GIA Battling Crimes: Suspends "Duplicate Report" Service to Prevent FraudDecember 11, 14
One month ago, the Gemological Institute of America (GIA) announced the sudden suspension of its diamond sealing services and the issuance of duplicate reports at all locations. Its formal explanation is that “the Institute is taking this action after receiving a sealed diamond for verification that did not match the data label in the sealing packet. GIA, with the assistance of an outside corporate investigation firm, is examining the circumstances surrounding the submission to determine the source of the sealing packet.”
The gravity of the “duplicate report fraud,” which this editorial will discuss in more depth, is further underscored by the need for a kind of “product recall” that the GIA is undertaking. “Clients with concerns about a GIA-sealed diamond may submit the unopened sealing packet to GIA for examination. GIA will verify that the diamond matches the report information and return it in a sealing packet at no charge,” says the GIA.
Duplicate Report Fraud
In its statement, the GIA neither details “how” fraud involving duplicated GIA reports actually transpires nor does it disclose that in recent years the lab has discovered about a dozen instances of this fraud in different variations. One might ask why the GIA’s dramatic action was only taken now. That being said, the suspension is better late than never.
The duplicate GIA report fraud has something in common with the industry’s recent scourge of undisclosed sales of synthetic diamonds: one knows exactly how many cases have been identified; one has a fairly good idea “who” may be behind it; but no one has any inkling as to how many instances of this type of fraud have escaped detection – and how many duplicated GIA reports are still being traded in the market or in retail stores. Once committed, it is a self-repeating crime.
The GIA certification system was established in the 1950’s to provide retailers and consumers with greater confidence and trust in their diamond purchases. To tamper with GIA reports will ultimately destroy any ability to preserve consumer trust in our product. This tactic shows unsustainable and ultimately self-destructive behavior.
The Trail of the Stolen 5-Carat Stone
To what length will some industry players go to devise more sophisticated ways to defraud fellow dealers, retailers or consumers? Greed apparently knows no boundaries. But the truth will come out at the end – and often the investigation of one crime leads to the discovery of another one. A very relevant story is the theft of a five-carat D-IF stone in New York that led, a few years after the fact, to a greater understanding of this GIA duplicate report fraud, which served as a very “rewarding” criminal activity that was still practiced up until now when the GIA declared “enough is enough.”
The following is the diagnostic analysis of a true story: The would-be seller of a five-carat diamond was the New York office of an Antwerp company; the prospective buyer was a DTC sightholder, also selling Forevermark stones. The involved parties were all seasoned diamond connoisseurs. The price for that five-carat stone hovered at that time around US$1 million – but in spite of the GIA report, the seller and buyer were arguing about the quality of the stone (and thus the price). At one point, the buyer phoned the seller suggesting that he “should take another look at the stone” – and it was subsequently hand-carried back by a messenger to the seller’s office in another building. Upon arrival, the parcel had disappeared – the stone was gone.
The Antwerp dealer went berserk. Accusations flew back and forth, but the video tapes in the prospective buyer’s office conclusively showed that the parcel leaving the premises contained the diamond. A loss claim was then filed with Lloyds in London of a “mysterious disappearance,” and the insurance company paid out in accordance with the insurance policy. So far, this tale features nothing really out of the ordinary. Naturally, the GIA and other labs were informed as well.
However, a few years later, a prominent Indian diamantaire – the manager of a N.Y. diamond jewelry operation – submitted a five-carat D-IF stone to the GIA lab for certification. The GIA promptly discovered that this was a stolen stone! The stone was not inscribed; it perfectly matched the information on its GIA report. The submitter claimed that this was a stone that he had inherited from his mother or grandmother, who got it from some ancestor working in India’s Golconda diamond mine.
Theft in an Elevator
In the end, the parties investigating the five-carat enigma concluded that this stone had been pickpocketed in an elevator in the 580 Avenue diamond building in New York. The evidence was overwhelming. It was the stolen stone.
Now the real story begins. After discovering the stolen stone, the GIA perused its records for its GIA report and other records from the original certification process. They found that all the proportions were absolutely correct, but it was NOT the originally graded stone. How could that be? This brought to light a type of hitherto rarely detected report fraud – which, with some variations, has since been caught a dozen times. But detection of this type of fraud has purely been by “sheer luck.” Nobody truly knows how many undetected fraudulent duplicated GIA reports are still out there. The fraudulent system has several variations. Let’s examine some of these in greater detail.
Duplicate Report Fraud: Variation I
Assume you hold a stock of large polished diamonds that are anywhere in the range of H color and up. Then carefully search any of the internet trading platforms and select and buy GIA certified goods that are basically of similar proportions and weight that match the stones you have in inventory. They need to be matching, but not precisely so. The ones you buy have a better color or clarity than the ones you already own. When you have already an internally flawless (IF) stone, you just need to buy better colors.
Using Sarine and other equipment, for every certified stone you have bought, you re-polish one of your own matching lesser quality stones and make sure you reach the same exact proportions and weight. In the process, you may have to sacrifice some points, but it’s worth it. Then you go to the GIA and order a duplicate report for the original stone. The GIA would generally provide such service on the spot for a few dollars. It isn’t unusual that a report gets lost – it’s all rather routine.
