Serious Times for the Diamond Industry

No one doubted there was a lot to talk about at the recent World Diamond Congress in New York. It was a meeting set against the most notable “family feud” in years, with the head of one diamond club suing De Beers against the wishes of others. At the same time, the industry was receiving yet another p.r. shellacking from nongovernmental organizations (NGOs). And it was the first Congress after last year’s media blitz about synthetics, which many now see as a serious threat to consumer confidence.

“All the topics we are discussing—Supplier of Choice, new regulations on money laundering, conflict diamonds, HPHT, synthetics—any of these could be our main focus,” noted Shmuel Schnitzer, president of the World Federation of Diamond Bourses, the umbrella group for the world’s diamond clubs, which along with the International Diamond Manufacturers Association meets every two years at the Congress. But with less than three days to discuss them, the result was a sometimes muddled affair in which delegates struggled to keep track of all that was happening and their new place in it. Among the main items on the agenda:

The fate of smaller and medium-sized dealers With middlemen suffering in today’s market, most pinned their current woes on De Beers’ “Supplier of Choice” policy, which encourages sightholders to deal directly with retailers.

In protest, the head of the Miami bourse, Derek Parsons, launched a class-action lawsuit against De Beers (in his own name, not that of the bourse), prior to the meeting. But this ran counter to the official position of the World Federation of Diamond Bourses, and some criticized Parsons—whose lawyer attended the sessions—for dragging inter-trade disputes “outside the family.”

WFDB president Schnitzer argued for a more cooperative approach, noting that De Beers had pledged to support the middle market by sales through its subsidiary Diamdel. “I believe we can only make progress on this issue through meaningful dialogue,” he said. Schnitzer pronounced himself pleased that De Beers had sold more through Diamdel in 2004 than the company originally had promised: “This is not simply a matter of words; it is expressed in action. I ask myself: Had we not chosen the path of ongoing dialogue but opted for head-on confrontation, would we have succeeded in reaching this result?”

But Parsons argued that the World Federation was not adequately representing smaller dealers. “You suggest Diamdel is the solution—you have no idea how many goods actually go through Diamdel,” he argued. “Certain cutting centers have been given rough diamonds by Diamdel just to silence the industry.” Later, he defended his class-action suit: “You can’t use the word negotiation when you talk with De Beers. If I win, I win for all of us, not just for me.”

HPHT/synthetics

Having already mandated disclosure for its members, the diamond associations looked at how gem labs should handle treatments and synthetics. Many were not pleased that some labs were grading synthetic stones.

“By certifying them, you are saying those diamonds are like ours,” noted Peter Meeus, managing director of the Diamond High Council, the Antwerp industry group. “If we start allowing these other products to enter our brand identity by issuing reports, we are saying this is the same as the real thing.”

Some went even further, arguing that HPHT stones also should not receive reports, although a World Federation resolution to that effect was shot down. Many felt that gem labs could only identify treated stones if they had access to them.

But delegates took issue with GIA’s HPHT reports, complaining they only mention the treatment in the comments section. Both associations issued resolutions asking labs to make the differences in the reports for HPHT and non-treated stones more obvious.

“When two reports look the same and you have to look at the fine print to see it’s treated, it becomes invidious,” argued Freddy Hager of the London bourse. “The certificate should be in a different form and you should know right away it’s a different product.”

IDMA’s resolution was notably specific on this point, asking that HPHT reports use a different color jacket, and that labs put an asterisk next to the color grade, which leads to a note about HPHT. “We want it so if someone is looking quickly at the report, they don’t miss the treatment or misinterpret what it is,” said IDMA’s newly elected president Jeffrey Fischer. Bill Boyajian, president of the Gemological Institute of America, which grades HPHT stones but not synthetics, said his organization was “reviewing all the policies. We are always listening to what others have to say.”

IDMA also called for accreditations for gem labs to ensure they all have sufficient equipment to detect treated or synthetic stones. “There should be a minimum standard to call yourself a professional diamond grading laboratory,” said Fischer. “A lab should not be issuing certificates if they cannot distinguish natural, untreated diamonds.”

Conflict diamonds

Just prior to the Congress, NGOs Global Witness and Amnesty International released yet another report slamming the diamond industry—specifically, a survey of diamond retailers as to their conflict-diamond policies.

According to the NGO survey, only 48 out of 85 jewelry retailers responded to written queries about their conflict-diamond policies. And of those who did, the groups complained, most submitted responses that lacked detail.

Only 37% of sales associates out of 246 stores visited by Amnesty activists on a “Conflict Diamond Day of Action” were aware of the issue, the survey said—and 54% of them gave what the group calls “an inaccurate definition of the problem.”

“Many stores repeated that their solution was to offer Canadian diamonds,” noted Amy O’Meara, program associate for Amnesty’s Business and Human Rights program. “From Amnesty’s point of view, Canadian diamonds are not the solution to the problem, nor are synthetic diamonds.”

In addition, out of the 246 stores, only 66 indicated they had a conflict diamond policy, 27 indicated they had no policy, 145 stores were unwilling to discuss the subject, and eight were uncertain. The report even notes the stores did not routinely offer consumers assurances that their diamonds were conflict-free—even though this is not something stipulated by Kimberley. “That’s real overreaching,” complained Cecilia Gardner of the World Diamond Council.

