Rap has spoken. However, our initial joy turned into sadness when we realized that it would have been far better for Martin Rapaport’s reputation and image if he would have kept his silence on the GIA’s Bribery Scandal. The inconsistency in his logic, laudatory words and applause about the GIA all gave the impression of representing a “salute to the sponsor,” who is responsible for a substantial part of Rap’s revenues. Aside from the scandal, Rap missed an opportunity in his “few full disclosure statements of our own” to address the issues raised in various internet forums and around breakfast tables in the cutting centers.

The revenue statements of the GIA don’t show a fee or royalty for the GIA’s granting of what has become a virtual distribution monopoly. A few years ago, an Israeli diamantaire started to collect some stones from third parties to send aggregate submissions to the GIA, but he was prevented from doing so. In Antwerp, a major Sightholder made a test (and the GIA is aware of that test): he shipped a few stones directly to the GIA and simultaneously sent some stones through the Rap window. The Rap stones came back within two weeks; the other stones took about six weeks.

Why did the GIA grant a “monopoly” to Rapaport to print money? What is the visual financial benefit to the GIA? Why would the GIA give preferential treatment to a specific “shipment contractor” (and that is what Rap basically is)?  These are all questions asked by the public – but Rap missed the opportunity to address that. I must add that the Rap windows have a good name, his service is considered excellent, and the computer software developed for efficient handling is all very good.

Maybe the questions should be addressed by the Board of Governors rather than by Rap. But he opened the door by stressing, “We at Rapaport define integrity as an unconditional commitment to core values. Our core values include honesty, full-disclosure transparency, fair trade and meeting commitments.” There is no way in the world that the window exclusivity and the apparent preferential treatment fall in the category of either “fair trade” or “full disclosure.”

In the past, people were encouraged by the GIA to use the Rap windows. Today - and I am happy to say so - potential Israeli customers for GIA certificates are invited by the New York and/or Carlsbad labs to submit directly. A most helpful and friendly lady called Keisha in New York said yesterday in a phone conversation “out of the blue” that she is willing to send anyone immediately certification submission instructions.  Keisha stressed, in reply to a question, that no third party needs to be involved when submitting stones for certification from Israel and that any office could just send stones directly to them through Brinks or another messenger service. She also said that "turnaround fluctuates from day to day but that it mainly takes 8-10 business days.” Bonnie at client services in Carlsbad said the same thing.

That still doesn’t change the fact that Rap is the only “collection window” allowed to operate in the main manufacturing centers. If Rap was owned by the GIA, I could understand the current arrangement. In the present form, however, being a non-profit organization subject to scrutiny, the GIA should have either opened up the submission window business and let these compete on price and on level of services – provided that the GIA will not discriminate in giving one priority to another.  Or, if it thinks it should not be a competitive business, it should issue open, transparent and fair bids for the distribution franchise for a specific period.

We would hope Rap would support that – as it is fully consistent with his core values as expressed in his article and, for that matter, in many of his public speeches. And if he would be successful in getting a window franchise through an open, above-the-board bidding process, I’ll be among the first to congratulate him.

Still, it isn’t clear what the GIA gets “out of Rap” – and we would like to know. It doesn’t make sense to pick out a person who is allowed to make millions because of an exclusive franchise – without any benefit to the party granting the franchise. People who want a GIA certificate will apply for it – with or without Rap – so it doesn’t widen the market or increase the business.

However, getting the goods back faster has considerable financial implications: many diamantaires have millions of dollars “stuck” in the GIA while waiting for a certificate. If Rap’s goods enjoy an advantage – that raises many questions.  Incidentally, in the past weeks, New York dealers are expressing amazement that the turn-around time has significantly shortened lately, “while traditionally this is a fairly busy season,” said one dealer. So there is also good news – but that doesn’t obviate the need for answers.

Rap and Certifigate
Rap, in his article, didn’t speak about anything of the above. He solely addressed the bribery scandal – after expressing his warmest admiration for the GIA. After stating that “the scale of our operations with GIA is large and financially significant for the Rapaport Group,” and after having rather self-servingly (or rather GIA-servingly) declared that “only a handful of bribers have surfaced and the number of stones known to be affected are in the tens, possibly hundreds, and certainly not thousands. The bribing activity appears to be limited to large stones graded in the New York lab and submitted by just a few firms.”

