Can the largest buyer of diamonds in the world vouch for its entire supply?

In 2000, when I first heard about the Kimberley Process, it seemed like it was attempting to achieve the impossible. “They are going to track every rough diamond in the world?” I thought. “How are they going to do that?”  

The Kimberley Process is now 13 years old, and while we can spend all day talking about its strengths and weaknesses, it does track an overwhelming percentage of the world’s diamonds and has introduced a lot more transparency into the market than existed before. (Remember, pre-Kimberley, diamonds were regularly reported to be from Switzerland, a country with no mines.) It may not have accomplished everything architects envisioned, but it has led to a more transparent industry.

Now, it’s 2016, and Signet Jewelers has announced a new plan that will work toward ensuring all the diamonds it sells are sourced from identified and verified sources. Considering Signet is the largest buyer of polished diamonds in the world, with supply coming from all corners of the globe, that also seems like no mean feat.

Even the people behind Signet’s Responsible Sourcing Protocol for Diamonds admit change will not come about overnight. This is a “work in progress” with the goal of “continuous improvement,” said vice president of corporate affairs David Bouffard at a press conference yesterday at Jewelers of America headquarters announcing the protocol.

The new plan is complex, like the industry itself, and I will dive into its details in future posts. Broadly speaking, it requires Signet’s suppliers to report on their diamond sources and to have those assertions audited.

One issue, of course, is that while Signet has power over its suppliers, it has less power over its suppliers’ suppliers. So if a vendor doesn’t buy diamonds straight from the mine—and most don’t—the protocol requires it to conduct due diligence on, and receive assurances from, its supplier. But then that supplier may have gotten those diamonds from someone else. The industry remains sprawling, diverse, and scattered; particularly in India, a large percentage of the market is informal. That will be hard to track.

The protocol makes some allowances for this, particularly for smaller stones. One of its categories is mixed sources, defined as a category where “some percentage of the diamonds is derived from identified and verified sources.” The inference here is that the remaining percentage will not be trackable.   

Indeed, as Diamond Manufacturers and Importers Association president Ronald VanderLinden, a guest at the press conference, put it, this is a “system of warranties” not a “chain of custody.” 

The company was eager to avoid some of the controversy that surrounded these initiatives in the past. All the major diamond associations were consulted about the plan beforehand; as a result, even traditionally skeptical groups, such as the World Federation of Diamond Bourses, have endorsed it. Diamond Development Initiative executive director Dorothee Gizenga phoned in, expressing gratitude that Signet will allow for responsibly sourced artisanal gems. Also on the phone, frequent critic Chaim Even-Zohar labeled the idea “fantastic,” if still expressing reservations.

One thing Bouffard repeatedly noted: Signet has been down this road before. In the wake of Dodd-Frank Section 1502, Signet investigated its gold supply chain. Working with its suppliers, it now feels it can account for 99 percent of the gold it uses. The company did not lose one vendor during the process, he adds.

We’ll see if diamond manufacturers prove as amenable. The new requirements will likely place further strains on midstream vendors, who are already the most financially stretched link in the supply chain. Some of the requirements here—audits and record-keeping—will cost money. Big retailers like Signet are perpetually squeezing their vendors, in ways that go well beyond this. This will be just one more thing added to their plate.

One participant at the press conference, Michael Steinmetz, CEO of Leo Schachter New York, said so far, he’s found the costs “negligible.”

But another supplier, speaking anonymously, was far more wary. Yes, Signet has provided guidance and hand-holding for complying with these new dictates. But he did anticipate this will add to his costs. Has Signet made financial allowances for that? No, and he didn’t expect it to. That is just not the way the game is played in mass-market retail.

As with De Beers, if Signet does not want to face a middle-market revolt, it may have to shoulder some of the financial burden. Like any business arrangement, this will be a dance.

It will also take time. Still it’s wrong to argue, as some still do, that because the diamond supply chain is sprawling and complex, greater transparency is impossible. At this point, the industry really has no other choice.

Another guest at the conference was Erik Jens, head of the diamond and jewelry division for ABN AMRO, who labeled the program “a clear step forward as far as transparency,” which will improve the industry’s “bankability.”

Jens is, of course, not just one of the most prominent bankers servicing the diamond industry; he is one of the few bankers left that still finances it, as a long list of others have decided it’s no longer worth the risk. This program may indeed cause increased costs and paperwork for Signet suppliers. Long-term this is clearly the path the industry must take.

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