The report didn’t receive a lot of press in the United States, though it did in the United Kingdom, including write-ups in the Financial Times and several tabloids. No one disputed that the results were embarrassing, especially since this is the second survey of this type this year, and Jewelers of America sent an advisory beforehand warning jewelers it was coming. Even so, there was widespread frustration that, five years after the conflict diamond issue first was raised, the industry was not only still fighting with NGOs but getting publicly spanked by them.

When the NGO reps appeared before the two organizations, the industry was ready to rumble. Many grumbled that testing the knowledge of $7-an-hour sales clerks was particularly petty and meaningless: World Diamond Council member Martin Rapaport compared it to questioning a bus driver about what kind of oil is in his tank, then using that to make a statement about the oil industry. HRD’s director of international affairs, Mark van Bockstael, said, half in jest, “If that’s all the criticism they have of our system, then we have done a pretty darn good job.”

Others felt the NGOs did not appreciate what had been accomplished. “If you want to ship rough diamonds around the world without the correct papers, it is practically impossible,” noted Edward Asscher, president of the Netherlands Manufacturers Association. “So don’t underestimate the impact you have had.”

But the NGO representatives, led by Global Witness’s Corinna Gilfillan, refused to give ground. “To hear you say, ‘We are doing everything we can’ … I don’t believe that, because that’s not what we found in our survey,” she told delegates.

From there the atmosphere deteriorated, and by the end of a session at the World Federation, the NGO representatives were being called “hypocrites” who engaged in “blackmail.”

“People are a little insulted that, after all we’ve done, you come here and insult us in this way,” said Parsons. Diamond Dealers Club president Jacob Banda asked, “Will there ever be a day when you will be happy?” Gilfillan shot back: “Yes, when you are doing all you can to stop conflict diamonds.”

Beneath the brickbats, there was an arguably serious issue—and potential dilemma. The industry’s solution to the conflict diamond issue has two components: the Kimberley Process, which regulates rough, and the self-regulation system (also known as the “chain of warranties”) that governs polished.

The “chain of warranties” is the less important of the two components, which is why it is overseen by the industry and not by governments, as is Kimberley. But it’s something the NGOs insisted on, and they held protests at the 2002 World Diamond Congress to ensure the system was put in place.

Two years later, it remains widely misunderstood by the industry, as both the NGO survey and a similar one by JCK demonstrate. Whether out of ignorance, or cynicism, or because they’re parroting the industry line from five years ago, many retailers and dealers still maintain that one cannot tell if a diamond is “conflict” or not.

But the fact is, you can tell—at least for stones mined post-Kimberley (after mid-summer 2003). Since every piece of rough can only enter a country with a Kimberley certificate, cutters are supposed to note those warranties on stones they manufacture. Dealers are then supposed to take those warranties and pass them down the line.

The problem is that not every stone is post-Kimberley. The issue of “stock” goods is a thorny one, and some feel there still is no good solution to it. The industry recommends that people use modified language on pre-Kimberley stones: Instead of saying they are “warranted” to be free of conflict, they should be declared “conflict-free to the best of our knowledge.” But before this language is used, Gardner says, retailers should make true “best efforts” to determine if the stones are conflict-free, including questioning their suppliers and having them question their suppliers.

That’s a lot of work, and now some are saying: If Kimberley works, why have the self-regulation system at all?

“If the rough is clean, don’t worry about the polished and the jewelry,” noted Zvi Shur of the Israel Diamond Manufacturers Association. “Everything else is a secondary problem.”

Gardner, who helped to design the system, said the “self-regulation system” is meant as a “back-up” to Kimberley. Having retailers demand only non-conflict stones adds an extra layer of protection to ensure illicit stones do not slip into the system, she says.

Gilfillan of Global Witness argues, “There are potential loopholes throughout the pipeline and that’s why you want to cover it from rough to polished. It’s unrealistic to say that the rough trade is perfect and there is nothing illicit going on.”

In any case, as World Diamond Council chairman Eli Izhakoff reminded the Congress, the industry already has agreed to self-regulation over polished, like it or not. The argument is how tightly it should be watched. “The resolution says any member found in non-compliance will be expelled,” said Gilfillan. “How can any member be expelled if there is no monitoring mechanism?”

In its report, Global Witness goes further, stating that “the self-regulation should move beyond being voluntary” and governments or the NGOs themselves should get involved in the auditing process. That stance caused widespread concern: “They are using the words ‘monitoring’ and ‘auditing’ and moving things further down the line, and we never agreed to that,” said Izhakoff.

By the end of the Congress, the NGOs and the industry had reached their umpteenth reconciliation, and the diamond associations issued a joint resolution expressing a renewed commitment to industry education and implementation of Kimberley. (See “Diamond Congress Resolutions,” p. 88) Gilfillan said her group, Global Witness, reacted “positively” to the resolution.

Still, some are worried about what’s to come. Fischer of IDMA lamented that the NGOs kept adding additional burdens. “At some point we may have to draw a line in the sand.”

Rapaport agreed, but noted, “It’s difficult, because they have access to the press. How does one say no to an NGO?”