Rapaport Magazine

Moral Clarity and the Diamond Industry

By Martin Rapaport
Sometimes it’s hard to tell right from wrong. And sometimes it’s not. Some people don’t want us to tell right from wrong. They prefer that the diamond industry avoid ethical issues and concentrate on “business only.” Often this is because they and their friends make windfall profits selling questionable products. When serious ethical matters such as severe human rights violations get in the way of their profits, they manipulate the truth through misrepresentation, denial, half-truths and confusion to protect their business interests. “Don’t ask, don’t tell, don’t know” is their credo.
   The purpose of this article is to promote moral clarity within the diamond industry.
We will analyze complicated issues and present ethical perspectives that encourage you
to establish your own ethical standards and an independent sense of moral clarity.
Finally, we will recommend specific actions that should be taken by individuals and industry organizations.

A Theoretical Model
   Let’s start our search for moral clarity with a theoretical model designed to establish a consensus baseline for right and wrong.
   Gangs of Colombian thieves operating in the U.S. are attacking traveling diamond salesmen and jewelry stores. Sometimes they even take jewelers hostage in their homes. Occasionally a jeweler or salesman is murdered. A market for stolen diamonds develops. Initially the prices of the stolen diamonds are very low; however, as the market becomes more efficient and diamonds are sold to unknowing or “un-asking” third parties, higher prices are achieved. Some dealers mix stolen diamonds with legitimate diamonds, masking their identity and lowering average prices.
   Decent people consider it highly unethical to buy stolen diamonds. However, some buyers eyeing large windfall profits claim that if they don’t buy the stolen diamonds, others will. After all, they say, “diamonds are neutral,” it’s not the diamonds’ fault they were stolen. Furthermore, if they buy the diamonds from a “third party,” they could claim they did not know they were stolen and avoid legal responsibility. Since the thieves and their dealers make windfall profits and don’t have ethical concerns, the market for stolen diamonds develops, expands and becomes more efficient.
   The creation of an efficient “quick cash” market for stolen diamonds at “good prices” encourages robbers to expand operations. New players enter “the business.” More jewelers get robbed, murder rates go up and there is a significant increase in robberies at the homes of wealthy consumers. Salesmen no longer travel with diamonds, insurance rates skyrocket and consumers start questioning the safety of owning diamond jewelry.
   As the market for stolen diamonds expands, some legitimate diamond dealers and jewelers find it hard to compete against the lower-priced stolen goods. Some stop buying and selling diamonds. The perception that diamonds are dangerous continues to develop as more people suffer robberies and assault. There is a significant decline in market and consumer demand. Diamonds now have a dangerous reputation. Demand and prices fall.
   Consider the six components of our model: ethical considerations, legal issues, financial incentives, reputational risk and long-term economic impact and social consequences.
   Obviously, different players have different perspectives. The robbers and their buyers are highly motivated by short-term profits. They have no ethical or long-term concerns. The legitimate dealers and jewelers suffer financial loss and physical threat. At first glance there does not seem to be much they can do.
   The solution, of course, is to shut down the market for stolen diamonds, arrest the robbers and their buyers and place severe fines and prison sentences on anyone caught dealing in stolen diamonds. By differentiating stolen diamonds from legitimate diamonds, denying them access to legitimate markets and then raising the risk and cost of dealing in stolen diamonds, windfall profits and liquidity disappear, robbers and their buyers lose their lucrative financial incentive and markets return to normal, safe and profitable conditions.
   Unless you are a robber or one of their buyers, the above scenario offers clear options. Trade or don’t trade in stolen diamonds. There is no gray area and that is what we mean
by “moral clarity.” Clearly, supporting the market for stolen diamonds, encouraging the mixing of stolen and legitimate diamonds and supporting the “right” of thieves to steal
and their buyers to sell into the market is highly unethical.

