Inevitable Diamond Ethics

140 95 Rapaport News

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 avi@diamonds.net  

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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