Making the grade (Part 3)

Tips to ensure your lab is up to snuff

Part 3 of 5

By Gina D’Onofrio

In order to properly grade diamonds, you must first ensure your grading environment is up to snuff. Consider the following:

Calibrate your instruments

No matter how precise, digital gauges can change over time due to wear; they can also become misaligned after being dropped. To check that your gauge is accurate, consider picking up a calibration block at your local jewellery supply house. Made from steel, calibration blocks offer precise measurement. (I own a 5-mm and a 10-mm block.) You can determine the accuracy of your digital gauge by simply measuring the block. I recommend doing this monthly and keeping a log of the date and measurements.

Colour vision

Proper equipment and a consistent grading environment are of little use without the regular screening of your own colour vision. American Society of Appraisers (ASA), American Gem Society (AGS), and National Association of Jewelry Appraisers (NAJA) require members regularly take (and pass) the Farnsworth-Munsell 100 hue test to ensure they have normal colour vision.

Take-in procedure

Your take-in procedure is critical to the appraisal process. First off, ask your client to bring all relevant paperwork that came with their diamond, including the purchase receipt, prior appraisals, and of course, the lab report. These papers reveal what the client paid, along with what they understand to be the quality and value of their stone. They also alert you to potential areas that need to be discussed or clarified.

A great deal of my time is spent educating my clients. Given the subject matter, the substantial cost of the item being appraised, and the emotional or sentimental circumstances surrounding it, what I say during the evaluation is critical. As appraisers, we are required to be impartial third parties. If you arrive at a grade that is several off from what the report states, it’s time to have a very delicate conversation with your client. After explaining you’ve verified the diamond is in fact the one described in the report, your next course of action is to describe how you arrived at your opinion, the typical tolerances for grading a mounted or loose diamond, and how and why labs differ in their grades. You may also want to give the client the backstory to the standards you follow (e.g. GIA, AGS, etc.) and what the industry finds to be an acceptable variance (i.e. one colour and one clarity grade). If the stone is mounted, you should also indicate how colour grade can be affected by the metal around it, and that to remove the stone from the setting may affect your opinion of the grade. Finally, explain how you will be approaching your research and replacement value. As always, include limiting conditions in your report. Remember that appraisers don’t mediate disputes between client and vendor—we merely offer our opinion and disclose any limiting conditions in our valuation.

More to come of this story in Part 4.

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Making the grade (Part 2)

Tips to ensure your lab is up to snuff

Part 2 of 5

By Gina D’Onofrio

In order to properly grade diamonds, you must first ensure your grading environment is up to snuff. Consider the following:

How about your wall paint?

Walk into any grading lab and you’ll likely find the walls painted white. Recently, though, GIA has recommended using neutral medium-grey, as it helps reduce eye fatigue. Various standards organizations such as ASTM International and International Organization for Standardization (ISO) also suggest neutral medium-grey walls. If you’re fond of wearing colourful clothing to work, consider putting on a white or light grey lab coat when grading diamonds to prevent colour spilling into the grading environment.

Lighting in the field

There are a few things you can do to create the right lighting environment outside your office. When I appraise a diamond or diamond jewellery at a client’s home, it’s not unusual to find myself surrounded by colourful paint or wallpaper, or to be given the option to set up on the dining room table under a dim chandelier. Instead, I use the kitchen counter near an outlet where I can ‘plug in my lab,’ which consists of portable full-spectrum lamps and a white paper base and background. When in doubt, I step outside and grade the diamond colour a second time in natural northern daylight, location, time of day, and weather conditions permitting, of course. After all, this is the type of daylight full-spectrum bulbs are attempting to mimic.

Master diamond grading set

How often do you clean your master diamond grading set? If you have an older set, inspect it to see whether the girdles are bruted. The rough surface can trap dirt, grime, and metal fragments from your tweezers, causing the stone colour to appear darker. Regular cleaning in sulphuric acid resolves this. GIA recommends cleaning a master set every two to four weeks. Since I use my master set less frequently than a lab like GIA, I clean it every few months. Your local bench jeweller or diamond cutter should be able to help.

