More than 600 Israeli diamond manufacturers have signed a letter that calls on bourses to support a decision taken by the World Federation of Diamond Bourses, which is meant to improve transparency in the rough diamond trade. If enforced, it will greatly reduce the level of risk that has for so long been part of the business.

 

Let’s think for a moment about a game of poker. All those around the table understand that, even though some players may be more talented than others, the mathematical risk is equally distributed.

 

But, now imagine that one of the players knows what cards the others are holding. Could the game continue to be played out fairly, with even the losers walking away satisfied that they had been provided a fair shot? Clearly not. Indeed, it is unlikely anyone would have even joined the game if they realized that the risk was unevenly distributed.

 

Until recently the rough diamond trade shared certain characteristics with the game of poker. While the talent, experience and knowledge of rough traders definitely were factors, the internal characteristics of a stone – which ultimately determine its value on the polished diamond market – were concealed equally from all participants. Like poker, rough diamond trading can be a high-risk business, but it is one that we agreed to join because the rules were fair.

 

But then something happened that undermined the premise of equally distributed risk, and that was the development of technologies that enable one to analyze the interior of a rough diamond, revealing its real economic value. To return to our poker analogy, it was as if spectacles had been invented that empower the wearer to see what cards all the players around the table are holding.

 

Now ask yourself, in poker, if one or more of the players was wearing those spectacles, should we expect the other participants in the game to continue playing? Almost certainly not, but in the rough diamond business some would disagree.

 

The game changer was Galatea, a system developed by a group of Israelis that was purchased by Sarine Technologies in 2008. It enables the comprehensive and accurate detection and mapping of inclusions in rough diamonds, and in so doing potentially eliminates much of the risk that has so long been part of the trade.

 

Game over? Not so fast. Galatea reduces a buyer’s risk as long as the buyer is able to use it before making the purchase. It’s common sense, surely. You wouldn’t buy a used car without first taking it to a motor mechanic to check it for hidden defects, and not afterwards, correct?

 

PASSING IT FORWARD – THE ROLLING STONE

 

But what is common practice with used cars is not necessarily so in the rough diamond business. The following is a far more likely scenario.

 

Buyer A purchases a rough diamond for a considerable sum; let us say $1.8 million, on the assumption that it will yield one or more high-quality polished gems that provide a healthy profit. But after submitting the stone for examination using Galatea technology, Buyer A discovers that the stone’s potential value had been grossly overestimated.

 

Buyer A is left with two choices; either absorb the loss or sell the rough stone to Buyer B, most probably at a modest profit. Guess which option is chosen.

 

So Buyer A has created the baseline, and each time the rolling stone is sold, the price edges upward. Eventually, however, Buyer C, or Buyer D or E decides to cash out and cut the diamond. Only then does he discover that he is holding a losing hand.

 

Once upon a time, the last buyer in the chain would have considered the loss fatalistically. After all, each of the earlier buyers had the same set of choices, because the risk was equal. But in the “Age of Galatea” it is always possible that one or more of the buyers in the chain was playing with marked cards, knowing full well that the stone being sold was worth considerably less than what was being asked for it.

 

In the Age of Galatea it is unlikely that the person who was burned would ever agree to do business again with the individual who sold him the stone. The rules of the game have changed.

 

 THE MISSION – TO HALT CREEPING MISTRUST

 

The creeping level of mistrust in the rough diamond trade, brought on by a conspicuous lack of transparency, is proving devastating. Friends of mine, some of them respected manufacturers and even Sightholders, have left the business disillusioned. Colleagues are switching professions, looking for more stable and more promising prospects in other fields. 

 

If this was another business sector – the pharmaceutical industry for example – we would assume that full disclosure was being practiced from the very beginning. And this is what we should aim for. With the technology that is available today, mining companies would ideally sell rough with Galatea reports, enabling the first buyer in the chain, and all those who follow, to make properly informed purchasing decisions.

 

But before that goal is achieved, there are other steps that can be taken. In fact, some already have. More than two years ago, the World Federation of Diamond Bourses (WFDB) decided  that while a diamond dealer is not necessarily obliged to reveal the results of a Galatea analysis, he or she is obliged to inform a potential buyer that such a report does exist, and this should be confirmed by a laser inscription on the stone.*

 

This cannot be defined as full transparency, but it definitely is a move that encourages transparency. The problem is that the bourses, which are expected to implement WFDB decisions, have been slow to follow through. However, one that was ready to pick up the gauntlet was the Israel Diamond Exchange, but it found itself almost alone.

 

In the meantime a group of young Israelis, most of them second-generation diamantaires, have established a group whose goal it is to encourage as many bourses as possible to join the WFDB initiative. Their mission is to salvage the ethos of integrity in the business, and the response has been overwhelming. In just several days more than 600 of their peers signed on. Something good is happening.

 

It is my fervent hope that this movement for greater transparency, with the courageous support of the Israel Diamond Exchange, will reverberate throughout the trade. Manufacturers will come to know that, if they want to reduce their level of risk and optimize their chances of getting a fair return on their investment, it would be wise to purchase rough where the business is most transparent.

 

Winners and Winners

 

Unlike poker, it is not a foregone conclusion in the diamond trade that there are inevitably both winners and losers. In a transparent business environment it is altogether possible that all players in the chain come out winners, just as in a non-transparent business environment the industry as a whole may ultimately lose.

 

Neither is it a foregone conclusion that your colleagues seek to deny you earning a fair profit.

 

The World Federation of Diamond Bourses Responds

 

*World Federation of Diamond Bourses (WFDB) president Ernie Blom, responded to the assertion that there was an official WFDB decision regarding the publishing of results of a Galatea analysis.

 

“While it is true that the WFDB has, indeed, discussed this issue thoroughly on a couple of occasions, with input from our bourse presidents across the world, no decision was made. I believe it is important for this point to be stressed.

 

Our 30 affiliated bourses are free to reach their own decisions on this issue and, as you write, the Israel Diamond Exchange is moving ahead with its own steps.

 

In conclusion, I would like to thank you for raising this issue as it goes to the heart of transparency in diamond dealings, which the WFDB promotes vigorously. As I am sure you are aware, the World Diamond Congress is being held in Dubai in May and the themes we have chosen are: Transparency, Responsibility and Sustainability.

 

The WFDB is keen to see rising levels of transparency because, firstly, it is critical for diamond companies to be able to trust each other, secondly it will aid the diamond industry in securing financing from the banking sector; and, thirdly, and vitally, consumers will see that we are an open and transparent trade that has nothing whatsoever to hide.”