In virtually every “gate” in recent history, the very discovery of the crimes always paled in its next phase: The cover-up. If history repeats itself, the greatest disgrace, humiliation and damage are done while the crimes are being covered up. This is the last thing that I expected to happen – and I have written in these columns that the GIA Board of Governors seems to be determined to get to the bottom of this. I probably was wrong – dead wrong. The GIA has now – at last – issued a press release that raises far more questions than answers. The market reactions we receive range from incredulity to rage: The GIA will let the criminals get away with it; it is blatantly ignoring the “victims”; not a word about the thousands (many thousands?) of fraudulent GIA certificates in the market, in the inventory of traders and jewelers, in the hands of the consumers. Not one word! “You see why I was right to shut up,” reads one e-mail, “nothing will change and I’ll still have to deal with Bill and others.”

After four months of silence, the GIA seems to think that sacrificing Thomas Yonelunas and four rather senior officials (supervisors; well above the “graders” levels) at the New York laboratory, appointing a Compliance Officer and introducing new compliance procedures will pave the road back to tranquility and respectability.

GIA Identified Perpetrators

The long-awaited press release was carefully crafted and lawyers probably cleared the text. The one line that made people jump most was the statement “We, therefore, will not tolerate any violations of our code of ethics by clients of the lab, most particularly improper attempts to influence the outcome of our grading reports. We have identified a small community of lab clients who are implicated in such actions and, rest assured, they will be dealt with swiftly and decisively.”

A small community of lab clients? What is that supposed to mean? A community is more than a few; it is more than some; it is more than a dozen; it connotes a real serious number. If there would have been only twenty or thirty criminals among the clients, the spin-experts would have suggested using the words “some” or “several” or “a few.” But a community of clients? A group of habitual offenders? Some readers reached for their dictionaries, which stress the religious or national groups' connotation of the word. That surely wasn’t the intention, but it doesn’t add comfort either. A puzzling word choice – but the message is clear: the GIA signals that there is definitely a meaningful group of clients who tried and/or succeeded in bribing lab officials.

True, the GIA doesn’t use the word “criminals” or “offenders” when referring to corrupt people who attempt to bribe to get a fraudulent grade. That’s another mistake and a pointed indication that the GIA has apparently decided in favor of a cover-up. And it displays a totally misplaced view of the reality they live in.

Viewing Crimes as Ethics Violations

Though four people were fired (and out of those four there may be at least two who will face criminal charges), those who did the bribing have now been reduced to clients “who have violated a code of ethics.” The GIA fails to understand that these people have committed a fraud against the industry-at-large, against colleagues and consumers. Dismissing this to merely an ethics violation is ridiculous. It reminds me of someone called Bill, who once was a president of a nation, and who, caught in a specific situation, technically never believed he had engaged in sex. He didn’t get away with that. The people weren’t stupid. Neither is the diamond fraternity (I am wary to use the word “community”) – nor are the consumers.  

The Board of Governors and the management of the GIA should not make a mistake: the diamond business will not tolerate a cover-up. Not this time. The producers (De Beers and others) will not tolerate it either. The integrity, the future, of the entire business is at stake. GIA’s apparent behavior is in marked contrast with the overall industry trend in respect to accountability, transparency, best practice principles and responsibility towards stakeholders. Moreover, by failing to publicly identify this “small community,” by failing to distance itself from that community, by simply saying “they will be dealt with swiftly and decisively,” without any other clarification, the GIA has failed to convince anyone of its resolve. That’s where the cover-up fears come in.

The GIA is well on its way to forfeit the right to use the slogan: “Ensuring the Public Trust through Nonprofit Service since 1931.” Reducing fraud, bribes, money laundering, cheating, forgery etc. to just another “ethical violation” makes any decent industry participant or outside observer sick. If the GIA isn’t careful, it may well be accused of violating “truth in advertising” laws. Ensuring Public Trust…..

So what means “swiftly and decisively”? There is talk in the market saying that some companies have received formal notification from the GIA “that they have been identified as having acted unethically and therefore will be banned to send diamonds for certification.” Wow – they cannot send diamonds anymore! None of these companies have, of course, neighbors who could drop the parcel at a Rapaport Pick-Up for certificates. No, if they are banned, they will refrain from sending stones for certification. They bribe – but will respect a ban on certificates? Wrote one New York dealer in an e-mail: “The measure is woefully inadequate. I also feel that not only should these people be banned from submitting stones, but anybody caught submitting for them, including through the use of Rapaport services, should also be warned that their submission privileges will be rescinded.”

