Regal Imports News for MARCH 2018
Just when you thought the diamond industry was making headway with Best Practices Principles and ethical behavior a 2 billion dollar diamond scam rears its ugly head in India!
The story begins with the Punjab National Bank alleging fraud against Nirav Modi, the jeweler to the stars and the Gitanjali Gems group. The Gitanjali group has over 2000 stores in India and also owns Firestar Diamond, Sandberg and Sikorsky, A. Jaffe and the Samuels retail jewellery chain in the United States. Some of the U.S. based companies have already filed for chapter 11 protection.
The accusations include colluding with a bank official to obtain unauthorized loans, over valuation of inventory, running over 100 shell companies to facilitate money laundering, round tripping or exporting the same polished diamonds multiple times to inflate receivables, switching diamond qualities and substituting synthetic diamonds for natural.
To make matters worse the accused are associated with De Beers. The Gitanjali group is a long time sightholder as well as the poster child in India for the Forevermark program. De Beers sightholders are supposed to be subject to continuous audits including best practices and inventory verification. De Beers claims that sightholders and Forevermark dealers adhere to the strictest ethical standards. This whole unsightly affair casts aspersions on De Beers auditing capability and the reputations of their chosen partners.
Nirav Modi (NiMo) is currently being referred to by the Indian press by the acronym Nimo, as in Finding Nimo. He is one of the wealthiest people in India and has fled the country.
This is not the first incident of this type to hit the Indian diamond business. Several years ago Jatin Mehta of Winsome Diamonds absconded owing Indian banks and creditors in excess of one billion dollars. Creditors have been trying to catch up with him ever since.
A representative of the Punjab National Bank stated that "Diamonds as a security are susceptible to fraud. It's almost intangible. Bankers have no expertise in estimating the value of either rough stones or polished jewels and are not trained to differentiate between synthetic diamonds and natural ones either. As a moveable asset class, where lots of precious stones can look similar, there is more chance of fraud and duplication." The diamond industry has already lost credit facilities in most of the major cutting and distribution centres. Banks are quite rightly afraid to loan money against diamond assets.
Fraud and the diamond industry's loss of banking facilities lead nicely into the introduction of a new crypto currency backed by diamonds from the Israeli Diamond Exchange. My comment about a crypto currency backed by diamonds is, if banks are unable to substantiate the value of diamonds they hold as collateral how can speculators bank on a crypto currency backed by diamonds. There are just too many subjective elements and too many hands in the pot. Diamond related schemes are all tailored to the interests of diamond producers and not to the needs of investors.
Paul Ziminsky explains that real investment diamonds have no relation to regular commercial diamonds. They are usually valued in the millions of dollars. He goes on to say that "in general gold, stocks, bonds or real estate have historically been a better choice for an inflation hedge or store of wealth."
Edahn Golan asks two very pertinent questions concerning importing and exporting diamonds.
1) Why does the United States import eight times the amount of polished diamonds than it consumes?
2) How can the United States, which has no real diamond mining industry, export more rough diamonds than it imports?
Edahn points out that over the past 14 years the United States has exported 85.6 million carats of polished diamonds more than it imported. In the same 14 year period, the United States exported 9 million carats more rough diamonds than it imported. He points out that "a long-lasting inaccuracy is not an error. It is a trend." He concludes by noting that U.S. diamond import and export figures are tracked by several different credible government agencies and that these inconsistencies are very troubling!
In 2017 Israel's polished diamond exports declined by 4% and polished imports fell 11%. Israel has been losing market share for years. We know that banks are weary of lending money against diamonds so the Israeli government has stepped up and guaranteed 284 million dollars in diamond industry loans. The fact that the government has stepped in where bankers fear to tread is hardly a sign of strength!
The loss of bank credit and market share is affecting Israeli diamond dealers so much that they are resorting to cannibalism or devouring their own kind. Israel is a world leader in science and technology and the government is supplying tech experts with the hope that they will assist the members of the Israeli Diamond Exchange to kill and eat downstream wholesalers and retailers. The Diamond Exchange has already liaised with Alibaba and James Allen and has built a tech centre to assist 150 local manufactures in setting up 'virtual diamond and jewellery stores'. The president of the Israeli Diamond Exchange, Yoram Dvash, addressed his membership saying, "You don't need expansion or offices, or to fly over. You have hundreds of millions of potential customers."
On a positive note, polished diamond prices rose in January and February. The question that comes to mind is, are the higher wholesale diamond prices due to increased demand or to the few extra points that diamond manufacturers are making by selling direct to end consumers? There is one thing for sure and that is that manufacturers selling direct to consumers is eroding the value and luxury attributes of diamonds at the retail level.