The gradually evolving hysteria surrounding gemological laboratory diamond over-grading, mis-grading, grade definitions and standards reminds me of the movie “Dirty Dancing” from the late 1980s.

In the movie, a family finds itself at a summer resort in upstate New York’s Catskill Mountains. Then, as the movie plot progresses, an intrigue evolves with all the elements of deceit, consummating relationships, and financial interests; all expected norms and standards are temporarily thrown out the window. The movie’s young, supposedly normative female lead, called Baby, who everyone expects to go on to college, join the Peace Corps and save the world before marrying a doctor, just like her father, submits to infatuation with someone not adhering to social norms and grades. This character, a dance instructor, is exorcised from the resort, but not before causing considerable anguish and even damage to the entire resort.

As the plot unfolds, the impertinent dance instructor is stricken from dance attendance lists – and banned from the camp forever. Jealousies, conflicting interests, fellow vacationers voicing their views on other people’s businesses, create an unpleasant overall environment of intrigue and tensions. Crimes are committed. Social norms violated. And all are acting against a backdrop of beautiful music, everyone dancing with each other, and after some kind of climax, everybody goes home. Many pretend not to have seen anything of what was going on; they simply want to enjoy the party. Call it “willful ignorance.” After all, everyone came to have a good time. However, at some point, the party at the resort is over. The music stops. Things go back to what they were before. The emotions pass. Until the next resort session.

Ethical Grading and Certification
Thus, it isn’t surprising that when concerns are raised about diamond transactions covered by what might be questionable certificates this prompts every resort resident to have his/her own say so as not to miss out on the [verbal] dancing floor. This includes respected luminaries such as World Federation of Diamond Bourse President Ernie Blom. He reminds us all, in an “open letter” to the industry, that “ethical grading and certification are the most basic principles of the industry and these cannot be compromised.” Then Blom goes on to make the surprising statement: “There is a common standard of colors and purities, and it is not about price but quality.”

That says precisely what we all like to believe – and some maybe really do – but it is merely an illusion that we all want the consumer to perceive. The truth is, there does not exist a common standard of colors and purities. All attempts to reach an international standard through the International Standards Organisation (ISO) have failed. Twenty years ago, ISO commenced work on standard ISO/TR 11211:1995 “Grading Polished Diamonds – Terminology and Classification.” The work was done mostly by the GIA, CIBJO, International Diamond Council (IDC) and Scandinavian Diamond Nomenclature. Last year, instead of finalizing the standard, it was abandoned. [Formally: it was withdrawn.]

The standard was jettisoned when the inescapable conclusion was reached that the industry doesn’t really want it. It also wasn’t practical. The nomenclature (identification terms) is the easy part. It is the technical application of the terminology that is the key issue – the specific process each lab must follow in order to arrive at its findings. Many labs have their proprietary equipment; their own methods. But also, they have their own standards. That’s where the problems start.

Defrauding or Misleading the Public
What is a certificate? It is internationally understood as a testimony or affirmation which certifies the true facts. Polished certificates are not only issued by testing laboratories or research organizations, but also by diamond or jewelry companies. A certificate furnishes the buyer of the acquired diamond with a description that at least has the character of a written assurance of certain properties. It is at this point that the WFDB president’s letter is unequivocal: “As part of the sales transaction the seller of diamonds provides a guarantee to the buyer of what is being sold and this forms a binding contract between the two parties. The seller cannot later hide behind an overstated grading report claiming ignorance as he/she will be held responsible regardless of any grading report supplied with the diamond(s) being sold.” Diamantaires cannot hide behind certificates with all kind of excuses.

In any community, just like the resort in Dirty Dancing, there are some axioms that are conveniently overlooked.

• Every diamantaire submitting polished diamonds to a gem lab knows precisely what grade their specific stones should be getting. They know color, clarity, etc. perfectly well.
• Many, if not all, diamantaires know that there are differences between grading practices of labs. They know these differences so well that, often, they also know perfectly well at what lab, at what location, they can get the “best” certificates. Indeed, just like in court cases, diamond companies may engage in “jurisdiction shopping” to find the best place to submit their specific diamonds.
• Every diamantaire knows that diamonds offered for sale with certain certificates trade at a discount from other certificates. Knowing that implies that they know that though the grade may be identical, the value is different. That must have reasons.

One worldwide lab owner, interviewed about color grading, says, “a difference of one or occasionally an error of two grades is possible. There is a human element. It isn’t always precise. But a difference of three or four grades (or more) is outright criminal.” That’s a self-serving view. Two grades difference should not be tolerated.

An Israeli diamantaire mentions that a specific lab – a lab that’s quite central in this discussion – would give grading differentials that amounted to an increase of 25%-30% or more in value terms. He said that a few years ago, when he was still working with that lab: “we had reached a point that we returned diamonds to the lab demanding that it lowers the grade. The exaggeration was far too large. We felt uncomfortable.”

