Beware of OvergradingBeware of Overgrading

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Beware of Overgrading

Diamond overgrading at European Gemological Laboratories (EGL) made news in 2014. However, many in the diamond industry have likely not yet experienced the aftermath of the scandal. The decision of the Rapaport Group to de-list all EGL reports from RapNet reinforces the importance of maintaining diamond grading standards as well as the need for clear communication between jewelers and customers regarding diamond grades.

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The Rapaport Group De-Lists the EGL

On September 9, 2014, the Rapaport Group issued a press release stating:

Effective October 1, 2014, EGL will no longer be listed as a diamond grading report on RapNet. This notice applies to all EGL grading reports including EGL International as stated in our previous notice.

This press release followed investigations, media coverage, and lawsuits that exposed rampant and prolonged diamond overgrading and quality misrepresentations by the EGL. Martin Rapaport, the chairman of the Rapaport Group and founder of Rapaport Diamond Report, further explained the impending threats overgrading posed to the diamond industry in his report, Honest Grading.

In his report, Mr. Rapaport blasted the EGL for utilizing Gemological Institute of America (GIA) diamond grading terminology but not GIA grading standards. He explained that this results in overgrading and misrepresentation. Overgrading, as he defined it, has occurred when a diamond graded using GIA terminology proves to be more than one color grade or one clarity grade lower than the original grade when verified by the GIA. He backed the GIA's diamond grading language and standards as employed by the entire industry.

Is There No Single International Standard for Diamond Grading?

However, on September 18, 2014, the EGL issued a rebuttal statement to the Rapaport Group. It said,

the use of the term "standard" suggests that such a standard EXISTS. However, at this point in time, there is no single, international standard for diamond grading that has national or international status or acceptance. In general, gemological laboratories that issue diamond grading reports will consistently state that the results of diamond grading are, to a certain extent, subjective.

Rapaport expressed his concern over what he called "gemological anarchy" if the industry accepts this claim of no grading standards. He stated the demise of the globally accepted GIA grading standard, the language of the trade, would result in the collapse of diamond prices, since dealers, retailers, and consumers would no longer have a benchmark for differentiating quality and price. He said,

The GIA is the global diamond grading standard accepted by the international trade and the legal systems of the United States and other countries.

Rapaport also questioned the EGL's use of GIA terminology on their diamond grading reports while disregarding GIA grading standards. The EGL diamond grading system employs all aspects of GIA's terminology when describing color, clarity, cut, and carat.

Indeed, this is the "Four Cs" rubric created by the GIA in 1953 and known all over the world. If no such standards exist, as the EGL states, then any lab can call a diamond any color or clarity grade they want.

Is Diamond Grading Subjective?

Regarding the EGL's statement that no standards exist because diamond grading is subjective, Rapaport pointed out that trained gemologists usually come within one color grade and clarity grade of each other in their reports. He also stated that 100 out of 100 gemologists can differentiate between a G color grade and a J color grade. Therefore, there's no reason for being more than one color or clarity grade off, as was consistently the case with EGL-graded diamonds.

Rapaport also pointed out that dealers on RapNet traded diamonds with EGL reports at prices lower than non-graded diamonds. He felt the lower price was a consolation maneuver by dealers who wanted to profit but didn't want to outright lie about the diamond's lower quality.

How Will the Diamond Overgrading Scandal Affect Retailers?

While diamond overgrading starts at the lab and is perpetuated by dealers, Rapaport noted that the ones who will pay the ultimate price are the retailers. According to US law, different rules apply for transactions between "experts" and transactions between "experts and consumers." Diamond dealers and retailers are considered experts. They can make an educated evaluation of the diamond's quality in reference to its price. On the other hand, the retail diamond customer can't make that educated evaluation.

While the customers thought they were buying a G color grade diamond, with an EGL report stating this, they actually purchased a J color grade diamond. Customers could demand their money back — and then some. If all outraged customers storm the stores, profits will vanish. If money isn't refunded, reputations will be lost as well.

The catastrophic consequences of diamond overgrading extend beyond fraudulent transactions, according to Rapaport. An ethical jeweler selling a correctly graded diamond with a GIA report can't compete with an unethical jeweler selling an incorrectly graded diamond with an EGL report showing the same color and clarity for thousands of dollars less. Many ethical jewelers could lose their businesses. Worse yet, they may also decide to sell overgraded diamonds in order to compete. This will perpetuate the problem.

