therefore, dear reader, we are biased in this report — because we admire the GIA for its history and values. We are, however, not going to pull any punches and, in true GIA tradition, we will “call it like we see it,” no matter what the consequences — for Rapaport, the GIA or the industry.
Max Pincione’s April 2005 lawsuit against Vivid Collection LLC, Moty Spector, Ali Khazeneh and the GIA included a charge that Vivid made payments to the GIA to “upgrade” the quality of diamonds submitted for grading. Pincione presented Exhibit “F,” a handwritten page showing details of alleged payments and upgrades (Click to view this document in a new window.) Exhibit F, which appears to be from the year 2000, contains numerous initials and includes the text “To Alina $3,500 For August in Full,” “To Alina for September $3,500 paid.”
Although the handwritten page allegedly provided to Pincione by an “informant” could have been written by anybody for any reason and may never hold up in court, in my view it looks authentic and like a listing of upgrades and payments for them. Upon information and belief shortly after the lawsuit was delivered to GIA, a GIA employee with a name very similar to “Alina” was suspended. As far as we can tell it looks like “Alina” was allegedly bribed to upgrade the quality of diamonds on GIA grading reports. Obviously, further investigation and disclosure are necessary.
Rapaport News became aware of the lawsuit in August and published a brief article about it. In September, we began hearing false rumors of an FBI bribery investigation obviously driven by GIA’s own internal investigation. Finally, on October 18, the first day of the Succot holiday, the GIA issued a press release announcing the completion of their internal investigation and organizational changes that included replacing GIA laboratory head Tom Yonelunas with Tom Moses and firing four employees.
Following the release of the GIA press release and the conclusion of Succot, I immediately traveled to New York and spoke with a number of people before writing this article.
While I do not have access to GIA’s investigative report, I was able to develop a limited opinion of what is going on. As far as we can tell, the current situation is as follows: No one knows or can guarantee exactly how many, the type, or which lab grading reports may have been affected by the bribers.
What we do know is that after a very thorough independent — and I believe honest — internal GIA investigation, only a handful of bribers have surfaced and the number of stones known to be affected are in the tens, possibly hundreds, and certainly not thousands. The bribing activity appears to be limited to large stones graded in the New York lab and submitted by just a few firms. GIA is expected to provide all details of its investigation to law enforcement agencies.
Furthermore to the best of our knowledge and based on our own investigation, no diamonds submitted through Rapaport Group offices have been tainted in any way or were subject to any improper grading. Our policy is that we submit all stones with unique Rapaport numbers and the identity of the actual owner of the diamonds is never disclosed to any laboratory employees. While a highly confidential list identifying our numbers and the owners is provided to GIA management on an occasional basis, to the best of our knowledge, this list was kept entirely confidential and not shared with any lab employees or supervisors who would have an opportunity to change any grades.
Buyers are encouraged to carefully examine all large, expensive diamonds from all sources and to insist on a verification procedure if they doubt the grading standard. While grading reports are, and will continue to be, an excellent basis for trading diamonds they do not replace the need for independent examination and the need to know and trust your supplier.
When an important organization like the GIA makes a mistake, the best and most honest way out of the problem is for the management of the company to take responsibility and make full disclosure of the mistake. Management should also apologize for the damages caused and carefully explain what they are doing to make sure that the mistake never happens again. Full disclosure is not only good public relations in that it enables the reestablishment of trust in the company and its products, it is also good therapy for management. From then on management realizes that they will have to operate in a fishbowl with their actions and reactions scrutinized by their board, the public and even their competitors.
While GIA’s press release provides important information, it is highly disappointing and problematic. It also raises a number of complex ethical issues.
First of all, GIA does not provide full disclosure of what happened — they do not straightforwardly admit that any employees have been caught taking bribes.
They do not name the people taking or giving bribes. While the diamond trade is being concerned, confused and misled about the number and types of grading reports illegally upgraded, the GIA does not disclose the extent of damage even though it seems likely that only a very limited number of large diamonds graded in the New York lab are known to have been upgraded.
The GIA’s refusal to name the bribers is highly problematic. By firing graders and acknowledging the existence of clients who are “implicated” in “improper attempts to influence the outcome of grading reports,” the GIA is telling us that members of our trade have bribed the GIA, but they are not telling us who they are.
The GIA is inadvertently casting aspersions on their honest clients, implying that some unknown number of clients are bad apples, but not informing us of how many, who they are, or the types of diamonds that they deal in.