More to come of this story in Part 3.

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Making the grade (Part 1)

Tips to ensure your lab is up to snuff

Part 1 of 5

By Gina D’Onofrio

They say diamonds are like snowflakes—no two are alike. Well, it appears the same goes for lab reports. The demand for diamond grading reports has increased in this age of online trading and mistrust. To consumers, they provide a sense of validation of a diamond’s ‘pedigree.’ Labs may come and go, but there will always be differences of opinion regarding diamond grading standards and the subjective element of the process itself. What is an appraiser to do?

We all know the scenario: Mr. Smith comes to your office with a new diamond in hand, along with a report from XYZ lab. He needs an appraisal to insure the stone, but he’s also seeking verification. You grade the diamond only to find your opinion of colour, clarity, or both are different to that of XYZ lab. Now what? Before you give your client what is sure to be unwelcome news, verify your own lab is in check and the ‘discrepancy’ is not your own doing.

In-office lighting

Given its subjective nature, grading diamonds is a complex business. But before you get down to the actual process, there are a few things to consider about your working environment that can help you arrive at a proper grading.

Let’s start with lighting. How often do you replace the light tubes in your lab/office? What colour temperature are they? For decades, the industry standard has been to use full-spectrum daylight-equivalent fluorescent light. This is a balanced, diffused, and cool white light. Typically, a bulb is classified as ‘full-spectrum’ when it has a colour rendering index (CRI) above 90 and a Kelvin temperature rating between 5500K and 6500K. Gemological Institute of America (GIA) has determined the useful life of a lamp for colour-grading purposes is 2500 hours, although it replaces its lamps approximately every 1800 hours. Therefore, if your diamond grading light is on 40 hours a week, that works out to almost 46 weeks of illumination before it is time to replace the bulbs. When grading, be sure to maintain the recommended 20- to 25-cm (8-to 10-in.) viewing distance from the light bulb. This can prevent overgrading diamonds that exhibit fluorescence, as they may react when brought closer to the bulb.

More to come of this story in Part 2.

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Terrorist financing, money laundering, and the Canadian jewellery industry (Part 9)

How’s your compliance regime?

Part 9 of 9

By Ken Brander

Complying with this legislation is demanding and technical. It’s also something you might not want to tackle on your own. Before you get too angry at the federal government, just take a moment to reflect on the true source of your angst. You have to comply with this legislation because criminals are searching for ways to convert and conceal the profits of their criminal activities. As regulators around the world force banking practices to tighten up, these crooks are going to look for alternatives to cash deposits and mortgages. Your business is one of the alternatives they’re looking at.

There are lots of good reasons not to conduct business with these types of folks, but we’ll save that for another article. However, you need to recognize some types of businesses and consumer products are more suited to launder money than others. Precious metals and stones, and in turn, the jewellery made from them, are particularly attractive products to launder money and assist terrorist groups with financing their operations. Diamonds are especially vulnerable to being used in this manner. As a dealer in precious metals and stones (DPMS) reporting entity, you are therefore a target of money launderers and those attempting to finance terrorist groups. This sounds harsh, maybe even extreme. However, by virtue of the products and services you offer, it is in fact a reality for your business.

Canada’s objective is not to weigh you down with administrative anchors, milk a cash cow, or prevent you from doing business. Above all, the federal legislation and FINTRAC aim to create a reporting mechanism that captures details of certain transactions and the people involved in those transactions, analyze this intelligence, and then share parts of it with police. As a former police detective who has benefitted from FINTRAC intelligence products, I can attest the information provided by Canada’s reporting entities is an important tool to help successfully investigate and prosecute criminals and those financing terror inside Canada and beyond our borders. Reporting entities such as you are Canada’s front-line defence against money laundering and terrorist financing. You see the suspicious activity long before the police or FINTRAC ever do.

