Chain of Custody, The Root of the Matter

Ever since the dark red hue of blood shadowed the sparkle of diamonds, accountability, with all it implies, has become the watchword of the diamond industry. What started as a cry of protest from a handful of people in a few NGOSs, has today become a groundswell of opinion, demanding transparency, compliance and even regard to human rights, in its widest sense, through the diamond pipeline, and from all segments within it. Encompassed within its gambit is a hydra-like spectrum of issues which have from time to time being raising different heads. But it all comes down to – how clean is the pipeline?

On March 6, this year, the Reponsible Jewellery Council (RJC) launched its Chain of Custody (CoC) system for gold and platinum group metals. This came after more than a year of preparation and much discussion. Originally, the RJC had proposed a CoC certification for both precious metals and polished diamonds. However, strong opposition from various segments of stakeholders in the diamond industry induced them to defer the implementation of the CoC for diamonds, in December 2011.

The RJC, a private undertaking, was founded in 2005, began operations in 2009 and today has 360 members spread across 26 countries. The organisation’s mission statement reads: “To advance responsible ethical, social and environmental practices, which respect human rights, throughout the diamond, gold and platinum group metals jewellery supply chain, from mine to retail.”

The RJC seeks to introduce certification on two counts: RJC Member Certification; and Chain of Custody Certification. While the former stands testimony to a member’s “responsible business practices which can be communicated to suppliers, customers and other stakeholders”, the latter “aims to support the identification of responsibly-sourced jewellery materials produced, processed and traded through the jewellery supply chain”. For the RJC, “responsibly sourced” covers two aspects: “conflict-free as a minimum” and “responsibly produced” taking in the entire gambit of “human rights, labour standards, environmental impact and business ethics (as articulated in the RJC Code of Practices, applicable to the jewellery supply chain from mine to retail)”.

What is not so clearly known is that while Member Certification is mandatory for all those who come under its umbrella, the CoC standard is totally voluntary for RJC members.

However, many of the retailers in the west particularly in the US – many of them RJC members – are all demanding that their suppliers provide a self-declaration about the source of the raw materials in their jewellery.

“All major retailers want KP certificates as well as a declaration about the source of the gold,” confirms Prem Kothari, a director of Fine Jewellery Ltd., and the President of the SEEPZ Gem & Jewellery Association. “That we are providing them. There is no problem about doing so as all the SEEPZ manufacturers use gold obtained through nominated agencies which are imported in bars and all have a serial numbers and are fully identifiable. Also, for the diamonds we use, we get a certificate from our suppliers.”

Colin Shah, Managing Director of Kama Schachter and a member of the SEEPZ G & J Association explains, “Ever since the Blood Diamonds movie hit the screen, there has been a great deal of consumer concern. The retailers in the US are answerable to their consumers and hence they are asking us to provide an assurance that the raw materials we use in jewellery are sourced from mines which are compliant in all aspects as generally required; that they are not involved in any illegitimate or terror activities and so on..”

Shah stresses that a large reputed company like his anyway uses vendors with a “similar philosophy and a similar approach to doing business”. “We work only with large suppliers like DTC sightholders and others who have direct access to supply from Alrosa and BHP,” he says. “We work with companies whose business principles we are confident about.”

While manufacturers in SEEPZ, as well as other large manufacturers generally have no problems complying with requirements of buyers, there is a concern within the industry on several aspects. “What does a medium-level or small manufacturer do?” asks one industry insider. “There are so many refineries that have sprung up in India, where gold comes in for refining, and there is no guarantee for the source of that metal.” The other issue is of the recycling. In India especially, there is a lot of gold which gets recycled – people are constantly selling gold, getting it remade and so on. This is all gold which has been in the family over years. There is no way of identifying the source of this metal either.

This is a small problem, as most exporters are able to provide the neccessary certificates for the metal – whether gold or platinum of the jewellery they produce.

What has hit the tender spot in the underbelly of the industry, however, is the move to introduce CoC for polished diamonds. While the implementation of this has been deferred by the CoC for the moment, it has not been put off the agenda altogether.

While much of the discussion was around the RJC proposal, there was apparently some talk of bringing it under the KP umbrella as well.

“Some quarters had raised the issue about a CoC for polished diamonds within KP,” says Nilesh Shah, Dy. Managing Director of the consortium Diamond India Ltd (DIL) and Co-Convener of the Diamond Panel Committee of The Gem & Jewellery Export Promotion Council (GJEPC) and someone, moreover, who has been overseeing the KP activities of the Council (GJEPC is the nodal agency for KP certification appointed by the Government of India). “But,” he continues, “most people felt that as KP has been constituted for certification of rough diamonds, it is not possible to take up the polished diamonds within it.”

Apart from this, as one diamantaire queries: “When you have KP certification in place, where is the need for additional certification for polished diamonds?”

KP in a sense has a very limited scope as compared to the much wider ambit that the COc as conceived by the RJC has. Its mandate is only to certify that those rough diamonds have not come from any zone of armed conflict, where diamonds are used to fuel civil war. The RJC’s CoC , on the other hand, envisages ensuring that no infringements of human rights, environment degradation, and labour welfare have taken place.