Why isn’t the GIA disclosing the names of the bribers? Could it be that when there is a conflict of interest between the financial interest of the GIA and the integrity of the diamond industry, the GIA protects itself at the expense of our industry? Is this how the GIA fulfills its mission statement of “ensuring the public trust in gems and jewelry by upholding the highest standards of integrity?”
When a conflict of interest arrives, is it the mission of the GIA board to protect the interests of the GIA or the public?
GIA undoubtedly has “good” reasons not to practice full disclosure. The threat of damages from the Pincione lawsuit obviously encourages GIA’s lawyers to limit public disclosure. On the other hand, the GIA is asking for the diamond industry’s trust, and one wonders, what else would the GIA hold back? If bribes were taking place in Carlsbad (California) — would this be disclosed by the GIA or would management, after taking legal advice, take care of it quietly? Can or should the diamond trade trust the GIA?
But what about the GIA board? If the public interest is being damaged and the board knows it — don’t they have an obligation to inform the trade and public?
Is this to be done through leaks to people that have agendas? Is GIA’s board to be exempted from the new zero tolerance policy?
Who makes decisions when there is a conflict of interest between the public, trade and the GIA? Who has the right to keep secret activities that violate the public trust and/or information that enables the trade to defend itself and consumers against fraud? Are the ethics and morals of the GIA to be governed by well-intentioned lawyers seeking to protect the GIA?
Now that we have provided perspective, communicated our strong words and made our impassioned pleas, let’s take a less emotional, more rational and realistic look at the situation. Other than a possible leaker or two, the GIA board consists of excellent people who really care about the GIA and its public trust mission. They and the GIA are currently in a tough situation. In some instances, whatever they choose is bad and it is extremely difficult to discern the lesser of the two evils.
Frankly, this is not a good time for us to attack the board and insist on idealistic, simplistic solutions to extremely complex problems and situations. Full disclosure is ideal and fair, but it is not a panacea. Applying a full-disclosure policy that is highly damaging to the GIA when appropriate alternative action can prevent abuse may be the wrong course of action. We must recognize that the GIA board has the right and obligation to make decisions that impact not only the GIA, but the industry and the public. We must give the GIA board space to operate and time to do what is right. Heaven knows, they have a hard enough mission as it is.
Having said the above, we emphasize that it is important for the board to carefully consider the full ramification of their decisions on all stakeholders, particularly the diamond trade. As a public trust entity, the GIA’s responsibility must be inclusive and sensitive. While a knee-jerk, full-disclosure policy may not be appropriate in the current situation, alternative solutions for the problems generated by partial disclosure must be provided. Ultimately, the GIA must recognize that, with rare exception, what is good for the trade is good for the GIA and what is not good for the trade is not good for the GIA.
Let us now consider the issue of identifying the bribers from a different perspective — a purely GIA self-interest perspective. By now, it is clear that bribers pose a threat to the integrity of the GIA grading report. If bribers are allowed to go on bribing, they will destroy the credibility of the GIA and eventually force the closing of the GIA laboratory and the GIA activities supported by profits from the laboratory.
If a grader specializing in large expensive diamonds gets paid $X per year, he can be making decisions over the year that directly impact the value of say, one thousand times X. Therefore, dishonest diamond dealers will always have an incentive to bribe graders/supervisors and graders — unless they are angels in heaven — are going to find it hard to resist the persistent and innovative offers of bribers. The more employees in a lab and the closer they are to the dealer community, the more likely it is that the lab will have graders or supervisors taking bribes.
Fortunately, there is a natural way to stop the bribing — deterrence through disclosure. Consider the game theory. If a briber does not get caught, he wins. If he gets caught and the GIA — in order to protect its assets and/or reputation — settles the case in a way that the briber ends up being penalized less then he has gained, the briber wins again and will continue bribing because he is in a win-win situation. By “protecting” its reputation, the GIA is attracting those that seek to destroy its reputation. The greater the GIA’s reputation and the more “protected” it is by the GIA, the greater incentive for bribers to attack.
On the other hand, if the GIA — through full disclosure, civil lawsuits, publishing the numbers of suspected reports or any other way — discloses or causes to be disclosed the identity of the bribers, a different game develops.
The briber suffers huge loss to reputation. The long-term monetary loss from such reputational damage far outweighs the short-term benefit of bribing.
Bribing goes from being a rational, though illegal, activity to an economically irrational activity. The lesson is simple. If we publicly ruin someone’s reputation, the potential monetary loss is so great that it just does not pay to bribe, i.e., deterrence. If we don’t ruin the reputations of bribers, they will continue to operate and eventually beat the GIA into the ground.
