RAPAPORT… The Diamond Source Warranty Protocol, launched this week by various U.S. trade organizations, is a step in the right direction in that diamond suppliers need to guarantee the authenticity of the goods they are selling.
While such efforts may be well overdue, they are welcomed at an opportune time for the industry. If anything, the protocol again highlights the shortcomings of the Kimberley Process (KP) as the organization continues to struggle with its own legitimacy.
Even efforts for reform within the KP are limited by its own inept systems and are unlikely to pass given the consensus system that governs it. As a result, the organization is limited by its original mandate and unable to adapt to the requirements of businesses operating in the diamond industry today.
Gillian Milovanovic, the U.S.-appointed KP chair for 2012, highlights what her proposal for a new KP definition of conflict diamonds would not encompass as much as what it does. “Certification should not address human rights, financial transparency, and economic development, which are better advanced through the exchange of best practices,” she told delegates at this week’s World Diamond Congress (WDC) in Mumbai. “KP certificates must continue to ensure that the rough diamonds are free from conflict.”
She added that additional certification standards beyond the current definition should apply only to armed conflict or violence that is demonstrably related to rough diamonds and independently verified.
By its own admission, therefore, the KP has irreconcilable shortcomings, which are neither new to the industry nor acceptable. Certainly the Rapaport Group, along with other founding members of the KP, has long recognized that the KP cannot ensure that diamonds are ethically sourced. In June, Rapaport launched The Campaign for Ethical Jewelry that aims to bring together companies, organizations and individuals dedicated to creating a truly ethical diamond and jewelry industry.
Rapaport’s ethical pledge requires jewelers to provide a written assurance that they have investigated their sources, and to the best of their knowledge, the products offered are free of human rights violations, significant environmental damage, illegal activities, or sanctions by U.S. or E.U. governments.
The new protocol – developed by the Diamond Manufacturers and Importers Association of America (DMIA), Jewelers of America (JA), and the Jewelers Vigilance Committee (JVC) – echoes many of those principles.
Essentially, it is a voluntary inventory management tool for retailers and their suppliers to gain greater assurances that rough or polished diamonds used in their products were not attained by questionable sources.
Through a written statement included in a commercial document pertaining to the diamond or any other item set with diamonds, sellers pledge that, to the best of their knowledge, the diamonds or industry products supplied do not contain diamonds that were obtained from, or processed by a questionable source – as specified by the seller – or a specially designated national and blocked person by the U.S. Treasury’s Office of Foreign Assets Control (OFAC).
Spokespersons for JA explained that individual businesses that elect to use the protocol would be expected to work closely with their suppliers on its practical implementation over time. Once implemented, a seller that provides a protocol warranty must also provide a qualified audit certificate that would be issued by an independent auditor.
Given the OFAC sanctions subjecting Zimbabwe’s Marange diamonds and the KP’s certification of Marange production in the past year, the U.S. trade organizations had no choice but to upgrade their avenues for assurance beyond the KP. They still have a lot more work to do. But while the protocol does not single out any country – it leaves that to the signatory to list – it serves to highlight that those goods are illegal to sell in the U.S. even if they come with a KP certificate.
Diamond suppliers, particularly in the manufacturing sector, should therefore not be surprised by the initiative. If diamond manufacturers wish to supply their goods to the U.S. market, they must be prepared to guarantee that they are doing so within the legal framework required by that market.
Should that entail segregating their manufacturing facilities and maintaining separate inventories of diamonds they source from acceptable locations from those that are not, so be it. If manufacturers choose to source their goods from what is considered a questionable source by their U.S. customers, segregating those goods is simply what they need to do to maintain their relationship.
The newly appointed presidents of the International Diamond Manufacturers Association (IDMA) and the World Federation of Diamond Bourses (WFDB) expressed their members’ grave concerns regarding the impact that the protocol will have on the flow of goods through the legitimate diamond supply pipeline.
But it’s not the protocol that will have an impact. Rather, it is the inadequate assurances provided within the existing industry framework that requires it. If suppliers are unable to guarantee their sources, they cannot sell to the U.S. regardless of the protocol. What the protocol does is make that guarantee more accessible, transparent and systematic.
Diamonds are not unique in this requirement; in fact, the industry’s stipulations are comparatively watered down. Under the Dodd-Frank Act, for which the final rules were passed in August, jewelry suppliers to the U.S. face a legal requirement to verify the source of their gold as conflict free.
Signet Jewelers stressed the point at a seminar given at this year’s India International Jewelry Show (IIJS) in Mumbai, titled “The U.S. Jewelry Market and its Expectations from Indian Suppliers – why the U.S. market requires a conflict-free gold supply chain” (see Signet’s presentation here). The company stressed that under the new law, failure to prove the source of gold will mean that U.S. publicly traded companies will not be able to use and sell jewelry containing gold without proper proof of its country of origin.
While Dodd-Frank does not extend to diamonds, the larger U.S. retailers – and the majority of smaller independents for that matter – will clearly protect themselves from breaking the law and will require the necessary assurances in their diamond procurements. They are equally motivated by the growing consumer trend that insists on ethical sourcing. Signet points out; all industries are paying much closer attention to sustainable and ethical sourcing, and, as a result, supply chain management.
The large attendance at the Signet Mumbai seminar indicated that the affected Indian jewelry wholesalers and suppliers are well aware of the impact these new laws will have on their businesses and are willing to learn and adapt accordingly.
IDMA, WFDB and others concerned about the impact on the diamond trade are underestimating their constituents. They too will adapt because it is necessary.
As Martin Rapaport, chairman of the Rapaport Group said, “The diamond industry is on the slippery slope of legitimacy. Suppliers need to make written commitments as to the sourcing of their goods and if they are not willing to, you should not buy from them. A supplier that is unwilling to guarantee the legitimacy of the products they are selling should be driven out of the industry.”
IDMA and WFDB’s complaint that they weren’t consulted in formulating the protocol is also misguided. This is a U.S. initiative because U.S. jewelers need to be protected from the real possibility that their suppliers will enable them to break the law. They simply cannot rely on the KP, or wait for any proposed KP reforms to make that guarantee.
It has nothing to do with advocating for one sector within the industry over another. Rather, it is necessary in order to maintain the integrity of the diamond product and ensure consumer confidence in the largest market for diamond jewelry. The assurances required by U.S. jewelers and manufacturers from their suppliers were inevitable and the U.S. trade groups that introduced the protocol should be applauded for their efforts.
The writer can be contacted at email@example.com
This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.
Copyright © 2012 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.
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