Certification fraud expected to grow.

Implications:  1. With high-value diamond jewelry sales increasing on the Internet, certification fraud can be expected to grow.

2. The labs can’t be expected to provide much security beyond their own premises.

3. Consumers must recognize that a certificate is only as good an indicator of diamond quality as the competence and integrity of their jeweler.

Analysis:

Diamond certification isn’t new to either the industry or to consumers. Grading certificates for both diamonds and colored stones have been available from GIA since about 1950. Initially, used almost exclusively by the diamond trade, ‘certs’, as they are often called, were frequently utilized to validate the quality of larger, high quality diamonds and colored stones by trade cutters and wholesalers. When offered in conjunction with the knowledge of an experienced trader, they added value by ensuring consistent grading; but they were only one part of the valuation process.

It wasn’t until the late 80’s that GIA certification caught the attention of consumers as private investors paid upwards of $60,000 for a 1 carat, D color, Internally Flawless, Ideal cut, round brilliant diamond. First used only to verify diamond dealer’s grading, certificates, in particular those issued by GIA labs, became more than just a second opinion, but the sole standard of diamond grading for investment purposes.  Unfortunately, the human factor was nearly eliminated from the process as investors often traded paper certificates with out the technical expertise to either validate or authenticate the accuracy of the cert.

Today, the use of diamond certificates has become common in the retail jewelry industry. More importantly, certs are an essential factor in driving the success of Internet diamond retailers like Blue Nile(NMS:NILE); where consumers buy expensive diamond rings and jewelry, sight unseen, based on the merits of a certificate and there in lies the problem. Used in conjunction with the skill of a knowledgeable jeweler, certificates were a way to standardize grading and document the quality of a diamond. Their value was not so much in the document itself, but in the combination of the jewelers authentication of the certificate and the normalization of the grading standards; something akin to the ‘chain of custody’ of evidence presented at a trial.

With high-value diamond jewelry sales increasing on the Internet, certification fraud can be expected to grow. This will continue to be a problem for GIA, as well as, other prominent gem labs such as EGL. But with hundreds of thousands of certificates outstanding and thousands more written each year, the labs can’t be expected to provide much security beyond their own laboratory premises. It is up to the industry to police itself and for consumers to recognize that a certificate is only as good an indicator of diamond quality as the competence and integrity of their jeweler.