Maurice Tempelsman: We Must Address Grading Report Problems

Maurice Tempelsman, chairman of Lazare Kaplan and a true statesman in the diamond industry, sent in the following commentary about the recent case in which some former employees of GIA’s database contractor gained “unauthorized access” to the lab’s database and allegedly changed grades. He says that, while he feels there is a clear need for strong action, he is not calling for anything specific here but wants to spark a dialogue:

Many in the industry were dismayed as greed, unethical conduct, and skillful abuse of technology resulted in some unscrupulous companies and individuals compromising the integrity of GIA’s grading report procedure at its laboratory in India. Needless to say that this criminal act—and a criminal act it is—cannot be tolerated as it risks tainting the product and the reputation of the industry to the detriment of all.

GIA’s initial reaction—withdrawing the certificates, publicly identifying the perpetrators, and denying them the privilege of submitting product in the future—are welcome and necessary first steps. But more is needed. At a time when the industry faces some grave, unprecedented problems—problems that are structural in nature and that will not go away with the normal up and down of the business cycle—some thoughtful, visionary leadership is called for.

What has gone wrong with the implementation of diamond certification as an instrument in diamond transactions—transactions with consumers as well as within the diamond trade?

The diamond industry had its share of visionaries. One of these, Robert M. Shipley, conceived of and started the GIA in order to bring professionalism and training to the gem and jewelry business. The first GIA gemological laboratory was established in Los Angeles in 1931. In 1953, the diamond grading system, based on Shipley’s 4C’s, became the international standard for determining diamond quality. In 1955, GIA issued the first diamond grading reports focused on providing to the consumer an objective, independent third-party validation of the characteristics that distinguish one diamond from another and to some extent affect its value.

Diamond grading and certification have, over time, become standard practices in the industry and are now part and parcel of the wholesale diamond trade as well.  That clearly has many trading benefits that should not be overlooked—such as standardizing trades and facilitating trading velocity. But as is often the case, sooner or later the law of unintended consequences comes into play. And the system primarily designed for consumer education and protection has become a method of stealth price manipulation. Push the grade up a notch or two or turn to a “laboratory” with wider grading tolerances and presto, as if by magic, tight or nonexisting margins get improved. Accompany this with the human capacity to rationalize, add in a highly competitive situation where margins are nonexistent, and you create the makings of a witches’ brew where the free market forces reward the dishonest rather than the imaginative and efficient.        

In the 80 or so years since Robert Shipley started implementing his vision, the diamond industry has grown and today is a global business of about $80 billion annually. The United States, however, remains the dominant market for polished diamonds. It has had a long and generally effective history of consumer education and robust consumer protection. From self-regulating trade associations to independent laboratories to required content disclosures to class-action litigation and FTC regulation for egregious violations, the U.S. consumers can feel relatively safe that their interests are not taken for granted, ignored, or abused. Life is complex, and the forces that drive a free market at times are contradictory and even self-destructive.

In this case the pendulum has swung too far from the originally contemplated purposes and needs to be recalibrated. This calls for an honest definition and then clear and firm leadership to correct the unintended consequences that left to run their course will cause great and permanent harm. If there is not leadership, then regulation, but the issue must be addressed head on and soon.

(Photo courtesy Lazare Kaplan)

JCK News Director