The Real World
   While the real world is more complicated, our theoretical model repeats itself in many ways. Consider the situation regarding Marange diamonds from Zimbabwe.
   Zimbabwean government security forces controlled by President Robert Mugabe
and his ZANU-PF political party have killed and tortured hundreds of Zimbabweans
to steal diamond wealth and keep their political party in power. In 2003 U.S. President George W. Bush placed economic sanctions on Mugabe and his ZANU-PF gang, including the current Minister of Mines Obert Mpofu. The president cited their actions
“to undermine Zimbabwe’s democratic processes or institutions, contributing to the deliberate breakdown of the rule of law in Zimbabwe and politically motivated violence and intimidation in that country.” These sanctions have been continuously renewed by President Obama.
   Detailed reports by nongovernmental organizations (NGOs) Partnership Africa Canada, Global Witness, Human Rights Watch and others have documented the 2008 murder of over 200 artisanal diamond diggers and the torture of thousands by military forces aligned with the government’s ZANU-PF party, the murder of hundreds of opposition Movement for Democratic Change (MDC) political party activists and the torture of hundreds more during and after 2008 elections, the seizure by the military of the Marange diamond fields, the establishment of mining companies owned by secret partnerships that include the military, ZANU-PF and unknown others, the failure of government-owned diamond companies to inform the treasury of their revenue and earnings and their failure to pay taxes, royalties and dividends owed to the government, the personal enrichment of
Minister Mpofu and other members of the ZANU-PF clique.
   The current situation is highly problematic with two MDC activists murdered in February, dozens of MDC activists jailed under false pretenses and the recent physical attacks by ZANU-PF on the MDC Home Secretary and Treasurer. There is great fear that the diamond revenue currently being hijacked by ZANU-PF will be used by their security forces to fund attacks on members of the MDC opposition during the upcoming campaign for elections in early 2013. Anyone buying Marange diamonds should be concerned that their money will be used to fund violence.
   Tendai Biti, MDC Minister of Finance in the unity government, had this to say about
the situation: “As Ministry of Finance, we fear that there might be a parallel government
in respect of where the revenue is going and not coming to Treasury…. I think the people that are stealing our diamonds are so sophisticated that stealing will continue.”

Legitimizing the Illegitimate
   So here you have it, a gang of thieves disguised as politicians stealing diamonds from their own people in one of the poorest countries in the world. Suppliers so evil that the U.S. government has slapped Office of Foreign Assets Control (OFAC) sanctions on them and you can’t legally import their diamonds into the U.S. You might think the diamond trade would be ethical enough to not buy these diamonds. Well, think again.
   At the recent Zimbabwe diamond conference designed to legitimize Mugabe, Mpofu and their gang of thieves, leaders of the diamond industry fell all over themselves, toadying up to the bad guys. Eli Izhakoff, chairman of the World Diamond Council (WDC) went so far as to say he would petition the U.S. and EU governments to drop sanctions against the Zimbabweans.
   What about the Kimberley Process (KP)? Isn’t the KP supposed to certify that diamonds are free of human rights abuses and violence? If the KP is certifying Marange diamonds, doesn’t that mean they are legitimate? No and no again.
   Here is what Ambassador Gillian Milovanovic, U.S. chair of the KP had to say at the Zimbabwe conference: “KP certification is not designed to address human rights, financial transparency, economic development or other important issues.” She failed to add that the KP does not address armed conflict and violence when the governments are perpetrating the violence against their own people, as is the case in Zimbabwe. From the KP’s perspective, it’s perfectly all right for Mpofu and his ZANU-PF gangsters to kill as many people as they like or steal as much money as they like. The KP is only interested in cases where rebel forces use diamonds to attack a government and the UN Security Council approves an embargo. The KP turns a blind eye to everything else.
   Please note that Milovanovic is a diplomat from the U.S. State Department. Her job is to talk, persuade and advise but she has no real power. Don’t be confused, just because the State Department approves Zimbabwean KP certificates, does not mean that the U.S. Department of Treasury ‘s OFAC won’t fine you up to $500,000 or throw you in jail for up to ten years if you are caught importing KP certified Marange diamonds into the U.S.
   What about the World Diamond Council System of Warranties (SoW)? Aren’t they supposed to ensure that diamonds are legitimate? Doesn’t the SoW guarantee that diamonds are free of human rights abuses? No and no again.
   The WDC is the puppet of the KP as indicated by their mission statement. “The primary objective of the WDC is to represent the diamond industry in the development and implementation of regulatory and voluntary systems to control the trade in diamonds embargoed by the United Nations or covered by the Kimberley Process Certification Scheme. … Conflict diamonds are rough diamonds used by rebel movements or their allies to finance conflict aimed at undermining legitimate governments, as described in relevant resolutions by the UN Security Council and UN General Assembly.” Let’s be clear, if the KP does not “address human rights, financial transparency, economic development or other important issues,” neither does the WDC or its SoW.