This gets us to additional axioms:

• In each and every instance that a lab makes grossly exaggerated claims, when the grade borders on the “criminal,” there are two parties that are at fault: the lab and the submitter of the goods.
• For years there has been a conspiracy-of-silence. Virtually every diamantaire in our camp is aware of one lab which has a fax machine as its main tool of trade. You fax your GIA or HRD certificate and you will be issued a “more attractive” certificate instead. Long-time trusted clients don’t have to submit the stones themselves – that’s part of the service.

The Diamantaire Carries the Legal Risk
As a general rule, the lab is – or believes it is – never liable. This is similar to the warnings on cigarette boxes: “Smoking may kill you. You have been warned.” Eventually, it is the law of the land that decides on matters of liability. Occasionally – and that has also happened not so long ago to the GIA – a genuine mistake is made. The internal findings may not have been properly noted on the certificate. Then, the lab admits liability and will compensate. But few grades have ever been challenged in court if there weren’t some elements of “bad faith” or “fraudulent intent” involved. Sometimes I wonder how often a diamantaire has looked at the disclaimers on the certificate (or “grading report”).

One of the more telling qualifications appears on the certificate of the recently established International Institute of Diamond Grading & Research, a subsidiary of De Beers:

“A similar report provided by a third party laboratory may differ from this one depending on when, how and by whom the diamond is examined and the changes and improvements in techniques and equipment that may have occurred between the two examinations. It will not always be possible to determine if a diamond has been treated or processed and the International Institute of Diamond Grading & Research offers no guarantees in this respect. The International Institute of Diamond Grading & Research has provided this report for a small fee compared to the present and potential value of the diamond referred to because it is able to limit the International Institute of Diamond Grading & Research’s liability as follows [then the standard disclaimer follows].”

At the end, to avoid all doubts, the De Beers disclaimer adds: “The above limitation of liability extends to the person for whom this report was prepared and to every other person to whom this report is distributed or shown.”

There is something interesting about this language. There has been a court case in which the judge ruled that when a lab certifies (or issues a report) on a stone that may be worth $20,000 or more, but the lab collected only a $62 certification fee, this fee was too small in proportion to the value of the stone to be considered “a guarantee.” That’s why the “small fee” is mentioned. Whether this legal precedent can be successfully applied in the future is a different matter.

Consumer and Trade Protection Laws Differ from Country to Country
However, a disclaimer on a certificate does not mean that a court of law in every country will either accept or honor it. WFDB President Ernie Blom correctly warns that in “blatant cases the misrepresentation can amount to fraud with criminal consequences, depending on a country’s consumer laws.”

In the United States, the Federal Trade Commission’s Guides for the Jewelry, Precious Metals, and Pewter Industries (16 CFR Part 23) defines what is or what is not a misleading trade practice is.

It is unfair or deceptive to misrepresent the type, kind, grade, quality, quantity, metallic content, size, weight, cut, color, character, treatment, substance, durability, serviceability, origin, price, value, preparation, production, manufacture, distribution, or any other material aspect of a diamond.

If, in the sale or offering for sale of diamond, any representation is made as to the grade assigned the product, the identity of the grading system used should be disclosed.

This isn’t just applicable to sales to consumers. The guides apply to persons, partnerships, or corporations, at every level of the trade (including but not limited to manufacturers, suppliers, and retailers) engaged in the business of offering for sale, selling, or distributing diamonds.

The publicity generated around an action against a specific laboratory group has let the genie out of the bottle. Any consumer having bought a wedding ring with a stated color or clarity can come back to the retailer asking for details on the grading entity – or submit stones to a grading lab. Will the consumer understand that the alphabet letter indicating color (or lack of color) may not have uniform meanings? Will he accept learning about price differentials?

Laboratories’ Ethical Violations
Take color terminology and grading. Accepted names and standards have a history. Well before the South African mines were discovered (around 1860’s) there were names for colors such as Golconda, Bagagem, Canavieras, Diamantinas, Bahias and others – often referring to the mines from which these colors originated. In the 1920’s, following the same naming traditions, the international trade used terms like Jager, River, Top Wesselton, Top Crystal, Crystal, Top Cape or Cape color. There was Blue-White, Light Yellow, Yellow, etc. In some of these categories, there may have been price differences of some 30 percent – all for the same color designation. [Incidentally, the FTC states that “it is unfair or deceptive to use the term “blue white” or any representation of similar meaning to describe any diamond that under normal, north daylight or its equivalent shows any color or any trace of any color other than blue or bluish.”]

