Diamond fraud costs consumers billions and could cost supply countries even more

Andrew Fox writes that consumers all over the world are at risk of being, or have already been, scammed with lab-grown diamonds that threaten the entire industry. 

For many people the largest cash purchase they will ever make is a diamond engagement ring. They feel it is a worthwhile investment because diamonds, which are formed by geological pressure over hundreds of millions of years, have built-in scarcity and, therefore, value.

Many individuals are being scammed by unscrupulous jewellers selling 'lab grown diamonds' (which most of us, myself included, wouldn't consider 'real' diamonds) in one of the biggest consumer frauds in history. It's time for regulators to get tough, and consumers to get smart. Otherwise, the entire legitimate diamond industry (which has already shrunk by a third during the pandemic) could collapse, since customers will no longer have confidence in what they are buying. This would cause humanitarian crises across the diamond producing world, especially in Africa.

Lab-grown diamonds, or LGDs are formed in a matter of weeks, not hundreds of millions of years. They are often sold at a similar price, often without being clearly marked as 'lab grown' (ie. fake). They have no inherent value.

The value of the global diamond market is $80 billion. Anecdotally, I can see perhaps 10 per cent of that being unknowing purchases of LGDs. This could be an $8 billion consumer fraud that few know of, and no one is doing anything about. As well as harming consumers, the LGD industry is stripping away the livelihoods of many communities, and weakening economies around the globe, while claiming it is 'ethical and sustainable'.

The real diamond industry is, thanks to the Kimberley process, ethical for customers and profitable for some of the poorest governments in the developing world. The 'ethical' choice isn't to buy a fake diamond (at almost the same price as a real one), but to support that process, which has removed 99.8 per cent of the world's conflict diamonds from the trade.

The perception that all diamonds come from war torn banana republics is simply inaccurate. Canada's diamond production largely employs marginalized indigenous people, and makes up 13.5 per cent of the world's diamond market.

The effects of a collapse in confidence in the diamond market would be even harsher in the developing world. Take the example of Botswana; since diamonds were discovered there in 1967, the country has prospered, and today both education and healthcare is free. This would not have been possible without the diamond trade that accounts for 70 per cent of all exports, and 30 per cent of total GDP.

This makes it all the more shocking that LGDs are sometimes being sold to uninformed customers as 'ethical' or 'sustainable', with the implication that real (ie. 'mined') diamonds are not.

It is true that mining diamonds is a carbon-intensive process due to the sheer amount of rock that needs to be displaced. However the mass production of LGDs is actually worse for the environment, because they are made through either high-pressure, high temperature or chemical deposition processes, which all require vast amounts of energy.

Singapore's IIa Technologies present themselves as 'leaders in sustainable LGDs'. They create their diamonds through power from the grid in a country where 95 per cent of electricity comes from natural gas. Similarly, China is a leading manufacturer of LGDs, and 55 per cent of its power comes from coal. Presenting LGDs as 'sustainable' is a stone-faced lie.

I can understand the appeal of LGDs. If someone can have an identical looking product for a lower price, why wouldn't they buy it? The answer is that diamonds are not just pretty to look at, they are a store of value. Diamonds increase in value over time, and are an effective inflation hedge.

However, the reliable resale value of an LGD is zilch, zero, nada. The inbuilt scarcity of real diamonds doesn't apply with labs: anyone can set up an LGD lab, and on the current trajectory, many more will. I regularly come across customers who bought LGDs and are now looking to sell them after a job loss or to pay bills. They are worth something now (much less than they paid for them) but as the LGD industry proliferates they will soon be worth nothing.

The US Federal Trade Commission has recently introduced guidelines surrounding the advertising of LGDs compared to mined diamonds. But guidelines are not enough when several months or more of someone's income is at stake. Most customers would not consider them diamonds, so jewellers should not be allowed to describe them as diamonds. Adding the prefix 'lab-grown' is not enough when the very definition of a diamond in the minds of most people is something that is inherently scarce and, of course, natural.

We need criminal culpability, or at the very least, licences rebuked. This is one of the largest consumer frauds in history. Because the diamond industry can appear opaque to both customers and regulators, the LGD fraud continues in plain sight.

If we allow this to continue, not only will thousands of consumers be conned out of one of the biggest purchases of their lives, but an industry that is a lifeline for some of the most vulnerable people and fragile governments in the world will be weakened, perhaps fatally.