   The WDC has been misleading the trade for many years by implying that KP certification and the WDC-SoW assures the legitimacy of diamonds. They have been
using phrases like conflict free and nonconflict diamonds to imply that these diamonds
are legitimate and free of human rights abuses. That’s an outright lie.
   Consider the WDC’s diamondfacts.org website, Employee Training Manual, page one, “We are part of an industry-wide, global effort to eradicate illegal diamonds. We will be discussing how you can speak confidently to your customers and assure them that the diamonds they are buying come from legitimate sources.” Additionally on page two of
the Manual: “The Kimberley Process guarantees that only diamonds from legitimate sources are used in our jewelry.”
   Pray tell, what is legal and legitimate about KP certified Marange diamonds that are illegal under U.S. sanctions and fund violence? The KP and WDC SoW never certifies legitimacy or lack of severe human rights violations, so why does the WDC lie to us and say that they do?
   In his keynote speech at the recent KP meeting, Izhakoff had this to say about KP certification. “For the process to work effectively, the consumer needs to understand that every legitimately traded diamond can be traced to a verifiable KP certificate, by way of the World Diamond Council’s Chain of Warranties. However, if we begin to differentiate between KP certificates, implying that one may be more legitimate than the other, then we will undermine consumer confidence in general.”
   While Izhakoff’s WDC is entitled to its opinion, it is unethical for him and his WDC to continuously mislead the trade and public regarding the efficacy of KP certificates. While it is technically true that every legitimately traded diamond can be traced to a KP certificate, it is also true that almost every illegitimate diamond can also be traced to a verifiable KP certificate. His statement is misleading because he implies to consumers and the trade that all KP certified diamonds are legitimate — which they certainly are not.
   Izhakoff’s carefully phrased, clever double-talk is not a slip of the tongue but rather the continuation of a consistent long-term misinformation campaign by the WDC to falsely claim that the WDC-SoW guarantees the legitimacy of a diamond.

Legal Issues
   In a letter to Rapaport, OFAC states “a U.S. person may not procure goods, services
or technology, including diamonds, from a blocked person directly or indirectly (including through a third-party intermediary). … “A U.S. person generally cannot purchase diamonds from a foreign company if the U.S. person knows or has reason to know, that
a blocked person has or has had an interest in the diamonds.” This makes it clear that U.S. companies can’t buy polished Marange diamonds from diamond cutters.
   Given the fact that diamond manufacturers have bought, cut and sold millions of carats
of Marange rough diamonds into the market, everyone in the diamond trade “has reason to know” that polished diamonds may originate from Marange.
   It’s not just a voluntary ethical issue anymore. Jewelers of America (JA) has advised its members that it is “illegal for U.S. owned companies or individuals to directly or indirectly buy or sell diamonds from Marange.” Furthermore they have advised all JA members to obtain a written commitment from their suppliers that the diamonds being sold to them do not originate in Marange. We congratulate JA for the correct ethical and legal advice they are giving their members.
   We strongly urge all U.S. diamond and diamond jewelry buyers to contact their
suppliers and require them to provide the following written commitment on all invoices:
   “To the best of our knowledge, the diamonds herein invoiced do not originate from
the Marange region of Zimbabwe or other sources subject to U.S. legal restrictions.
Our supplier of these diamonds has provided us with a similar assurance of origin.”
   Members of the trade are cautioned that in the fall of 2010, Cecilia Gardner, Esq., President and CEO of the Jeweler’s Vigilance Committee (JVC) and General Counsel
of the WDC, issued a guidance that falsely claimed U.S. companies can indirectly buy Marange polished diamonds from the secondary market. She writes: “If the transaction is on the secondary market, not a transaction directly between a U.S. company and a listed company (or a 50 percent-owned affiliate of a listed company) then the transaction should not be blocked nor would it violate any U.S. laws.” This is a false statement that directly contradicts the written directions in the letter OFAC sent to Rapaport. We have sent our OFAC letter to Gardner and asked her to revise her guidance.
   In the same advisory Gardner writes “You will note that there is one issue that JVC
has not addressed in this article — the ethical calculation one might apply generally to the purchase of diamonds from Marange. This is a subject for another day. JVC’s focus and expertise is legal compliance, which is the subject of this article.” We note the JVC tagline at the header of their web page states “The Industry’s Guardian of Ethics and Integrity.” All we can say about this is “if not now, then when.”
   I want to make it clear that Gardner has done and continues to do countless good for our industry. I respect her, her work and her good intentions. However, I believe that here, she has crossed the line.
   Let this be a warning to all of us. If the corruptive influence of the WDC can twist the JVC — how much more so, the rest of us. It’s easy to make the mistake of prioritizing unification of the world diamond industry through compromise over the need to protect
the interests of the U.S. industry by doing what is right. But, we must put our foot down, being inclusive cannot come at the price of turning a blind eye to unethical behavior or specifically encouraging the sale of diamonds that should not be sold in the U.S. for
ethical and legal reasons. Gardner and the JVC need a break from the WDC.
   I respectfully call upon JVC’s board of directors to review the situation and align
their position with JA’s. Furthermore I respectfully request that the JVC board of directors ask Gardner to resign her position as General Counsel of the WDC so that she can devote her efforts to the ethical and compliance challenges confronting the U.S. jewelry trade. Simply put, Gardner should be working to protect the U.S. jewelry industry, not the
cutters in India.