Our goal is not to provide the GIA with specific solutions to all problems, but rather to encourage and plead with GIA’s board, management and lawyers to come up with their own innovative solutions. We recognize that the GIA is in a difficult situation. However, sometimes what we think is a solution creates an ever bigger problem. Sometimes our biggest nightmare is when our dreams come true. The bottom line is that GIA’s board must consider and take responsibility for the unintended consequences of their actions.
Actions taken with the best of intentions are often the most dangerous.
The trade must also recognize that the GIA is going through a very difficult transitional period. Optimal long-term solutions to the problems at hand will take time to implement. Quick-fix solutions, although apparent, may be unsustainable and nonoptimal.
We in the trade need to make our points, turn down the hysteria, and work together with the GIA to help solve the problems at hand. We must recognize that the GIA will have to take a series of steps as it develops new processes for improving the integrity of its grading reports. The trade should expect and support a process of change that will ensure and enhance the credibility and integrity of GIA’s grading reports.
The only amusing statement in the press release is that when dealing with the bribers, the GIA tells us “rest assured, they will be dealt with swiftly and decisively.” Now I mean no disrespect to GIA, but having grown up in New York, I imagine that these bribers are pretty tough guys. “Swiftly and decisively”? – we are, of course, waiting and wondering. What is the GIA going to do, have their lawyers throw paper airplanes at the bad guys?
Seriously speaking, I doubt that the GIA, who is unable to name the bribers, is capable of “dealing” with them. While we can expect the GIA to forward their investigative report to the appropriate legal authorities, such authorities rarely act swiftly or decisively. Perhaps the GIA could initiate a civil lawsuit that would enable the disclosure of the bribers names and then the diamond dealers could “deal” with them.
The real issue here is why isn’t the diamond trade taking responsibility for the rotten apples in our midst? The GIA is the well from which all of us drink.
The New York laboratory provides the 47th Street community with unique opportunities that employ hundreds of people. The GIA enables the entire diamond world to legitimize premium prices for the best diamonds. Bad people are poisoning our well. Clearly, our trade must take immediate proactive protective measures.
The press release issued by the Diamond Manufacturers and Importers Association of America (DMIA) on October 25, 2005, is a good step forward.
We believe that the World Federation of Diamond Bourses (WFDB) and International Diamond and Manufacturers Association (IDMA) should develop a joint resolution at the upcoming Mumbai conference that provides the following:
- Make it a violation for any member to bribe any laboratory employee.
- Make it a violation for any member to knowingly trade in any diamond whose diamond grading report has been improperly upgraded due to bribery.
- Require a five-year suspension for any member found to have bribed any laboratory employee or knowingly dealt in any improperly upgraded diamond.
- Require all organizations to post, and/or, give notice to all members, the individual and company names of all those found to have bribed any employee of any diamond laboratory.
Such findings should be based on the conclusion of due legal process by the WFDB, IDMA members or national court systems. Furthermore, we encourage the WFDB and the IDMA to establish a joint investigative committee that will collect information from members about any irregularities at any recognized laboratories. The committee should also consider publishing advisory guidelines as to the measures that laboratories may take to ensure the integrity of their grading reports.
The Rapaport Group is deeply concerned about “improper attempts to influence the outcome of GIA grading reports.” It is our intention to use our available resources to fully investigate all aspects of diamond grading reports and bribery attempts. To that aim, we encourage members of the trade who have information about any improper behavior related to GIA grading reports to contact the GIA directly and/or their local Rapaport offices.
We recognize that some firms may not wish to contact the GIA directly or may want to present information anonymously. Such firms are encouraged to contact Moily Spiegel in Israel, moily @ diamonds.net, +972-3-613-3330; Lea Retter in Belgium, lea @ diamonds.net, +323-232-3300; Ofira Gutman in India, ofira @ diamonds.net, +9122-5637-6633; Gastin D’Aquino in Hong Kong, gaston @ diamonds.net, +852-2805-2620 or Martin Rapaport in New York and worldwide, rap @ diamonds.net, +1-212-354-9100.
Dear friends, what is going on now is not acceptable. Our information indicates that Pincione is planning a more aggressive legal approach and it is only a matter of time before the current controversy is picked up by the general media and the credibility of our industry is put to severe test. Grading report and certificate issues have now captured my personal attention and I will try to write more on this subject next month.
The fundamental foundation of the diamond industry rests on our integrity as a community committed to honesty. This foundation is now under attack. Hopefully, the GIA problem will be limited, but these events and this story must serve as a clear warning that we are in danger of losing the integrity of our industry and our products. Make no mistake about it, if we ignore this problem, it will not go away. Now is the time for all of us who care about our industry to work together and find ways to ensure the security of our grading systems and the integrity of our diamonds.