Omnipotent Ombudsman
February 01, 07Forget about all the juicy stuff going on in the London High Court case (Jayam N.V. versus DTC), which includes admissions by the Diamond Trading Company (DTC) that it had provided wrong information to the Ombudsman, had used extraneous data in its allocation process (outside of the Sightholder profile), and that its legal department was caught unaware of the facts when writing letters and other probably well-intended but nevertheless sloppily executed procedures.
Forget about the ungracious recording that was played in court, in which an ex-sales director was “informed” by Jayam’s principal that the sources of wealth of the ex-DTC employee may become an item in the litigation. (They have not.) The real issues in the court case are the following: (1) the status of the Ombudsman’s findings and recommendations, (2) the failure, (or inability as it turns out now) of De Beers to accommodate some or all of these recommendations, and (3) the level of compensation due to the Sightholder.
So at the very same time that the litigation was in progress, lawyers of De Beers went back to the European Commission (EC) to settle its own problems with the Ombudsman – which are, to some extent, the same issues raised in court. The DTC succeeded in making a “combination deal,” increasing the authority of the Ombudsman and increasing his involvement in implementing Supplier of Choice (SoC). In so doing, the DTC also, somehow, has made sure that there will unlikely be more cases such as the one currently heard in High Court.
The EC’s competition authorities, which in turn were more than tired of all the complaints lodged about SoC, saw an opening “to outsource its investigations” or, more precisely, “to outsource its monitoring and investigating responsibilities” to the Ombudsman.
Thus, the EC closed the files on all outstanding complaints and expects that future issues will be dealt with by the Ombudsman. The original concept of the Ombudsman was for the Sightholder or applicant Sightholder to have an address to “resolve disputes” with the DTC. That was the ultimate objective – and it didn’t work. The Ombudsman made judgments (called: recommendations). These judgments, to a large extent, did not really lead to any action. The Ombudsman system did not “solve disputes,” but certainly has proven capable of getting to the bottom of things.
This is not a criticism, but rather something that anyone who read or listened to any of the court proceedings will have come to realize. Corrective action in allocations cannot be done retroactively. They can only be dealt with in future Intentions to Offer (ITOs). But then, by favoring one party over another, one does injustice to other applicants. It’s a vicious circle. Most judgments are not implementable.
De Beers is addressing this predicament by extending the authority of the Ombudsman so that it includes the power to set compensation in certain circumstances. Thus, when the DTC, according to the Ombudsman recommendation, has reconsidered a supply decision and finds it is unable to supply the additional goods that the Sightholder should be entitled to, then the Ombudsman is empowered to set the compensation that the DTC must pay.
If that rule would have been in effect earlier, there might have been no need for Jayam to go to court.
Ombudsman as Filter of All Information
What has become evident in the last few years is that De Beers’ administrative mechanism was not able to effectively exclude extraneous information (meaning information that is not coming from the profiles) from its supply-decision process. The logical thing to do is have some “quality control” monitors that should filter the incoming client data into the system.
De Beers has chosen another way, which, at first reading, seems problematic. The company has added to the task of the Ombudsman. He now has a requirement to review the following:
· all confidential information provided to the DTC in the Sightholder profile questionnaires;
· all confidential information provided to the DTC relating to the third-party verification audits of the Sightholder profile questionnaires;
· a representative sample of all confidential information provided to the DTC in connection with the BPP assessment process; and
· all confidential information contained in the templates completed by the DTC for the purposes of the assessment of the Technical Manufacturing Ability Criterion.
All confidential information contained in the Sightholder profile questionnaire and relating to third-party verification audits must be provided directly to the Ombudsman prior to being disclosed to the DTC. This is in order to identify any information that goes beyond what is required by the DTC or permitted to be obtained by the DTC under the SoC documentation. If such confidential information is identified by the Ombudsman, he will ask the relevant applicant to remove it before the submission is provided to the DTC.
This means that from 2007 onwards, the Ombudsman will review confidential information provided by all applicants for the purpose of applying to become a Sightholder, including information contained in the Sightholder profile questionnaire. This will ensure that the DTC is not exposed to any extraneous information outside the parameters of the Sightholder assessment process and alongside other mechanisms currently operated effectively by the DTC. This will also ensure the continuation of the DTC’s practice of actively discouraging the attempted provision of such information by clients/potential clients.
