[fc-discuss] Financial Cryptography Update: Diamond governance

[iang@iang.org]

((((((((((( Financial Cryptography Update: Diamond governance )))))))))))

                           December 21, 2005


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https://www.financialcryptography.com/mt/archives/000616.html



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In news of a big scandal in the diamond world, the rating agency was
found to be inflating valuations prior to sale.  I find this a good
example of what we mean when relying on "trusted third parties" means
we are more vulnerable:

http://money.cnn.com/2005/12/20/markets/diamond_bribery/index.htm
==========8<===========8<====
The Gemological Institute of America, which grades diamonds for
independent dealers and big retailers, fired four employees and
shuffled top management after an internal investigation of its
policies, the Wall Street Journal said. 
 The institute's internal probe started after a jewelry dealer who was
also the former head of retail operations at luxury jeweler Harry
Winston claimed that the institute and two diamond dealers conspired to
inflate the grade of two diamonds that he sold to members of the Saudi
royal family. 
 The diamonds, which were sold for $15 million, were taken to an
independent appraiser and found to have a lower grade that made them
worth much less, the paper said. 
 The dealer alleged that lab workers took bribes to inflate the quality
of diamonds in grading reports, according to the news report, which
cited people familiar with the situation.
======>8========>8===========

Bribes, Saudi royals, diamonds, it's got it all!  Only problem is, this
is an old plot.

When we create an agency of such power, we all become vulnerable to it
(a point credited I believe to Mark Miller).  That which we call the
Trusted Third Party is no more than a hack that leaves us vulnerable to
the TP _in exchange for maybe being secure against something else_; 
whether that is a good exchange is highly dependent on the
circumstances.

In that case, when we say "trust" we mean you have no choice but to
trust this arrangement - in other words you are highly vulnerable.  The
business about trust being nice and warm and consumer-oriented is
simply marketing designed to lull us to sleep while others sleep not. 
(Auditors, CAs, Issuers, take note.)

We need to guard the guardians and watch the watchers as if they are
untrustworthy.	Because, frankly, if we do not, they will be.  Oh, and
for those who think it can't happen to them because they have
structured it "properly" please take note:

==========8<===========8<====
"Fees depend on a diamond's size; grading a one-carat round diamond
costs about $100. In 2004, the institute, a nonprofit, had income of
$104 million, the paper said.
======>8========>8===========

Non-profits are likely to have poorer governance as they have a better
ability to hide information from stake holders.  Why?  They don't have
shareholders, they only have employees.  That means the guardians and
watchers cannot be guarded and cannot be watched.  Who'd trust a
nonprofit voluntarily?

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