GIA, Sex and the World Federation
March 16, 06Watching the chatterboxes on the Internet discuss the still evolving GIA Certifigate scandal, there seems to prevail an uneasy feeling that the bribers will get away with it. We don’t share that feeling, but agree that very little seems to be happening. However, the fact the Executive Committee of the World Federation of Diamond Bourses (WFDB), headed by WFDB president
The reason? The bourses (or most of the bourses) don’t face the legal impediments that are frustrating actions by the GIA itself, by the DTC and by other bodies. In judicial proceedings within the bourse community, the internal rules of many of the bourses include provisions that exempt arbitrators from the rules of procedure and evidence “and they are expected to reach a decision according to the best of their knowledge and conscience.” They are generally empowered to make a decision if one of the sides of a dispute fails to show up after notification that a meeting is scheduled.
Instances in which a trader bought a stone with a fraudulent certificate can be dealt with very effectively and decisively by the arbitration system, which can also award damages, compensation and other remedies. What makes the statement by the WFDB of such interest is the implication that the bourses may use their disciplinary system to address Certifigate. While arbitration is normally between members of the bourse, the disciplinary mechanism is meant to deal with issues between a member and the bourse community at large, and with the bourse itself. The bourses can act on behalf, and in the best interest, of their members.
Even though the bourses have similar remedies as have the GIA (with its Code of Professional and Ethical Conduct) or the DTC (with its Best Practice Principles), the burden of proof (the rules of evidence) are dramatically different, and, if I may say, more effective. Most bourses have provisions that specifically state that disciplinary action can be taken for impairing the good name of the bourse, for behavior of a type that infringes on the rules or character of society or of public morals, or causing material and/or moral damage to members of the bourse and/or to the bourse itself.
The bourses can suspend the rights of a member to enter the trading halls of the exchange, or to expel a member.
In the context of Certifigate, Schnitzer has gone on record stating that for all practical purposes, the required disciplinary action in a case of fraud would be expulsion from the member bourse and from the WFDB. “We cannot afford to be less than most stringent here,” Schnitzer said. “We must take severe action against transgressors, to protect our collective reputation and the global diamond business’ integrity at large.”
The timing of the Schnitzer announcement is certainly interesting. It came a day after the GIA issued a rather strange rebuttal to a Wall Street Journal article. Said the GIA: “the article from [March 8] erroneously states that the ‘Gemological Institute of America fired four employees it accused of accepting bribes from diamond dealers as part of an inquiry into inflating the grades of stones.’ This statement is not true. The employees were terminated, following an extensive investigation conducted by independent counsel on behalf of a Special Committee of GIA’s Board of Governors, for violating GIA’s Professional Ethics and Conduct Compliance Statement. We have therefore requested that the paper publish a written correction to set the facts straight.”
As a journalist it hurts me to see that the GIA states that these employees were not accused of accepting bribes – we know, for certain, that some of these four (maybe not all) took bribes and delivered, or helped to deliver, fraudulent certificates or other favors. The problem of the GIA is that it is not able or allowed, nor should it be, to establish whether someone has committed a criminal act. That is the task of the FBI, law enforcement and the judiciary. The only course of action open to it is to determine violations of its own internal ethics code. So the worst that can happen to a worker is to lose their job, or for a client to be denied future access to services. (The GIA is under no legal obligation to accept stones for grading from anyone.)
The bourses are in a similar situation, but expelling somebody from the World Federation makes it, for all practical purposes, impossible for the person to continue to be in the diamond business. An expelled person may also find it difficult to get lines of credit from banks, while, under the new due diligence and Know Your Client requirements, even companies that are not bourse members may not want to deal with such parties. But the great attraction of the bourses is their ability to make commonsense decisions.
Sex and Shakespeare: Circumstantial Evidence
Let’s take a totally hypothetical (non-diamond) situation. Let’s pretend that the GIA, the WFDB and the DTC have a provision in their ethical codes that prohibits prostitution. (I don’t think they have a provision like that and I don’t recommend that they should – this is just for argument’s sake.) Let’s say that a member of these organizations is seen entering a hotel room at 11pm with a woman who had previously been seen loitering in the bar.
A few hours later, she is seen leaving the room counting a wad of greenbacks. Next morning at breakfast the member, when asked about his late night visitor, calmly explained that he enjoyed intellectual discourse on the works of Dickens and Shakespeare. Nothing improper occurred; there was no violation of the ethical codes. Would you believe him? Of course not. But any suggestion that the intercourse was anything but verbal would not be considered as credible or supportable in any court of law. In the case of DTC Best Practices and in the case of the GIA Code of Ethics the rules would probably give the gentleman the benefit of the doubt. (It is precisely for these situations that lawyers charge $500 an hour to talk about circumstantial evidence, conclusive evidence, corroborative evidence, demonstrative evidence and hearsay, indirect evidence, insufficient evidence etc. etc.) What counts for the bourses is really common sense. They are not limited by these legalities.
The bourses have another advantage. Let’s not kid ourselves. Many players in the diamond industry know exactly from whom they have bought a stone with a fraudulent certificate. If we want to be careful, we might call it a problematic certificate (or as some have said, ‘a certificate with the help of god’). Such players are far more likely to identify bribers within the framework of a bourse judicial system than go to the police, FBI, DTC or the GIA.
The List of Letter Recipients
The question has come up again and again why doesn’t the GIA publish the list of names of people who have violated their code of ethics? Actually, we have toyed with the idea to publish the list ourselves – and protect our sources.
Though we favor publishing such a list, the legal and commercial implications will be enormous. In fact, a company on that GIA list has technically only been found to be in violation of ethics. Though we all know that this is a euphemism for bribing - it doesn’t make it actionable. What would a jeweler like Zale,
Now let’s take De Beers. When the DTC dumps a client based on ‘a GIA letter’ it is really implying that it accepts a finding by the GIA. It does not have access to the evidence, reasoning, circumstances etc. which are all held by the GIA and probably handed over to the FBI. For the GIA to give that information to third parties would create a legal mess for everyone involved. The whole industry is caught in a tragedy (I don’t want to use the word comedy) of make-believe. To go back to the earlier noted hotel room – we know what happened; the Shakespeare story is not credible. However, no-one seems to be able to do much about the bribers except the FBI and the WFDB.
The disciplinary committees of bourses don’t have the right to send people to jail but they can kick bribers out of the organized trading frameworks. And injured parties can recover damages. Though we expect the FBI and the US prosecutors at some point to knock on some doors and we may even see on CNN some handcuffed bribers entering a courthouse, this is likely to take many more months, if not years.
The bourses can take action now but what is needed is for a few members to come forward. If they don’t they shouldn’t grumble that justice isn’t being done and the bribers are getting away with it.
Have a nice weekend.