Confidential information obtained by the DTC from third parties rendering services to the DTC (such as the services currently provided by Kroll (forensic auditors who check the veracity of Sightholder profiles) for the purposes of third-party verification of Sightholder profile submissions) will also be provided to the Ombudsman prior to being shown to the DTC.
In addition, the Ombudsman will be entitled to see, in advance of the DTC, a representative sample of any confidential information obtained by the DTC from SGS (an outside company that verifies BPP) for the purposes of BPP verification audits.
Omnipotent – Albeit Conflicted?
Assume that tomorrow a Sightholder has a complaint that information that should not have been used to determine his allocation or Sight eligibility had entered into the decision-making process. Assume that this Sightholder suspects that the DTC has not followed proper procedures. To whom would he turn? Going to the Ombudsman will be useless, because, basically, the Sightholder will be saying that the Ombudsman did not sufficiently filter information that went into the decision-making process. Or worse, the Ombudsman or his people let some information slip through.
Pima facie, it seems like the Ombudsman is going to become part of the “executive branch” in the implementation of the SoC system and is going to share responsibility with DTC management. This may be a masterly and ingenious move on the part of the DTC, and it will undoubtedly inspire confidence with the EC competition authorities, but does it really serve the Sightholders? Can the Ombudsman remain the central focus of the dispute-resolution process?
The Ombudsman doesn’t work alone; he has a staff to maintain. His added responsibility will undoubtedly impact the business of the Ombudsman. Under the new model, the Ombudsman will become a significant supplier of services to the DTC. Can he remain an honest, independent broker when the commercial relationship between him and De Beers intensifies? It should be stressed that the changes in the Ombudsman mandate were suggested by De Beers itself. That’s not a negative, but it’s something to think about.
EC’s Outsourcing of its Monitoring and Investigation Responsibilities
The Ombudsman will be required to inform the EC of his activities, and some of the information will become available to the public at large. This is undoubtedly a giant step forward. Thus, the new obligations of the Ombudsman will include:
· notifying all final determinations and/or recommendations to the European Commission;
· submitting an annual report to the EC describing his activities and any follow-up action taken by the DTC as a result, a non-confidential copy of which report will be published on the Ombudsman’s website; and
· not creating in his role as Ombudsman (and for a period of three years following the cessation of his appointment as Ombudsman) any conflict of interest with any individual, company or other organization (including the De Beers Group) that has an interest in the production, supply or purchase of rough diamonds at any level of supply or any association established to protect the interests of such entities.
We want to be precise about the “origins” of the changes. A number of complaints have been lodged with the EC over the last few years about the excessive, sensitive commercial information that the DTC was gathering about clients and from clients, which, ultimately, led to arbitrary supply decisions and also limited the excess to rough for non-clients.
Says an EC source, “In the light of the investigation based on these complaints, the Commission requested De Beers to improve the transparency and the checks and balances of the SOC selection process. In response De Beers has significantly revised the Ombudsman’s mandate on 21 December 2006. Most notably, the Ombudsman will filter all the information De Beers collects for the purpose of admitting Sightholders and allocating rough diamonds. This should enhance the existing measures in place to ensure that De Beers’ distribution decisions will not be based on any extraneous information, whether submitted on request or voluntarily. Other improvements include enhanced transparency of the SOC criteria through the publication of their weightings, the possibility for the Ombudsman to apply in certain circumstances compensation for incorrect supply decisions, the possibility for the Ombudsman to conduct investigations at the Commission’s request or on his own initiative and more detailed rules on conflicts of interest.
The Commission considers that the revised Ombudsman mandate enhances the level playing field for supplies of De Beers’ rough diamonds. Moreover, with his wider powers of investigation, the Ombudsman, who will closely cooperate with the Commission, is well equipped to safeguard the correct implementation of the SOC scheme.”
Legal versus Commercial Imperatives
By making the Ombudsman an integral part of the “executive” branch, by maintaining his role as an arbitrator, and allowing him to set compensation (to injured clients), he remains the ultimate “judiciary branch.” His commercial relationship with De Beers will intensify, which will jeopardize his independence. Sometimes it is useful to remind ourselves that SoC was born out of a need of De Beers to become legally compliant. That was its main imperative and its reason d’?tre. The commercial arrangements were secondary to the legal needs.
While we have applauded the commercial changes made by DTC Director Varda Shine and her team – and still believe these changes are needed and welcomed – we are concerned that the changed role of the Ombudsman is the fruit of the “legal imperatives” being okay with the EC competition authorities. So while we reported a few weeks ago that
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Have a nice weekend.