Reputational Risk
   U.S. purchases or sales of Marange and/or other diamonds involved in human rights abuses present a grave and immediate danger to the U.S. diamond market as well as the companies and brands selling diamonds. I cannot imagine a worse scenario than jewelers being brought up on charges for violating OFAC sanctions by selling diamonds involved in human rights abuses.
   In 1996, the media publicized severe labor problems in Nike’s supply chain. By the 1997-1998 fiscal year, Nike’s revenue fell by 16 percent, profits plunged 49 percent and the share price fell by 57 percent. Wake up U.S. retailers, consumers are not going to buy diamonds if they are evil. The WDC might be able to fool consumers for a while longer but if we keep on importing dirty diamonds our industry is finished.
   Needless to say, all the trends are with ethical consumerism. Dodd-Frank is forcing companies to clean up their supply chain as global warming or should I say global warning wreaks havoc with the weather. Socially responsible consumerism is not just a trend, it’s a long-term lifestyle commitment. Years ago we used to light up cigarettes in airplanes; would anyone dream of doing that now? How long do you think our industry can get away with selling diamonds involved in human rights violations?
   We must separate ourselves from the bad diamonds. It’s not just an ethical or legal issue. It’s survival.

Financial Interests
   Consider the perspective of an Indian diamond cutter who does not have an ethical
or legal problem dealing with Marange diamonds. If he can buy Marange rough diamonds at a 25 percent discount and then cut and mix them with diamonds from legitimate sources, he can make an extra 25 percent windfall profit. There is a huge economic incentive for diamond cutters to buy Marange goods, mix them and sell them as legitimate.
   Taking this to another level you might want to ask how much more Marange diamonds would be worth if Izhakoff and his WDC gang could get the U.S. and EU to drop sanctions while continuing to convince the world that KP certs guarantee the legitimacy
of diamonds. The bottom line is that there are huge profits in dirty diamonds.
   When diamond manufacturers tell you they can’t separate Marange diamonds, don’t believe them and don’t buy from them. Cutters can separate VVS1’s from VVS2’s,
Triple X’s from Triple VG’s and rough diamond productions from one customer to another. Would your supplier tell you they could not separate treated or synthetic diamonds from natural diamonds? If your supplier can’t guarantee a supply of diamonds free of Marange, then simply stop buying from them. Money talks when money walks.

Conflicts of Interest
   By now it should be clear that there is a fundamental conflict of interest between international diamond manufacturers and U.S. diamond buyers.
   Diamond cutters in India do not have OFAC or EU/UK legal constraints. In their
market, Marange diamonds are perfectly legal. Furthermore, they do not have the same level of reputational risk that U.S. retailers and international brands have. If and when
there is a consumer backlash against dirty diamonds, U.S. retailers and brands will feel the heat on the frontline, head on. The Indians will hide in India. Their horizon does not include the socially conscious U.S. consumer. They don’t see or feel our risk. What they do see and feel is money. Lots of money they can make right now by selling the U.S. Marange diamonds.
   From the U.S. buyer perspective Marange diamonds are poison. Not only are they unethical and illegal, they also destroy the level playing field of our markets. Retailers who cheat get lower prices in a highly competitive market environment. Legitimate diamond dealers and retailers are in danger of losing business when being forced to compete against sellers of illegal Marange diamonds.
   The only solution is for the legitimate U.S. diamond trade to insist on the separation of good diamonds from bad diamonds and the exclusion of bad diamonds from our distribution system. We need to establish and support independent competitive source certification systems that support legitimate markets for legitimate diamonds. We should support efforts by the Responsible Jewelry Council (RJC) and others to create legitimate Chain of Custody (CoC) and Source Certification Systems (SCS).
   There is a fundamental conflict of interest between the WDC and the legitimate U.S. diamond industry. The WDC supports the mixing of Marange diamonds with legitimate diamonds, the establishment of standards that ignore human rights and the misrepresentation of these standards to consumers.
The WDC claims to represent the interests of the entire diamond trade from mining companies to retail jewelers, but it doesn’t. The WDC represents the interest of Mugabe and other illegitimate and illegal miners as well as profit-seeking diamond cutters against the interests of the legitimate U.S. retail and wholesale diamond trade.
   Let’s make it clear. The WDC is pouring poison into the well from which we all drink.
It is incomprehensible that U.S. retailers and diamond dealers are represented by an organization that advocates the mixing and legitimization of illegal and unethical diamonds and their importation into the U.S. It’s bad enough that the WDC is doing evil — but it is outrageous that we are allowing it to do so, against us, in our name. It makes no sense for U.S. companies and organizations to legitimize and support an organization that opposes our American laws and values.
   The Rapaport Group hereby calls upon all legitimate members of the diamond trade and especially all U.S. members and trade organizations to publicly resign from the World Diamond Council. If organizations wish to be represented at the KP, they should apply for independent observer status and ensure their legitimate interests are presented and protected.
   Legitimate mining companies should carefully consider the impact of Marange and other illegitimate diamond sources on the value and reputation of their production. Legitimate producers should support chain of custody and source certification systems that separate their production from diamonds of unknown or problematic origin.