Your lawful obligations are many and creating a compliance regime is a major undertaking requiring expertise, continued attention, and investment. Being compliant is an achievement for you and your business, one you might even consider promoting in your business advertising. As a consumer, I can assure you that credentials and business practices matter and influence customer choice.

Finally, here is a bit of good news. This article can be used as proof of compliance toward your ongoing training obligations. Have your staff read the article, initial your training log, and keep the feature in your FINTRAC file.

The act, the regulations, FINTRAC, and the bad guys are here to stay. In the near future, you can expect increased regulatory attention, not less. This is not something you can avoid and it is simply beyond your control. For most ‘persons’ or ‘entities’ involved in the jewellery business, building an AML compliance regime is an exercise they’d prefer to do tactically under their own terms. After all, the strategic application of resources is usually always preferred over crisis management. So, breathe easy, visit FINTRAC’s website, shop around for some expertise, and start thinking about your AML compliance strategy moving forward.

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Terrorist financing, money laundering, and the Canadian jewellery industry (Part 8)

How’s your compliance regime?

Part 8 of 9

By Ken Brander

Recently, I attended a Canadian jewellery show and spoke with a number of jewellers about their AML compliance programs. The folks I met generally grouped themselves into two separate camps. Most had no idea what I was talking about and were shocked to learn of the act, the regulations, FINTRAC, and their legal obligations. Many in this group were relatively new business owners. The second group of people was at least generally aware of their obligations, but really felt no impetus to comply. Many thought that since they had been in business with no visits from FINTRAC for so many years, there was no real reason to worry, that this was just another cash cow for the federal government, or that they’d simply brush FINTRAC off if they ever actually called.

I hope by this point in the article, you have come to realize your AML/TF obligations are nothing to take lightly. You have tremendous investment in your business and shouldn’t dismiss the act, the regulations, or FINTRAC. This regime is a global movement and Canada is firmly committed. Simply review the administrative fines FINTRAC has assessed to other small business owners just like you to recognize the seriousness of this requirement. The average fine per violation is more than $3000 and FINTRAC usually assesses a reporting entity with multiple fines. Plus, names are posted on FINTRAC’s website. Being publically cited and fined for breaching federal money laundering and terrorist-financing laws is bad for business. On top of those fines, you’ll still need to get your AML/TF program in place. If you think the cost of compliance is high, consider the cost of non-compliance.

I spent a lot of time speaking with members of Canada’s jewellery industry this summer. Here are some of the more dangerous misconceptions I heard that could really hurt you.

I don’t plan on registering my business with FINTRAC. If they don’t know about me, I should be able to stay unnoticed.

This is analogous to not paying your personal income taxes until Canada Revenue Agency (CRA) comes knocking on your door. Do you know anybody who has had a CRA audit? They’re not pleasant. You should assume FINTRAC knows about your business, as it shares information with other federal government agencies, including CRA. When data mining, it’s pretty easy to run a search through tax returns and identify businesses involved in jewellery sales. Plus, FINTRAC investigators read magazines like this one and surf the Internet looking at your advertisements. Don’t assume FINTRAC doesn’t know about you just because you haven’t registered your business.

I don’t accept cash sales, so I don’t have to report to FINTRAC.

This statement demonstrates a lack of understanding about the threshold event that makes a dealer in precious metals and stones (DPMS) a reporting entity and subject to the act and regulations. Remember the trigger—which is subject to incredibly restrictive exceptions—is the purchase or sale of precious metals, precious stones, or jewellery in an amount of $10,000 or more in a single transaction. This includes an inventory purchase and it doesn’t matter how you paid for it.

If you never accept cash from a client, you will never have to submit a large cash transaction report to FINTRAC. However, don’t confuse the reporting requirement with the threshold event that activates your legal obligations. They are very different.

If and when FINTRAC calls, I’ll just throw something together quickly or drag things out.