Unethical jewelers will also lose. When customers figure out their EGL-graded G color diamonds are really J, many could demand refunds. Others could demand refunds in addition to damages. These unhappy customers could also resort to social media to blast the industry in general and their jewelers in particular. Even if money is refunded, lawsuits can still be filed on fraud charges.

Why Did RapNet De-List All EGL Labs?

Rapaport recognized that some EGL labs are more consistent with GIA grading than others. However, the problem remains that the EGL brand lacks common standards. The umbrella of the EGL name covers numerous labs around the world, each with individual and independent ownership. For example, EGL USA is widely considered by jewelers to be the most accurate. On the other hand, EGL International, a known flagrant violator of GIA grading standards, often overstated color by 4 grades and clarity by 2.

Since EGL International could trade on EGL USA's better reputation, Rapaport axed all EGLs from RapNet as a result.

Are There Other Discrepancies in Diamond Grading?

RapNet did have a discrepancy with GIA's grading regarding the SI3 clarity grade. Although RapNet lists diamonds clarity-graded as "SI3," this is a non-GIA term. Rapaport noted that the disparity between SI2 and I1 clarity grades was too great in the GIA's system. Thus, most in the industry used the intermediate SI3 grade. He explained that he wasn't changing the GIA grading system. Rather, he was adding to the diamond's description so it could be fairly traded on the Internet without being seen. The Rapaport Group has appealed to the GIA to add SI3 to its clarity grading nomenclature. He noted:

We recognize that while the GIA grading system is not perfect or all-inclusive, it is the standard that must be used when using GIA terminology.

Rapaport recognized that while the GIA originated modern diamond grading terminology, healthy competition should exist among labs that employ it. RapNet lists diamonds graded by the GIA as well as by labs from the American Gem Society (AGS), the Diamond High Council (HRD), and the International Gemological Institute (IGI). He also speculated that, eventually, other labs could create their own grading systems to rival the GIA's.

How Can the Industry Fight Diamond Overgrading?

Rapaport also offered solutions to combat what he called the diamond overgrading "poison." He proposed that all dealers and retailers stand behind what they sell. They should offer their customers a grace period in order to have their diamonds graded by a third-party lab before committing to the actual sale. In addition, sellers can disclose the possible inaccuracy of accompanying EGL reports and allow buyers to knowingly assume responsibility. He also recommended that all gemological labs operate under similar grading standards.

To offset the threat overgrading poses, Rapaport called on all diamond industry leaders to rally around the GIA standards. "Hundreds of thousands of consumers have purchased more than one billion dollars of overgraded diamonds," he said. Consumer confidence is worth more than the profits gained from misrepresented diamonds. He also implored trade organizations to become involved and keep vendors accountable for the quality of the diamonds they sell.

How was EGL Diamond Overgrading Exposed?

What spurred the delisting of all EGL reports from RapNet?

A local Nashville, TN news program, Channel 5 News, investigated one of their area's largest jewelers. In May 2014, Channel 5 News went undercover and revealed that Genesis Diamonds sold customers incorrectly graded diamonds with EGL reports. When customers tried to re-sell the diamonds at different jewelry stores, they offered the customers prices far below what they paid, due to the lower color and clarity grades of the diamond. To one customer, Genesis sold a 2.68-ct diamond that the EGL graded as an H VS1. A trained gemologist at another store graded it an L SI1. (That represents a difference of four color grades and two clarity grades). She lost thousands of dollars.

By July, the exposé resulted in four lawsuits against Genesis Diamonds, for fraud and for violating the Consumer Protection Act. One lawsuit named not only the owner of Genesis Diamonds but also the sales associate who sold the diamond.

Many jewelry stores haven't yet experienced customer backlash. However, they're still taking preventative measures in light of the diamond overgrading upheaval. For example, a fourth generation jewelry store in Pittsburgh, PA quit buying EGL diamonds. It now strictly sells GIA or non-graded diamonds.

Most gemologists, jewelers, and trade experts agree that action in retaliation to years of EGL's overgrading was needed. However, the consequences of overgrading may just be surfacing. The industry may see further action taken.

Note: To learn about some of the post-2014 effects of the EGL diamond overgrading scandal, in particular on some jewelry retailers, read this article.

Megan Coward, Graduate Jeweler Gemologist, GIA, Graduate Gemologist

Megan Coward is a graduate of the GIA with Graduate Jeweler Gemologist and Graduate Gemologist accreditations. She has 20+ years in the retail jewelry industry in various roles including as a diamond buyer and gemstone appraiser.

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