When asking for a duplicate report, there is no need to bring in the stone. So, now the criminally minded diamond merchant has an inventory consisting of diamonds in which two stones will have two identical GIA reports, though one of them will, in fact, have lower colors or qualities. The difference can amount to a lot of money… As it turned out, the five-carat stone that had been stolen also had a duplicate GIA report. This led to further investigations. Let’s just say that, based on today’s (Idex) prices, the price differential of a five carater between D-IF and E-IF is somewhere in the 30%-plus range. This is a lot of money.
As in so many of these stories, what actually happened next is all covered by private agreements. The stolen stone technically belonged now to Lloyds. It was handed over to the insurance conglomerate which sold it at a 25% profit over the amount it paid out in the claim, mainly because the market had improved. [The theft occurred in 2009.]
Duplicate Report Fraud: VariationII
At the GIA, all certified diamonds below one carat are automatically inscribed with a number. The inscription is actually rather light and can easily be removed. [The laser could go slightly deeper to make it difficult to polish off, but the GIA claims that this would increase the risk of damaging the stone.] However, in diamonds larger than one carat, the GIA will only inscribe them at the client’s request.
Here comes the variation of the aforementioned fraud mechanism. After having obtained a duplicate GIA report, the newly created duplicate stone is submitted for inscription of the number. “It happens often that we get requests like this. Especially consumers in Asia like to have the inscription, so there is nothing out of the ordinary for such a request,” says a source within the GIA. Here, the criminals enjoy the commoditization of the diamond market. When an inscribed stone with a duplicated GIA report is traded, chances for the discovery of the crime are rare.
The GIA has now changed its policy. Says one executive: “Unfortunately, because of some of the behaviors that go on in the industry today, when a diamond comes back for something as simple as inscription, we have to fully review the stone again.”
One New York insider whispered to me that this is a beautiful scheme with which to obtain a GIA natural certificate for a synthetic stone. “This is even easier,” whispered my source. “You don’t need to play around with lower colors etc. Just prepare a synthetic stone that exactly matches the GIA certificate; then ask for a duplicate certificate and – on top of it all – have the synthetic diamond inscribed outside of the GIA.”
This is one of the reasons that the GIA suspended its duplicate report system. “One could – prior to the discontinuance of duplicate reports – request a duplicate report and have a cut to match synthetic inscribed with the GIA report number outside of the GIA – so they would not resubmit the stone. One would then have an official GIA duplicate and a synthetic cut to match with the GIA report number inscribed on the synthetic,” confirms a GIA spokesman. Of course, due to the limited growth size of synthetics until now, this scenario would only work with polished stones up to about two carats.
Are there synthetics out there with GIA natural diamond reports? Only the criminals doing this would know. Basically, it wouldn’t make a difference: the GIA report would have turned the synthetic into natural…forever.
Duplicate Report Fraud: Variation III
This is based on an actual case in Tel Aviv. You re-submit a stone that has an “old” GIA report and have it re-certified to get a “fresh” report; this gives the illusion that the diamond is a freshly mined and polished stone. Somewhere, there is resistance when buying large diamonds that have “old” GIA reports, so the request is not uncommon.
However, when it then turns out that the color grade is one lower or the VS1 becomes a VS2, the submitter comes in arguing: “You graded it so-and-so in the past; it is unfair or impossible to downgrade it now. That causes big losses, etc.”
In a few such instances, the GIA was able to determine that it was a specially cut “duplicate stone” and not the original. How does the GIA know? The record of the certified stone often contains far more information than what appears on the report; for instance, it may contain a pinpoint only visible with a higher magnification, or some other characteristic of no relevance to the report itself. But taking a newly cut stone to the GIA to have it re-certified on the claim that it has an old report is quite a risky way to commit fraud. It’s not recommended.
GIA Cooperation with the Police
It is standard operating procedure at the GIA to inform the relevant police authorities in every instance when fraud is detected. That’s a global policy. In places like New York, Hong Kong and Belgium, the relations with FBI, or the Federal Diamond Police Squad in Belgium, and with other respective police organizations, the cooperation is quite close and intensive.
The methods used by the police to conduct such investigations are fascinating. The GIA really doesn’t want to discuss them. “My reluctance is not to withhold information, but to protect our processes so we can be successful at ultimately protecting the public,” noted one of my GIA sources. Others warned me as well. Disclosure could be interpreted as intervening in ongoing investigations. Some of those interviewed for this article take issue with the cooperation claim.
One might argue that the suspension of the issuance of duplicate GIA reports may lead to higher costs for the trade because when they need a certificate, they may have to certify the stone all over again. The GIA says that “when a report is lost, stolen or damaged, clients may obtain report information through GIA’s online Report Check service or by requesting a data document.”
There are still parts of the fraudulent schemes that cannot be resolved by the GIA. Many companies have access to laser inscription equipment. The danger that synthetic diamonds or stones otherwise “cut to measure” may be circulating with GIA paper is still there. Let me say it again: this is unsustainable and ultimately self-destructive behavior.