If the market rumor is true – this is a disgrace. I was unable to get the GIA’s confirmation that these letters have gone out – but they were definitely discussed at the board level. It’s part of the cover-up. Any decent self-respecting organization that has discovered a community of criminals in its midst has only one option: bring in the law enforcement officials. Actually, it had been my understanding that the GIA had “notified” law enforcement that it was conducting an investigation. The GIA press release says, in its heading, “GIA Completes Independent Review.” This implies that the investigation is over. The release notes that the investigator, attorney Thomas F. O’Neil III, has identified the offenders. That’s enough. Don’t hide behind the nonsense of “legal proof.” Banks, financial institutions, and a host of other businesses (including the diamond business) have a legal obligation to report suspicious transactions to FinCEN. Bribery, corruption, etc. are predicate money laundering offenses. The law doesn’t require you to have proof – a reasonable suspicion is sufficient. The GIA has more than just suspicion. Chairman Destino states as a matter of fact that the GIA has “identified a small community of lab clients who are implicated in such actions.” So the GIA has proof of criminal behavior involving the institution itself – not taking the legally mandated action will make it an accomplice or co-conspirator, a partner-in-crime.  Let’s hope that the new compliance and ethics procedures announced by the GIA will not allow it to swipe it all under the carpet.

Where are the hard questions about the “community”? Let me help the Board of Governors by suggesting a few points on the agenda of the next board meeting, some three weeks down the road. [I would suggest to Chairman Ralph Destino to meet much earlier; who needs the bad feedback just before Thanksgiving? Or is that intentionally, thinking that the industry will be quiet out of fear that the bad news will get out?]

• What about all the people who were defrauded? Who will compensate them?
• Where is your individual and collective civil duty to report suspicion of laundering, bribing, etc. to the police or to FinCEN?
• What about the other employees who are implicated? Are they going to be denied their next pay-rise and are being slapped on their wrists. Or is the GIA serious about upholding its own ethical standards?

GIA to benefit from MCI/WorldCom Experience

GIA’s review of operations and of the legal claims is in the hands of Thomas F. O’Neill III, who gained experience in “messy operations” when he served as Senior Vice-President and General Counsel of the MCI Group at WorldCom, Inc. in the 1995-2002 period. As is well known, MCI, formerly known as WorldCom, has paid a penalty consisting of $500 million of cash and 10 million shares of new common stock of MCI, Inc. in connection with the settlement of charges brought against WorldCom by the U.S. Securities and Exchange Commission. These funds and shares have been deposited into the WorldCom Victim Trust to be distributed to eligible investors who suffered losses, pursuant to the terms of a Distribution Plan. Indeed, O’Neil is partner in the Washington law firm of DLA Piper Rudnick Gray Cary US LLP (“DLA Piper”), which also represented MCI/WorldCom during the critical years.

The GIA’s having acquired this expertise is quite good news for diamond certificate consumers and clients who may have suffered millions of dollars of damages in the Certifigate scandal: the GIA has an experienced lawyer and law firm to represent itself – and, we hope, they will also look after the best interest of those consumers who have put their trust in the GIA since 1931.

When O’Neil talks – the board listens. One of O’Neil’s recommendations was the appointment of a Compliance Officer in the laboratory who will report to the general counsel and will oversee the enforcement of the Institute’s compliance policies. Chairman Destino stresses that the GIA has a policy of “zero tolerance for any misconduct by employees of the laboratory. Going forward, all GIA employees will be obligated to report all suspected violations of the Institute’s compliance policies to the new Compliance Officer. “At the same time,” adds Destino, “our policies apply with equal force to lab clients.”

The GIA statement stresses that “Yonelunas, former head of the GIA Laboratory, while not implicated in any violations of GIA’s Professional Ethics and Conduct Compliance Statement, has tendered his resignation, effective December 31, 2005 to ensure a smooth transition of leadership.” Yonelunas may not have violated any ethical rules – though the concept of “ethics” at the GIA is clearly different from the common usage. However, Yonelunas certainly has dismally failed in imposing proper management procedures, in managing oversight functions, and a host of other competence issues as the fraudulent practices have taken place over many years. He seems to have ignored warnings pointing to problems. He was in charge. He is responsible. He is a good man – and I mean that – but that is no consolation to the many consumers who spent their best money in purchasing overpriced diamonds putting their trust in the GIA.

Where is Martin Rapaport?

In his submission to the European Commission stressing the illegality of the De Beers-Alrosa trade agreement, Rapaport lashes out at the Commission’s staff for being biased, not transparent, etc. About the Rapaport Group, he states that it “has played an advocacy role in a number of areas including fair disclosure for treated diamonds, eradication of conflict diamonds and the establishment of the Kimberley Process and the promotion of free, fair, honest, open and competitive diamond markets.”

