Lifting Sightholder Suspensions in the Best Interest of All
January 24, 08 “The DTC will act in good faith in considering any past conduct of the [Sight] applicant, and will use reasonable endeavors, where necessary, to verify (and consult with the applicant concerning) the veracity of any alleged misconduct.” If one reads further down on the relevant Sightholder notes, which are part of the contractual obligations between the DTC and clients, it says “the DTC will take into account whether any key individual (as defined elsewhere) (1) has been disqualified as a director, (2) has been convicted in any jurisdiction of any criminal offense of fraud, theft or dishonesty that brings the diamond industry into disrepute, (3) has been expelled from a diamond bourse or (4) is a person whose past conduct would cast doubt on his personal probity or integrity.” The language gives the DTC considerable room for discretion. It is not like a soccer game where international rules define precisely when the referee issues a yellow (warning) card or draws a red card indicating that the player is out of the game. The rules are clear in their ambiguity. Commentators – myself included – had been pounding the DTC from the very day some Sightholders were implicated in the GIA Certifigate consumer fraud scandal to finally start implementing Best Practice Principles (BPP). The DTC missed the opportunity to act, hiding behind the non-convincing excuse that “there has not been a criminal conviction.” It moved the goal posts and left only a small space in which to act. It is this lack of resolve that narrowed the DTC’s own room to maneuver. Other producers, incidentally, didn’t impose on themselves these unnecessary constraints and did act in the Certifigate case. We have said it before: the DTC is afraid of some of its customers. This, again, became clear more recently when the failure by the DTC to act in the U.S. Jacob the Jeweler case signaled to the market that some major industry players don’t play by the DTC’s rules – they have their own rules and convey a “don’t mess with me” attitude. And they get away with it. The greatest tragedy of the DTC and De Beers is their in Skeletons in the Closet Though it is easy to blame management, this wouldn’t be totally fair. When BPP was drafted, the authors of these rules of conduct were not aware of De Beers’ own past practices, which are not tolerable today. This meant that the rules could only be applied to the future, in a forward-looking manner. They couldn’t apply to the distant past. Even DTC Managing Director Varda Shine, an enthusiastic supporter of BPP, has been insulated from some of the company’s past practices, which she generally dismisses as unfounded rumor. She is wrong – and her bosses didn’t properly warn or advise her. Thus, the DTC is managed today by young, mostly inexperienced, but well-motivated people who don’t know their own company’s history. They are not familiar with the skeletons in their company’s closet. So when the Brenig-verdict reached their desks showing a criminal verdict against some 13 individuals, including six who were viewed as “key individuals” in Sightholder groups, the DTC, almost as an automatic knee-jerk reaction, announced six suspensions. These companies’ invitations to the annual DTC Cocktail were withdrawn. They were advised that they were no longer entitled – with immediate effect – to use the DTC Sightholder Signature materials, the logos, etc. The damage to these companies’ reputations was immediate. It seemed like a “great day” for the DTC and BPP. Congratulations were in order. But in all their enthusiasm, the DTC staff – and their lawyers – apparently overlooked the contractual commitment to verify the details with their clients, especially the linkage between “key individuals” and relevant Sightholder groups. In some instances there was no clear link or, at best, a spurious one; at least in one instance there was a “mistaken identity,” and the suspended Sightholder company had a link to a “key individual” who was not even convicted. Last week’s “hearings,” where the DTC team and its lawyers faced each of the suspended Sightholders, brought to the table London’s and Antwerp’s top lawyers. The DTC side had little chance because of the limited room it had left itself to maneuver. The DTC was forced to lift the suspensions – and it did so reluctantly and even angrily. It will take time for the DTC staff to realize that the lifting of the suspensions was the right thing to do. It is best for fairness, it is best for the market, and, moreover, it is best for De Beers – but not for the right reasons. The sad irony is that the inexperienced DTC staff that imposed the suspensions, with the approval of De Beers’ highest echelons, acted in good faith. They believed they did the required thing, and they were convinced that this was good for De Beers. They prob And we ought to tell them that they were right. They unwittingly applied BPP on the wrong case. Ethical, moral, regulatory and legal standards are in perpetual motion. What represented standard operating procedure 10-15 years ago may often be prohibited today. What complicated the Brenig case – and the temporary Sight suspensions – is that today’s norms were applied to fiscal rules and industry practices of the past. In the present political and commercial atmosphere, people tend not to raise the past. They don’t dare say aloud that, once upon a time, “Don Pedro” invoices appeared in well over 25 percent of all diamond invoices in Antwerp – and the government condoned, accepted and even agreed with, this opaque practice. I seriously doubt that any of the youngsters at the DTC would even know who “Don Pedro” is – and what he