In late 2022 the Scottish Food Crime & Incidents Unit published its strategy for the next three years. It identified alcohol as being one of the products most susceptible to food crime, with the potential for both low level criminality and serious complex fraud. Here we take a look at the impact of fraud on the production, sale and supply of Scotland's national drink.

What does food crime look like?

Crime within the food and drinks sector can range from investment fraud to trades of counterfeit alcohol. Not only does this present serious public health concerns if products are not fit for consumption, it also creates a risk of severe reputational brand damage if products are being illegally passed off as genuine.

The most recent Knight Frank Index records that the value of rare whisky has increased by 373% in the last ten years. However, increasing values have left the market vulnerable to fraud. In addition to the sale of counterfeit products, in recent years there has been an increase in fraudulent whisky investment schemes where investors are encouraged to invest in casks, which in some cases do not actually exist. In 2020 a British national was arrested by the FBI after allegedly defrauding investors of £10 million in a fake cask scam.

The Scotch Whisky Association reports that 44 bottles of whisky are exported from Scotland every second of every day to international markets. As sales bounce back to pre-pandemic levels so too does the risk of criminal exploitation amongst supply chains.

Just how common is whisky fraud?

Perhaps more common than you might think. In 2018, Scottish based consultancy, Rare Whisky 101 sent 55 bottles of whisky to the Scottish Universities Environmental Research Centre for analysis. The bottles were selected at random from retailers, auctions and private collectors. The results showed that 21 out of the 55 bottles tested were either fake or were not distilled on the year stated on the label.

In 2017 the most expensive dram of whisky ever sold turned out to be fake. Chinese millionaire Zhang Wei paid £7,600 for a single dram whilst on holiday in Switzerland. Suspicions about the label and the bottle were raised after pictures were posted online. The bottle was sent for testing and confirmed to be a fake. Rather than being 193 years old, testing showed that it was most likely to have been distilled in the early 1970s.

The risk to your organisation

Counterfeit alcohol can present serious issues for businesses at all points in the supply chain. Public health issues aside, it can lead to serious reputational damage if products are falsely branded as genuine and require to be recalled following intervention by regulators. In such cases false or misappropriated documents are often used to sell or market a fraudulent product. Under the Food (Scotland) Act 2015 (the "Act"), this can lead to enforcement action being taken by the industry regulator, Food Standards Scotland ("FSS"), against food business operators.

In addition to the power to issue Fixed Penalty Notices and to issue Compliance Notices, the Act also gives FSS the power to seize food which it deems unsafe or food that is not what it purports to be. The Act also places a legal duty upon organisations to report suspicions or concerns about any products or ingredients in its supply chain to FSS.

What can you do to protect your organisation?

    1. Your organisation should have a current risk assessment that identifies potential areas of vulnerability. This should be regularly reviewed to take account of any new or emerging threats and should be made available to key members of staff.
    2. Ensure you have an up to date "incident response" plan that sets out the steps that need to be taken to respond to concerns of financial crime and/or fraud.
    3. Ensure that you are regularly reviewing and updating your organisation's internal policies and procedures which set out your regulatory requirements and how you are meeting them. In the event of enforcement action by regulators it is advisable to have a paper trail showing robust financial and health and safety policies that are already in place.
    4. Know your supply chain and ensure you have carried out due diligence on all existing and new suppliers.
    5. Seek legal support as soon as concerns are identified. Having the right support from the start can make a significant difference in managing what can be a complex process. It can demonstrate to regulators that issues are being taken seriously and will help you to manage your brand and reputation.


      Contributor

      Paul Marshall

      Partner