I met a jeweller who was called up by FINTRAC for a compliance examination. A good deal of his business involved jewellery repair and he had never heard of the act or the regulations, and was completely caught off guard. It took him more than two weeks of work, all day and every day, to get enough of a compliance program assembled to please the investigator. That is time he could have spent repairing jewellery and earning sales. It was clearly stressful for him.

Some people are very comfortable managing risk through a crisis. Most of us, like my jeweller friend, are not, and we prefer to be more proactive managing our affairs. Keep in mind this important point: Canada’s DPMSs have been under this legislation since 2008. Don’t expect much in the way of concessions from the regulator.

I’m a wholesaler and I don’t deal with customers off the street. I’m exempt from this, since I sell to retailers, not the general public.

Not true. Remember the threshold event drawing you into this legislation involves a single purchase or sale over $10,000 in a single transaction, regardless of how payment was made and regardless of who you bought from or sold to. The threshold applies to all parties in the transaction, including wholesalers. Depending on your business activities as a reporting entity, you may never come across a situation where you have to submit a large cash transaction or suspicious cash transaction reports; however, you do need to have all the elements of a compliance regime in place to meet your obligations under the legislation.

More to come of this story in Part 9.

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Terrorist financing, money laundering, and the Canadian jewellery industry (Part 7)

How’s your compliance regime?

Part 7 of 9

By Ken Brander

Among other functions, FATF conducts mutual evaluation reports (MERs) of member states to determine the degree to which they have incorporated the 40 recommendations into domestic law, as well as their compliance. Canada has had two evaluations, the first of which was in 2008. At the time, Canada was found to be non-compliant in a number of areas, specifically regarding beneficial ownership, ongoing due diligence, and enhanced measures for high-risk customers. Having addressed the issues from the first MER, Canada was determined to be fully compliant with FATF’s recommendations during the follow-up evaluation that took place this year. All this goes to demonstrate that Canada considers FATF compliance to be very important. When FATF talks, Canada listens.

As a dealer in precious metals and stones (DPMS) reporting entity, you should be very concerned about another FATF report released earlier this year entitled, “Money Laundering and Terrorist Financing Through Trade in Diamonds.” This document was very comprehensive and examined money laundering typologies at all stages of the diamond pipeline.

It revealed that Canada assesses the level of its own DPMS reporting entities’ AML/TF compliance as a lackluster ‘medium.’ Globally speaking, FATF found that international FIUs are not receiving many reports from Canada’s diamond dealers. The authors noted, “This may be an indication there is not enough awareness in the sector of the importance of combating ML and TF within the diamond sector and that diamond dealers are not sufficiently aware their sector is being misused by criminal organizations to launder their proceeds.”

This FATF assessment is supported by FINTRAC’s own estimation. Earlier this year, I submitted a request under the Access to Information Act and gained valuable insight into how FINTRAC grades DPMS compliance. In a word: dismal. The internal correspondence I received as part of my request judged DPMS compliance in the areas of policy and procedure, risk assessment, ongoing compliance training, and the two-year review. Consider these appraisals from a FINTRAC insider:

• “The majority of the reviews conducted by the reporting entity were complete deficiencies, since no documentation was provided to support a review of the compliance regime.”

• “A minority of the [reporting entities] develop just-in-time policy and procedures, however, in those cases where they are developed, the policies and procedures do not address some or all of their obligations under the PCMLTFA.”

• “The smaller entities primarily are not aware of the requirement to conduct training due to the size of their organization.” These types of comments go on for two pages.

As we observed earlier with Canada’s response to FATF’s evaluation, what this group says matters and Canada will legislate change across all business sectors to get its national AML/TF regime up to international standards. FATF’s typology report on money laundering through diamond trade also matters and you can rest assured FINTRAC has read it and will formulate a strategic response. FINTRAC itself recognizes sector-wide systemic deficiencies across virtually every DPMS AML/TF obligation. The Canadian jewellery industry is facing a failing grade in this regard and should, therefore, expect increasing regulatory attention from FINTRAC.

More to come of this story in Part 8.

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