represents. How many DTC lawyers will actually remember that only in 1999-2000 De Beers made the “strategic decision” to operate legally in every jurisdiction in which it operates? In one of the hearings held for suspended clients last week, one party actually recalled instances in which his company was involved with the CSO and Diamdel in the very same practices that were cited as reasons for his suspension. The DTC should be careful to sit in judgment today on behavior and actions taken in a period when different norms and standards prevailed – some of these standards were also part and parcel of De Beers’ own standards. Good Governance Arrived Rapidly In a way, not remembering the past is a testimony and a tribute to the positive change De Beers and the DTC have brought about through Supplier of Choice and BPP. Allow me to cite from an anonymous Sightholder
and that is widely circulating on the Internet. “In the past decade, the working practices and the nature of the diamond industry have changed dramatically. The rate and pace of change has been remark
The Sightholder further writes that “the introduction of mandatory compliance with 'Best Practice Principles', or BPP, into the DTC's own working practices, in the 2003-2005 contract period, is another example of change positively impacting the industry and the consumers' image of the industry - upholding the image of the diamond itself. The impact of BPP has contributed to a genuine behavioral change amongst many of the industry's diamantaires and has rippled way beyond just the DTC's own clients. Working practices that may have been generally accepted as common place a decade ago have been confined to history, and in its place is a significantly more transparent and reput
BPP Cannot Be Applied Retroactively
The Brenig case relates to the period 1995-1999 when the industry and its practices were very different to those of today. The retrospective application of the BPP compliance requirement is unreasonable, unworkable and impractical. The compliance declaration DTC Sight applicants have been required to sign clearly states “Since 7th July 2003.” To quote the anonymous Sightholder once again, “So what does this date mean or signify if not the amnesty, of potential transgressions before that date, or cut-off date? Just how retrospective is the application of compliance likely to be, 10-20 years?”
The DTC has said that it is the date of the criminal conviction that counts. That concept needs to be reexamined. It must enforce current BPP violations – and stop hiding behind “conviction” excuses.
Positive Fall-Out from the DTC Suspensions
What about other industry players? When the Brenig-affair first came out into the open, a key actor privately confided his personal concern: “If the judge gave a suspended sentence, his intention was to give the defendant a second chance. In Antwerp, often a judge might also ban a person for a certain period from working in his profession. That specifically didn’t happen here. So if it is the intention of the court to allow these people a second chance, why should a banker trigger the demise of the business by stopping his credit? Or why should colleagues refuse trading with the convicted companies?”
It must not be overlooked that the individuals involved in the Brenig case do now have a criminal record. That the DTC has been forced to ignore this now for very good reasons doesn’t alter that basic fact. Many diamond players wonder: what if the suspensions by the DTC would not have been lifted? Could other Sightholders have still conducted business with these companies? Non-Sightholders should actually ponder the same question, given a criminal conviction that includes money laundering charges. The problem hasn’t been fully solved.
The silence of the organized diamond business – the diamond bourses – is a source of concern. Bourse membership affords privileges – also in due diligence processes for both AML/CFT and Kimberley Process purposes – and their silence may either show a lack of leadership or a genuine bewilderment as to how to act in these situations.
The actions taken by the DTC, BHP Billiton, Harry Winston and other stakeholders gave the impetus to many industry players’ renewed serious thinking
Common Sense and Proportionality
Rules of proportionality must prevail – and they did in this case. Key individuals in companies that are convicted of recent money laundering offenses, recent narcotics trafficking, recent laundering on behalf of organized crime, recent smuggling or things like consumer fraud (false certificates), corruption, etc., should be expelled from the DTC and the industry at large. The time for excuses is over. It didn’t make sense to expel Sightholders for fiscal infringements that happened over a decade ago – when BPP was light years away from the mindset of the diamond business – while current outrageous scandals are overlooked. BPP needs to be implemented, and this false start should not deter the DTC to what it must do – if it wants to maintain BPP as an integral part of its business strategy.
Suspensions or other sanctions serve a purpose. BPP serves to maintain confidence in the trade – mostly consumer confidence, but also from other stakeholders, including banks, governments and trade participants themselves. At the end of the day, decisions in the BPP sphere should be made on a sound commercial basis – what is good for one’s individual business, and, maybe, what is also good for the industry at large. Dealing with decent and honest people must, in the long term, always be good for business. To me, that is what BPP is all
In that context, the lifting of the DTC suspensions against six DTC Sightholders was
Have a nice weekend.