GIA Under the Loupe

Many years back a sightholder had a diamond of more than 10.00 cts. that received a grade of F from the Gemological Institute of America’s laboratory. The sightholder thought it deserved an E. After several resubmissions, it finally received the E. The sightholder then sold it. A little while later he saw the same stone, offered by another big company. This time, the sightholder says, it had a grade of D.

Around the same time, another dealer had a stone he considered a VVS1. He says a friend told him that, if he submitted it through the right guy, GIA would grade the stone Flawless. It did, he says.

These purported episodes may have been the result of honest mistakes or simply reflect the subjectivity of diamond grading. For years, when disputes like this arose, many gave GIA the benefit of the doubt.

But with GIA acknowledging “isolated instances of misconduct” at its New York lab—and firing four employees because of it—many are wondering if stories like this are the result of something more sinister.

For years there have been rumors that some GIA graders took payoffs to improve grades. In 1997 GIA officially acknowledged that a grader was fired for accepting a bribe. Several years later, there was talk that a lab higher-up was fired for similar reasons—which GIA denied.

But the allegations resurfaced when former Harry Winston employee Max Pincione filed a lawsuit against GIA and the Vivid Collection. The lawsuit, first revealed by JCK‘s “eMonday” newsletter in August, alleges “payoffs” by Vivid to improve lab grades. (GIA has said it will “vigorously defend” itself in the lawsuit.)

GIA’s board of governors launched an internal investigation and hired a former U.S. attorney and his law firm to probe procedures at the lab. As a result, new procedures were enacted, four graders were fired, and the lab’s chief executive officer—though not implicated in any wrongdoing—resigned. The lab also instituted some new procedures to stop further problems, including the appointment of a compliance officer; new enforcement policies; and elimination of the “Membership” system, which critics felt created different “tiers” of lab clients.

CRITICS NOT SATISFIED

The recent moves have been mostly welcomed but have not silenced all of GIA’s critics.

Many are also disappointed that the investigation is said to be concluded; they feel it should be ongoing and should cover GIA’s lab in Carlsbad, Calif. There is still a possibility that actual law enforcement agencies may get involved—GIA has contacted authorities—although at press time none had confirmed involvement. Even so, board members say there are now far greater safeguards in place: “We are confident we are going to be able to preclude any kind of difficulty in the future,” says one on condition of anonymity.

Ralph Destino, newly installed GIA chairman, said, “The scrutiny will continue. People say there may be more bad apples there and if there are, we will find them.”

But he added: “The rumor mill has it that there are thousands of stones affected. That is just a product of hysteria and exaggeration. This was very limited.”

Some are also disappointed that GIA—listening to its lawyers—has not used the word “bribe” or provided the names of the graders or companies involved. However, to be fair, GIA is in a dicey position. It says privacy laws prevent it from being specific about why the graders were fired. Sources indicate that the graders were dismissed more for violating lab rules, such as contacting clients improperly, than for outright bribery. Investigators were said to be helped by one grader who turned the equivalent of state’s evidence.

Bribery can be hard to prove; most bribers do not leave obvious records. The closest thing may be “exhibit F” in the Pincione lawsuit—a handwritten sheet of paper that purportedly shows a list of payoffs to different GIA graders. For now, its veracity has not been substantiated, and even Pincione’s lawyer says it will have to be backed up by oral testimony in court.

In the trade, dealers seem most interested in what will happen to the companies that, in the words of Destino, “improper[ly] attempt[ed] to influence the outcome of our grading reports.” GIA told JCK those companies will be “terminated.” De Beers has said that, if they are sightholders—and some of the rumored names are—they could lose their sights for violating the company’s Best Practice Principles.

This issue is important because, as even GIA employees now acknowledge, the Institute did not take a tough line on incidents in the past. There were no reports to law enforcement, and lab clients said to offer bribes weren’t terminated. “The way these things were dealt with in the past left the door open for them to happen again,” argues Jeffrey Fischer of the International Diamond Manufacturers Association.

The situation has left many concerned about its impact on market confidence. Many worry, now that the trade media have covered the story, the consumer media might get involved, hurting confidence among the millions of consumers who have GIA reports. Pincione’s lawyer has mused that the story might attract outside interest.

It’s not clear that the consumer press would be interested. GIA is much better known within the trade than among consumers. Still, the story is an ugly, juicy one, and Dateline NBC has already run a piece casting doubt on grading reports.

One thing is for sure: The situation is a sad chapter for a widely respected and important trade institution. GIA takes its role as a public-benefit corporation seriously, and the overwhleming majority of its employees are people of high integrity who are strikingly committed to its mission.

But GIA is also caught between two worlds. For attached to this idealistic, noble, public-benefit nonprofit is a money machine—the GIA lab, which in the past has been a for-profit subsidiary. And some question whether running a very successful business inevitably taints a nonprofit—and whether those with a nonprofit background can run a successful business. Indeed, some in GIA cite naiveté as one reason for the lab’s problems. Lab management simply couldn’t believe these things could happen.

There has also been widespread skepticism toward GIA’s second money machine: fund raising. GIA, which raised virtually nothing 10 years ago, has regularly been raising thousands of dollars, an effort capped by a lavish “League of Honor” dinner at the Plaza Hotel in New York (JCK has been among the past honorees at that dinner).

Raising money is always a delicate issue for a nonprofit, but particularly one that includes an arm that makes a difference in people’s livelihoods. GIA has repeatedly denied that donors are shown any favoritism; even so, no matter how much donors legitimately believe in GIA, it’s also true that many givers have seen their donations as a “business expense.”

As JCK went to press, in response to what it now calls the “appearance of impropriety,” GIA took an extraordinary step —it decided to stop accepting money from the diamond industry. Its decision to forgo a not insignificant amount of money is a sign of just how much this scandal has shaken the Institute.

As with the New York Times, which weathered its own scandal years ago as a result of a bad apple, GIA as an institution and brand will undoubtedly survive. Most diamantaires say the lab is still the best- respected in the industry. But even with its recent dramatic moves, it still has a way to go before it regains the industry’s full trust. No one doubts GIA will be able to move on once this story is over. Unfortunately, it looks like that may not happen for quite a while.