Wow, the price guru needs a lesson in math. The handwritten note, on which one briber kept a careful record of fraudulent upgrade orders and their payments – a note of which Rap says “in my view it looks authentic and like a listing of upgrades and payments for them” -- refers to some 20 fraudulent upgrades. In terms of dates, these upgrades refer to less than two months of “bribing activity” and well over $100,000 of bribes paid (or noting commitments to bribes to be paid). This activity took place in mid-2000 and the people involved (on both sides – bribers and bribed) were still in business until just a few weeks ago.

If a bribing activity that started somewhere in the 1990’s and remained (officially) unnoticed until early in 2005 because of a record covering a few weeks in 2000 is now labeled as only a matter of tens, or maybe hundreds, of stones, this is – to say the least – a rather ridiculous conclusion.

The note seems one of a continuous record and it was included (in the law suit) because it records the bribe (of some $60,000) allegedly paid to upgrade a 37.01 carat J/VS2 stone to an H color in a ring (which was given on “memo” for $770,000 and subsequently sold for $1.2 million). That ring is subject of a law suit. One of the graders who got a $3,500 monthly retainer on top of the other billable upgrades was fired only last month. The other alleged instance in the court case, the turning of a 103.78 carat E-VVS2 pear-shape into a D-Flawless (which was sold for $14 million set in jewelry), was not documented on the handwritten note as, chronologically, the grading took place a few weeks later. This, by itself, should be a reason to note that there are more pages available. [Some talk about hundreds. New York prosecutors have decided to question the submitter of that evidence and it must be assumed that they will be able to piece the larger picture together.]

At the GIA lab in New York, four very high (supervisor level) employees had been fired. That wasn’t done just because of an isolated event characterized by Rap as involving only “tens of stones; possibly hundreds…” In any event, all the papers and market information point to continuity – to something that has been taken place for years and years and not an “isolated event” in the year 2000. The definite Rap statement that stones known to be affected are in the tens, possibly hundreds – and certainly not thousands, defies any logic.

A Grader that Doesn’t Accept a Bribe is an Angel
Sometimes I question whether Rap realizes what he is rapping. Just read the following sentence very slowly: “Therefore, dishonest diamond dealers will always have an incentive to bribe graders/supervisors and graders — unless they are angels in heaven — are going to find it hard to resist the persistent and innovative offers of bribers. The more employees in a lab and the closer they are to the dealer community, the more likely it is that the lab will have graders or supervisors taking bribes.”

If you are a grader and not accepting a bribe then you are an angel? And, conversely, if a grader is not angel then he must be a briber because it is too hard to resist the bribes? I don’t believe that anyone in his right mind could make such a blanket statement.

I don’t think that all diamantaires are crooks or potential bribers. Rap seems to think differently. He says: “Fortunately, there is a natural way to stop the bribing — deterrence through disclosure.” He calls that the “natural” way. I tend to differ: I think the natural way for a businessman to conduct diamond business is by being honest, by being ethical and by being decent. The “natural” way is not to bribe. Period. To say that the “natural” way to stop bribing is a function of the penalty, the loss of reputation, or the loss of good name is perverse thinking. I tend to believe that we don’t do crimes because we believe that they are wrong – and that’s why we don’t do it.

Making all kinds of accusations on the one hand and minimizing the number of stones “known to be affected” on the other hand makes sense in the foregoing context. Martin talks about the crimes “discovered” – I also include the thousands of fraudulent certificates which are out there and which have not yet been discovered.

Rap Should Revisit his Own Values
Rap wrote: “We believe that the World Federation of Diamond Bourses (WFDB) and International Diamond and Manufacturers Association (IDMA) should develop a joint resolution at the upcoming Mumbai conference that provides the following:

• Make it a violation for any member to bribe any laboratory employee.
• Make it a violation for any member to knowingly trade in any diamond whose diamond grading report has been improperly upgraded due to bribery.
• Require a five-year suspension for any member found to have bribed any laboratory employee or knowingly dealt in any improperly upgraded diamond.
• Require all organizations to post, and/or, give notice to all members, the individual and company names of all those found to have bribed any employee of any diamond laboratory.

Please, is there anyone out there willing to tell Martin Rapaport that it is a money laundering offense and a severe criminal violation of laws in every decent country, to bribe. Why would anyone need the IDMA or the WFDB to pass a resolution and to declare that bribing is a violation of IDMA and WFDB by-laws?

And then Rap passes judgment: bourses are required to suspend a bribing member for five years. You are wrong, Rap, the law requires you to call the police when you suspect bribing. Let the court decides what to do with the briber. Don’t do what too many want to do – let’s keep it just among us. It is not decent; it is immoral; and it is illegal.