U.S. Diamond Buyers Unite
   It’s time for U.S. diamond buyers to organize themselves, stand up for their rights, assert their identity and exercise their market power. It is absurd that foreign diamond suppliers think they can force us to buy their illegitimate and illegal diamonds. “We can’t separate the diamonds,” they say. Poppycock, I say.
   Legitimate American buyers need to come together under an organization like Jewelers of    America and present a united front for an ethical supply chain. We must deal with diamond suppliers in an organized, powerful and focused manner. American diamond buyers have a responsibility to their customers and we have the economic power to back up our ethical demands.
   The Rapaport Group supports the African concept of BEE – Black Economic Empowerment, which seeks a fair and equitable distribution of the benefit from diamonds and other mineral resources originating in developing African countries. We also support the concept of an American BEE – Buyer Economic Empowerment. It’s time that we communicated to our African comrades that American buyers have the right not to buy their unethical and illegal diamonds. The message from diamond buyers is simple and straightforward. Meet our ethical standards or we won’t buy your diamonds.

The Way Forward
   While it’s nice to talk about ethics, nothing really gets done unless there is money
behind it. If we want ethical diamonds, we must make sure they are profitable. The obvious need for separating good and bad diamonds is also an opportunity to create a differentiated diamond product category with a unique selling proposition. We can add value to legitimate generic diamonds through ethical source certification that emphasizes and markets their goodness. A diamond with a documented legitimate supply chain
is worth more than a diamond from an unknown source. We need to market this.
   Ethical and source certification has the power to change markets the way that
cut grade diamond grading has. Once the American Gem Society (AGS) introduced
a cut grade, excellent cuts brought significant premiums as sellers used the excellent cut
on the grading report to differentiate their products. So too here with ethical and source certification, competitive market forces will encourage suppliers to obtain added value through ethical sourcing.
   The way forward is for the diamond industry to create a competitive market with the added value attributable to certified ethically sourced diamonds. Supply chain management should not just be about damage control, it should be about getting higher prices for ethically sourced diamonds and branded jewelry.

Rapaport Recommendations:
  1. All U.S., EU/UK diamond buyers should obtain a written commitment from their suppliers that the diamonds being sold to them do not originate from Marange or other sources subject to government sanctions. 
  2. All diamond trade associations should pass resolutions requiring their members to make full disclosure when selling Marange diamonds or other diamonds subject
    to sanctions. Disclosure should be in writing on the invoice and similar to requirements for treated and synthetic diamonds.
  3. All legitimate U.S. and other trade organizations, companies, and individuals should withdraw from the World Diamond Council (WDC). The WDC should immediately issue public statements clarifying the limitations of the WDC System of Warranties. Eli Izhakoff should resign from the WDC.
  4. The Jewelers Vigilance Committee (JVC) should issue clarifications regarding their position that U.S. companies can buy Office of Foreign Assets Contol (OFAC) sanctioned diamonds indirectly in secondary markets. JVC should withdraw from the WDC.
  5. A meeting of U.S. diamond industry stakeholders should take place to discuss
    how to support, promote and source ethical diamond certification as well as the Responsible Jewelry Council’s (RJC) Chain of Custody (CoC) certification
    for diamonds. Discussion about how the U.S. industry should be represented in international forums should also take place with consideration given to expanding the role of Jewelers of America (JA). Consideration should be given to holding
    a meeting in Washington to encourage the continuation of sanctions
    against Zimbabwe. 

Article from the Rapaport Magazine - December 2012. To subscribe click here.

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