However, the concept behind the CoC – traceability – is not completely unknown to the diamond industry. In a small way, that is what the brand Canada Mark diamonds attempted to do – guaratee the source as being Canadian mines. De Beers’ Forevermark brand is a similar exercise, though it is not limited to, and goes much beyond, the origin of the diamond from mines which are compliant on all counts.

The one point that has not been missed by sections of the industry is that such exercises come with a premium attached. “Are they trying to make an exclusive club?” asks one diamantaire incredulously. “Are diamonds from only some minds kosher? And then, every extra step that is taken in reaching the diamond to the consumer increases costs.” Industry analysts have pointed out that should the CoC be implemented in letter and in spirit, it would add immensely to both administration and costs, which would ultimately affect the prices of diamonds. With consumers already shying away from the heat on this point, it is something that the industry feels will only add to the problem. With most diamond manufacturers being extremely concerned with shrinking profit margins, this becomes a serious concern.

Apart from cost concerns, another major problem revolves around the way the diamond industry has been doing business. As industry insiders point out, the entire business is based on assortments. From the mines to the ultimate parcels to the jewellery manufacturer, diamonds go through a series of assorting and re-assorting. “From the same set of diamonds, one trader can make a better margin than another, purely based on the assortments,” comments an industry person. “And then, what about small diamonds? Those propounding the CoC system say that up to 30 cents it is possible to trace the origin. But the small diamonds are like snowflakes, they are just so many of them all around that it is impossible to keep track of them.”

The general opinion within the industry is that the need for a CoC for diamonds arose out of the issues of blood diamonds and Zimbabwe, and the general crisis which had kept KP locked in an impasse for almost two years.

“Instead of setting up another standard, which would be difficult to implement, why not strengthen KP,” suggests Praveenshankar Pandya, chairman DIL and past chairman of the GJEPC. “After all, everybody’s goal is the same – to ensure that diamonds which are tainted in any way do not enter the pipeline.”

Strengthening, reforming, evolving the KPCS has been a matter of concern since the Zimbabwe imbroglio hit the organisation like a minor tsunami. It is a matter which has been brought up many times by Eli Izhakoff, chairman of the WDC, an important part of the KP. It is also apparently close to the heart of the current KP chair, Gillian A. Milovanovic. In an attempt to understand the industry and its issues first hand, the redoubtable lady has been visiting various centres and interacting with the diamond industry in each place first hand. In the process of this exercise, she was also in India recently.

“This is the first time that a KP chairperson is moving around and visiting the centres,” said Pandya, expressing appreciation for the move.

While the KP chair has won the approval of sections of the industry on this count, the contradiction of her position is evident to most and is not something that can be overcome so easily.

“While on the one hand KP has withdrawn all sanctions on Zimbabwe exports, after due deliberation on the report of the KP Monitors, the US’s OFAC list still has Zimbabwe entities like ZMDC on it,” points out Vansant Mehta, past chairman of the GJEPC and vice president of IDMA. “So no company in the US can import Zimbabwe goods – they are still banned.”

And with the US taking the KP chair, there is a disconnect somewhere feels a section of the industry. Moreover, this is something which is not proper in the modern business world, they feel. Industry oragnisations and their leaders have expressed their opinion and tried to represent their case to various authorities in the US, it is clear that the government of that country will not budge on the issue of OFAC or its attempts to quell terrorism and other violations.

However, some diamantaires have found their own way out to maintain the inviolability of US laws – they just set up a separate company to deal in Zimbabwe goods if they want to continue doing business with that country.

“After all every country has the right to decide the manner in which it wants to conduct itself,” says Shah. “So one has to either comply with their systems and requirements or any businessman has the option of not doing business with them. It’s as simple as that.”

Others cautiously opine that Milovanovic seems to be taking her chairman’s hat seriously and taking an objective view and may even bring about the much needed turnaround for KP. “After all, anyone in the chair must put the organisation they head and the larger good above the sectoral interests of their home country,” they say.

However, be that as it may, this determination to keep Zimbabwe – and other similar countries which the US deems to have transgressed expected norms – goods out of the country could be one of the reasons for insisting on a CoC for diamonds, say some. A double insurance so to speak.

As one diamantaire puts it. “This is all politics. The US wants Mugabe out at whatever cost, and as they are not able to achieve this politically, they are trying to dry up all finance to the government.”

And while all manners of analyses are flying around, one insider asks, “How many compliances is the diamond industry going to have to deal with? Are there so many different certifications and standards in any other industry?”

Whether it is commerce or politics, or a genuine concern by different entities to ensure that the diamond pipeline remains kosher, one thing is clear – the industry is all united in ensuring a blood diamond-free and clean, kosher pipeline. The only question is – what is the most practical, universally applicable manner in which this can be done.

There is a genuine fear that bringing in as wide-ranging compliances as the RJC’s CoC envisages may paralyse the industry in more ways than one if it is to be impeccably followed. That combined with the worry that too many different compliances will all lead to only outcome - mere lip-service being paid, or circumventing the obstacles through other means. This is certainly not desirable as the diamond industry strives to maintain business principles and ethics and create not only a new image, but a new practice of transparency and compliance so that it can forever shed the negative perceptions prevalent today.