Rap clearly places himself within that increasingly smaller group of people (within and outside the GIA) that wants to minimize the problem. That is more convenient to all.

The GIA itself talks about a “community of clients” (that bribed or violated the organization’s rules of ethics), but Rap refers to them merely as “a handful of bribers.” Any diamantaire living in New York (or in Tel Aviv for that matter) can give names of top GIA graders that have been made redundant at the GIA in recent years under “heavy clouds.” The only difference between the current court case and these other cases is that the court issue brought the issue out in the “open” – that others were covered up and not brought to the attention of the law enforcement authorities doesn’t mean that they didn’t happen or that investigator Thomas O’Neil bothered to look into these cases.  

I find it puzzling that Rap notes that he is “not going to pull any punches and, in true GIA tradition, we will ‘call it like we see it,’ no matter what the consequences — for Rapaport, the GIA or the industry.”

 I am not convinced – and fail to be impressed.

GIA to announce free verification services
We expect that the GIA will shortly announce that for a period of at least half a year, GIA certificate holders who wish to enhance their comfort level will be allowed to submit stones (or stones set in jewelry) for free verification. That’s a major step into the right direction. [We hope Rap will also not charge for these shipments]

The part of Rap’s comments that gave us most comfort is his statement that “to the best of our knowledge and based on our own investigation, no diamonds submitted through Rapaport Group offices have been tainted in any way or were subject to any improper grading. Our policy is that we submit all stones with unique Rapaport numbers and the identity of the actual owner of the diamonds is never disclosed to any laboratory employees.”

Until a few years ago (I think in Santa Monica up to 1996) the graders would know the identity of the owners of the stones. Today, as we’ll discuss in a future article, for the “bread and butter” goods (not the specials) there is indeed considerable comfort that the grader doesn’t know whose goods he is grading. The problem starts when there are arguments with supervisors who insist that better grades are warranted, when the graders see it differently. Using Rap is a further guarantee that one’s identity remains shielded from the grader – assuming, of course, that Rap’s stones do not get preferential treatment.

We do not understand, however, why Rap confirms that “a highly confidential list identifying our numbers and the owners is provided to GIA management on an occasional basis. To the best of our knowledge, this list was kept entirely confidential and not shared with any lab employees or supervisors who would have an opportunity to change any grades.”

As the “anonymity” is such a source of pride to GIA management – and the Rap window provides such anonymity, why would Rap pass on lists identifying the link between specific stones which were/are graded and their owners? I hope that investigator Thomas O’Neil did look at the uses of these lists by management and let’s assume that these lists were not shared with lab management or employees.

Let’s give both Rap and GIA the benefit of the doubt and conjecture that the only use of these lists was to augment the list of potential donors. That, actually, under the circumstances, would be quite a relief.

What’s a Leaker? What’s his Crime?
The good thing about Rap’s article is that he now rather belatedly calls for the disclosure of the names of the bribers etc. Welcome to the Club – where were you a few months ago when we were the only ones calling for this?  But why, after having said the right thing, does he “undo” this brave act by saying: “While a knee-jerk, full-disclosure policy may not be appropriate in the current situation, alternative solutions for the problems generated by partial disclosure must be provided.” Where is the logic? First he wants full disclosure – then, all of a sudden, it may not be appropriate.”

Can’t Rap make up his mind?

Rap repeats what we have been saying for months that the “GIA is inadvertently casting aspersions on their honest clients, implying that some unknown number of clients are bad apples, but not informing us of how many, who they are, or the types of diamonds that they deal in.”

In his conclusion, he buried quite an explosive accusation. Says Rap: “Now that we have provided perspective, communicated our strong words and made our impassioned pleas, let’s take a less emotional, more rational and realistic look at the situation. Other than a possible leaker or two, the GIA board consists of excellent people who really care about the GIA and its public trust mission.”

What the hell is a “possible leaker”? Why are they not “excellent people”? And why don’t they “really care about the GIA and its public trust mission”? Is it their crime that they want to avoid cover-ups? Martin – do you realize that after accusing the GIA of casting aspersions on their honest clients, you are now doing the same thing to the honest members of the Board of Governors? Don’t you think you have an obligation to disclose these names? And specify why are they not caring about the trust they are required to uphold as governors of a non-profit institution?

You are invited to respond on our IDEX Online forum – a place you’ll find many more questions that deserve answers.

Have a nice weekend.