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US: $64B diamond industry rocked by fraud

Bribery allegations against the Gemological Institute of America tarnish system for valuing gems.

CNN
December 20th, 2005

A scandal has rocked the $64 billion global diamond business and tarnished the credibility of one the industry's biggest players,according to a news report Tuesday.

The Gemological Institute of America, which grades diamonds for independent dealers and big retailers, fired four employees and shuffled top management after an internal investigationof its policies, the Wall Street Journal said.

The institute's internal probe started after a jewelry dealer who was also the former head of retail operations at luxury jeweler Harry Winston claimed that the institute and two diamond dealers conspired to inflate the grade of two diamonds that he sold to members of the Saudi royal family.

The diamonds, which were sold for $15 million, were taken to an independent appraiser and found to have a lower grade that made them worth much less, the paper said.

The dealer alleged that lab workers took bribes to inflate the quality of diamonds in grading reports, according to the news report, which cited people familiar with the situation.

"The investigation uncovered a handful of employees and a handful of clients who violated GIA code of ethics," Ralph Destino, chairman of the institute and chairman emeritus of Cartier, said in an interview, according to the Journal.

Since the quality of diamonds is impossible for the average person to evaluate, dealers and retailers rely on the institute's grading system is to determine the worth of the stones, the Journal said.

While standardized measures are used in valuing diamonds, the price -- unlike that of gold and other precious metals -- varies depending on factors such as internal flaws and the absence of a yellowish hue, according to the report.

Sales of diamonds have been growing at twice the rate of the rest of the jewelry business, the paper said.

The Gemological Institute employs 700 graders who evaluate far more diamonds than any other organization in the world, the report said.

Its clients are usually dealers and retailers seeking to value diamonds over one carat, though individuals can also pay for the service.

Fees depend on a diamond's size; grading a one-carat round diamond costs about $100. In 2004, the institute, a nonprofit, had income of $104 million, the paper said.



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