In the United States, the American Gem Society developed its own scheme of color grade using the number 0 (zero) to 10. It was practically impossible to match the AGS descriptions to any of the other so-called “old terms” nomenclature. Then in the early 1950’s, the GIA developed its own D to Z scale. It was mainly for teaching their students. It wasn’t until 1955 that the first GIA certificate was issued.

The GIA never “patented” its system, standards or nomenclature. Virtually all grading labs are using the D to Z names but they are not necessarily adhering to the conditions or methodology of the GIA. The GIA system is based on a set of master stones. The GIA’s Tom Moses recalls that the organization keeps a record of companies or organizations that have a complete or partial set of master stones. A jeweler, for example, that only sells in certain ranges may typically have only from E to I. It is extremely time-consuming, expensive and challenging to create master stones sets. [At one time Lazare Kaplan used to sell sets of GIA master stones.] It is believed that many labs have their own master stones which may materially differ from those of the GIA.

When the WFDB president refers to “a common standard of colors and purities,” he has the GIA’s standards and terminology in mind. That’s problematic. What happens in reality is that labs use the “GIA terminology” but set their own (generally more relaxed) standard. As one lab explained to me: “We have our definition of what constitutes an ‘I’ color; what is important is that we consistently apply the term ‘I’ to the diamonds we grade.”

The GIA, however, clearly feels that labs that don’t have GIA master stones, that don’t follow grading system’s methodologies and processes, shouldn’t use these terms.

The consumers, especially in the United States, are familiar with the GIA terms – also because of the tens of thousands of gemology students who were taught how to grade at the GIA and are now jewelers or otherwise professionals who explain grades to consumers.

The President of the London Bourse, Harry Levy, has argued that “these labs do not mis-grade, according to their own standards. They have their own master stones, they grade consistently according to their own system, they use the terminology of the GIA but never claim that they grade according to GIA standards. The trade is aware of this. That is why we have much larger discounts on, say, EGL stones than on equivalent GIA stones. So no fraud is being perpetrated at this level, the only fraud is the end seller when he sells to the consumer assuming that the grades on the EGL report are the same as those of the GIA one.” But the end seller depends on his supplier, who in turn depends on his supplier – and so we go up the value chain…. One might not escape liability.

This raises various questions. Do traders have a moral or legal responsibility to make clear that the grade of the certificate is not a true equivalent of GIA grades? Are traders in Mumbai, Tel Aviv, and Antwerp and elsewhere wittingly or unwittingly party to consumer deception?

Jewelers Should Review their Policies
Over the weekend, I received a stock list from a large Indian sightholder listing all of his GIA certificates, making remarks (in the comments column) such as “upgraded color,” “upgraded clarity,” etc. Before jumping to conclusions, I read on the website the company’s explanations. It has its own grading, but if the GIA gives it a better grade, they call it “upgrading.” For the non-informed, the term is confusing. Buyers like “upgraded stones” – it gives a sense of getting a good deal.

There are many different souls in our hypothetical Dirty Dancing environment. There are several main retail houses (the so-called “majors”) which are part of the problem and not part of the solution. In one instance – and I have a lab director stating this – the buyers for the jewelry chain looking for a certain color or quality will not just straightforwardly purchase the stones needed on the market. No, they will do their upmost to source in India, Israel or elsewhere so-called “borderline goods” – those which are on the higher borderline of color or quality ranges of a lower quality. These goods are cheaper. Then, they hope to get them recertified in the U.S. getting a better grade – or, what is increasingly the case, have them re-graded in an in-house laboratory. Of course, using the GIA terminology.

It’s even more complex. Even within a very same laboratory organization the grading may not be consistent among branches. Assume, theoretically, that what may seem like a J, K, L or M grade in a strict U.S. laboratory, may get an “I” in India or Israel. Recently, there have been instances in which the majors insist on having certificates graded (or “re-confirmed”) by a local lab in the United States. This also may be a matter of liability. Some retailers don’t feel at ease knowing that the certificate originated from a lab outside U.S. jurisdiction. That’s another area where recently several problems have arisen.

All these issues – and more – have come up because, among some of the Resort Vacationers concluded “enough is enough” – this is crossing every conceivable red line. What is not being said is that this isn’t a “sudden event” – the upgrading [and some of it seems clearly fraudulent] has gone on for many years, for decades. Some labs were established in the 1970’s. An isolated court action (in Kansas) may have brought some questionable practices into the limelight. But at the end of the day, these are practices that have, for many years, delivered enormous amounts of (extra) income to thousands of stakeholders from every conceivable level of the diamond pipeline. It’s like dancing all the way to the banks. The challenge is whether anything will, in fact, be done to change it.

My bet would be that the outcome will be similar to the ending in the Dirty Dancing movie. The vacation at the resort is over. People go home. It’s back to business as usual. The memories of the fears, anxieties and thefts will fade…. This is one occasion where I truly hope that I have it all wrong.