2016: A Full Bouquet of Wine Fraud

by K2 Intelligence Investigations · Compliance Solutions · Cyber Defense
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K2 Intelligence - Investigations · Compliance Solutions · Cyber Defense

The rapid growth of the international wine market has given rise to a simultaneous growth in wine fraud. The burgeoning demand, especially in China, has exposed all players—collectors, investors, vineyards, distributors, and auction houses alike—to a number of sophisticated scams.

The product itself is uniquely susceptible to fraudulent activity. Labels, capsules, and corks—all of which embody crucial branding elements—can be relatively easy to counterfeit. Add to this the absence of international regulation, and the opportunities for foul play abound.

In 2016, a year that set a new record for the most expensive wine collection ever sold at auction—$22 million in sales over one three-day period—new scams have more than kept pace. What follows is a brief look at the fraud landscape.

Dealing with a Counterfeiting Culture

Due to their close geographical proximity, China would seem a natural market for the wines of Australia, but market entry has been anything but smooth. Beyond the pressing need for reliable translators and trademark lawyers, Australian wine companies have confronted a host of questionable business practices.

China’s trademark laws are especially challenging, in that they grant ownership to the first company to register, which needs not be the creators of the product or brand being trademarked. This creates an obvious advantage for local distributors, who secure trademarks in their own name, unbeknownst to the vineyard. When that company decides—for whatever reason—to switch distributors, they find to their dismay that they don’t, in fact, own their own trademark.

China is also a lively market for empty bottles from upscale labels. Bottle scavengers sell them to rogue suppliers, who fill them with forged wine. In response, Australian vintners have resorted to smashing their bottles after wine tastings and have begun using anti-counterfeiting printing techniques better suited to vulnerable currencies. Australian companies have found that the sheer vastness of the marketing opportunity in China must be carefully weighed against the risk of fraudulent business dealings.

Investors Beware

In the UK, several wine investors have been bilked by a novel scam in the last year. An investor receives a call or email from a company whose flashy website and slick promotional materials attest to its supposed legitimacy. The fake company offers to purchase the investor’s entire wine portfolio at an attractive price. The investor transfers the portfolio to a holding facility—often a legitimate warehouse—designated by the fake company. Once the transfer is made, the wine is immediately relocated to a foreign facility, and all communication with the victim is cut off. The wine is gone and the investor has no recourse.

Wrong Bottle, Wrong Year

A wine auction in Geneva was rocked when six vintage bottles of Domaine de la Romanée-Conti (DRC)  were unexpectedly withdrawn from sale. Don Cornwell, a Los Angeles burgundy expert, had called the wine’s authenticity into question, basing his claim on close examination of the bottles, which appeared to have either the wrong type of engraved glass, an incorrect type of capsule, or a suspect label. He was able to show that one of the bottles—a ’78 worth an estimated $12,500—had a kind of embossed glass that had been used only in the ’74 vintage, not the ’78. The fraudulent bottle made all the other bottles suspect, and they were all taken off the market.

Big Names Implicated

Though notorious wine counterfeiter Rudy Kurniawan was imprisoned in 2012 for disguising inexpensive mixed burgundies as DRC and other Grand Cru producers from Burgundy, the repercussions of his fraudulent activities continue to be felt. In a May 2016 lawsuit filed in New York State, a Singapore investment company claimed that 132 bottles of DRC—purchased via private sale in 2011 for $2.45 million—were, in reality, forged by Kurniawan. But what really caught the attention of the wine world was the alleged involvement of some of its foremost experts. These figures, named in the lawsuit, included the head of Vanquish Wine auctions in charge at the time of the fraud; the CEO of Cep’Age, a Bordeaux wine firm; and a Missouri-based wine dealer and wine-storage facility owner.

A Wine-Centered Ponzi Scheme

Noted wine merchant John Fox offered his well-heeled customers what appeared to be an excellent deal. They could pre-order fine European wines at below-market prices, paying up front and taking delivery in two years. What they didn’t know was that Fox was running a wine Ponzi scheme, falsifying the purchase orders, and taking in roughly $20 million between 2010 and 2015 for “phantom wines” that his customers would never receive.

To cover his steps and maintain his company’s credibility, he used the money coming in from new customers to buy wine for prior customers who were growing impatient—an oenophilic variation on the classic Ponzi scheme. It is estimated that 4,500 customers paid more than $45 million for wines never received, from which Fox pocketed over $5 million.

The scam ended with a series of lawsuits and criminal actions brought by unhappy customers, ultimately resulting in bankruptcy for Fox’s company. After pleading guilty in federal court, Fox now faces up to 6.5 years in prison and must pay $45 million in restitution to clients.

Exotic Animal Black Market Fraud

Tiger bone wine, a traditional Chinese medicinal practice involving the brewing of the exotic animal’s bones, fell under international scrutiny after the discovery of 40 frozen tiger cubs at a ‘so-called’ haven for endangered tigers in Thailand. While not confirmed, it is believed that the world renowned Tiger Temple was smuggling exotic animals into the black market, where tiger bones are in high demand. The popular internet trading site, Alibaba, hosts a designated section for tiger bone and tiger bone wine sales. And tiger breeding farms have been opening across the region, hoping to meet the supply demands. While hunting, killing, and trading of protected animals is illegal in China, Beijing grants exemption to breeders of captive tigers, allowing the practice to continue in certain areas of the country.

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