No other trade publication has ever said about itself that it is a promoter of free, fair, honest, etc. So where is Rapaport now? The answer is obvious. The Rapaport Group is too conflicted – its involvement with the GIA makes it impossible for it to play the self-imposed and self-declared role of “promoting honest and competitive diamond markets.” Martin knows very well that, economically, corruption and bribing are patently anti-competitive practices. No decent company can compete with other companies that enjoy the benefit of fraudulent income or advantages.

Martin is genuinely concerned about these issues – in Africa, in Europe. But in New York, he keeps quiet. Not one passionate editorial against the bribers and corruption in New York or at the GIA. As one New York manufacturer wondered, “Is he in bed so much with the GIA that he can’t come out with the news about them?” Not one word.

Earlier this year Rapaport was so worried that he provided a court affidavit stating that [a particular producer] “is destroying the fundamental structure of the existing free, fair and competitive polished markets in New York, Los Angeles and Miami. If [that organization] is allowed to continue their illegal distribution schemes they will cause irrevocable damage to the diamond markets of the United States and to consumers.” He elaborated saying, “I believe that the foregoing conduct by [that company], if not remedied, poses a direct threat and immediate harm to competition in the diamond industry and the U.S. markets for, and purchasers of, diamonds and diamond jewelry.” Each and every of these sentences are applicable to the distribution of fraudulent GIA certificates, to bribing etc. The dangers to the markets are clear – and no one could have more eloquently stated it than Rapaport. Sadly, not one word.

Knowing Martin, his own “inability” to go after this corruption in an advocacy manner must disturb him – and should be reason for him to pause and wonder whether this situation doesn’t seriously undermine the very trustworthiness and credibility of his trade publication as the reasons for his silence here are blatant and obvious, for all to see. As a journalist he must know that silence has a price. Apparently, it is worth paying it.

If a “Cover-Up” is Carried Out - Bill Boyajian Must go Home.

GIA President William E. Boyajian, breaking his silence on this subject, expresses his gratitude to “the Board of Governors for their strong leadership in this sensitive matter. Because of GIA’s important position in the industry and in the public eye as the leading authority in gemology, we take very seriously the need for our practices, procedures, and employees to be beyond reproach.” Indeed, we reported in earlier comments that the exercise had been board-driven. For a very strong leader such as Bill Boyajian to allow a board to review management practices – which basically means a check-up on the Boyajian administration – must have been incredibly difficult for the hands-on manager.

Whatever consequences the investigation will still have for his position as president – as I expect there will be – the positive changes now announced happened at his watch and he deserves to share in the credit. However, and I hope that Bill Boyajian will reflect on this – if there is going to be a cover-up, it will be pinned on him and nobody else. If there is going to be a cover-up, Bill Boyajian’s days at the GIA will be numbered. It cannot be otherwise.

On the other hand, if the GIA does what it should do – and that includes getting rid of the fund-raising among the “community of clients” and the hard sale of Honor Leagues for Big Money -- nothing will taint his incredible achievements in building the GIA into the world’s most distinguished gemology research institute.

Though the very fact that the GIA made an announcement ought to be welcomed, it has taken the organization too long to come to the present conclusions. Compliance Officers, strict enforcement of its own rules, and strict adherence to laws, should have been standard operating procedure for a non-profit multinational organization such as the GIA. What has happened – and I don’t know yet how deep O’Neil was able to get to the bottom as, I fear, industry cooperation may not have been easily attained – was ultimately the result of mismanagement, absence of proper procedures, and a too cozy operating atmosphere.

No one should make the mistake of viewing the steps announced by Chairman Destino as “the results” of the investigation – but rather as the beginning of a new era in which more changes will be imminent. Four employees were fired. There are more people involved, albeit in different ways, and it seems that somewhere an arbitrarily threshold was set where to take drastic actions and where to deal with the abyss in different ways. Maybe it is hard to apply zero tolerance retroactively – but I think the GIA ought to do so.

Looking beyond employees and clients, I would hope that the GIA and its new procedures will become more responsive to outside parties who, throughout the years, have alerted the GIA to abuses in the systems – claims which were invariably dismissed out of hand with considerable indignation. Let’s hope that the GIA will become more responsive to all its stakeholders – and look at them at eye-level. It is taking the right steps – and that certainly must be a relief to the entire business.

Let’s see what will come next.

Have a nice weekend.