On 31 January 2023, the Fraud Advisory Panel ("FAP") published a report highlighting the cost of alcohol fraud to the UK's food and drink sector.
FAP's report has been prepared in conjunction with experts in the alcohol industry and outlines the cost of alcohol fraud to organisations operating in the food and drink sector and to the UK economy more widely. The report also provides information to assist organisations and individuals to identify alcohol fraud risks within their businesses and supply chains.
What is alcohol fraud?
Alcohol fraud can take many forms, ranging from simple label swaps to large complex criminal enterprises with illicit supply chains producing "almost perfect" replicas. It is estimated that 25% of world alcoholic drinks are believed to be illicit and possibly dangerous.
What is the cost of alcohol fraud?
The FAP report notes that alcohol fraud costs UK businesses approximately £200m in lost sales and almost 3,000 lost jobs each year. The impact of alcohol fraud is felt throughout the industry from small scale retailers to high end investors.
In addition, governments lose revenue, from reduced excise duty and VAT ("the Alcohol Tax Gap") and lower income and corporation taxes. In 2021, HMRC estimated the Alcohol Tax Gap at £1.2billion.
Finally, there is the cost to human life – illicit alcohol is often dangerous and the FAP report cites a number of instances where alcohol fraud has caused serious harm or even death.
What can be done to mitigate the risk of alcohol fraud?
FAP's report describes the alcohol industry as "institutionally vulnerable" to alcohol fraud. The report refers to the size of the market, the numerous supply channels, increased online sales, a large number of small- and medium sized operators (SMEs), and a modern consumer mindset more concerned about price than authenticity, as all contributing to what the FAP refers to as a "perfect storm" for the occurrence of fraud in the industry.
FAP provides useful practical tips for navigating the risks of alcohol fraud. David Richardson, Regulatory and Commercial Affairs Director of the Wine and Spirit Trade Association (WSTA), provides the following top tips to the industry:
- Know your fraud risks - Identify the risks of fraud, consider your levels of vulnerability and tolerance to each risk, and the steps you can take to mitigate them.
- Keep good paperwork - Organisations should be systematic and thorough about the information you expect from suppliers, including proof of authenticity.
- Insist on proper contracts - Avoid informal deals – "handshakes are not a sound basis for business".
The primary objective is to prevent alcohol fraud affecting your business in the first instance and steps including conducting robust due diligence in your supply chain will help to do so. However, prevention is not always possible and so it is important that your organisation is able to identify, investigate and appropriately respond to incidences of alcohol fraud.
If you have any questions about how to manage the risk or the steps to be taken if concerns around alcohol fraud arise, please do not hesitate to contact the Corporate Crime and Investigations Team at Brodies.
Contributors
Partner
Associate
