Sadly, the final days of summer are here, and many of us are trying to squeeze in that last barbeque, the last dip in the pool, and yes that last summer drink. As we savor our fancy watermelon margaritas, ginger radlers, or classic gin and tonics, perhaps it’s a good time to consider how these trendy drinks have found their way to us—a path that was paved by Prohibition and riddled with fraud.
Although Prohibition ended in 1933, many argue that the three-tiered distribution system created when the 18th amendment was repealed paved the way for endemic fraud that pervades the industry even today. That system is comprised of:
Producers, a group that includes brewers, wine makers, distillers, and importers who are allowed to sell their products only to wholesale distributors.
Distributors, who in turn, sell products to retailers, such as bars and restaurants, or liquor stores or markets.
Retailers, who are the only ones allowed to sell directly to consumers, with a few exceptions that vary by state.
This system provides a great example of the battle between states’ rights and federal rights and highlights the corruption that pervades the industry. Here’s why: federal and state laws forbid producers and distributors from offering money, loans, or anything else “of value” to retailers to freeze out the competition. However, each state has its own rules about what constitutes something of value. For example, in New York, wholesalers are allowed to provide branded glassware to bars, but gifts of sports tickets are prohibited. The reverse is true in Colorado, where bar owners may often find themselves in possession of tickets to coveted sporting events but pay for their logoed glasses.
Keeping up with the rules is as difficult as it is enforcing them. State liquor control boards are generally understaffed with limited resources to investigate allegations of improper conduct in the industry. As a result of budget cuts, many state regulators are able to investigate only the most salacious of allegations and rely on industry players and watchdog groups to undertake independent investigations that document improper conduct.
Such was the case in Illinois when the Wine and Spirit Distributors of Illinois (WSDI) presented the Illinois Liquor Control Commission with the results of its 2015 “bootlegging” investigation, involving the illegal importation of alcohol from Indiana to Illinois.
For those who are contemplating the origins of the term bootlegging, it did not come from the practice of drinking alcohol out of a shoe. The word came into general use in the Midwest in the 1880s when it was used to describe the practice of concealing flasks of alcohol in boot tops when going to trade with American Indians. The term came into wide use when Prohibition ended the legal sale of liquor and created a demand for illicit supply, and many link the establishment of organized crime and NASCAR racing in America with bootleggers’ success. Today the term is applied more generally to any goods that are made, distributed or sold illegally.
Now back to Illinois. The WSDI had begun raising its concerns with Illinois regulators in 2013, but budget cuts had left only 16 regulators to oversee tens of thousands of liquor licenses issued by the state. In September 2015, the Illinois Liquor Control Commission announced that it had filed charges against a number of business owners in connection with the bootlegging. Separately, in September 2016, Empire Merchants, New York’s largest wine and spirits distributor, fired its CEO and filed suit against its co-owner, claiming in federal court that the two men and others had defrauded the company of tens of millions of dollars through an interstate smuggling scheme.
As colorful as it seems, bootlegging is not the only prevalent illegal scheme. Allegations of pay to play have ripped through the beer industry in recent years. In October 2014, Dan Paquette, owner of the now-closed Boston-area micro-brewery tweeted about the brewery’s refusal to “illegally buy (draught) lines.” That tweet, along with many that followed, became a rallying cry for many micro-breweries, causing front-page headlines and a state investigation into illegal practices. As a result of the investigation, the Massachusetts Alcoholic Beverage Control Commission (ABCC) fined the Craft Brewers Guild a record $2.6 million by state regulators for paying Boston bars to put its beers on tap, describing the multi-year scheme as a “pervasive illegal enterprise.”
In July 2017, the Alcohol and Tobacco Tax and Trade Bureau (TTB) launched its largest trade practice enforcement to date, targeting pay to play schemes in Miami in a joint operation with special agents from the Florida Division of Alcoholic Beverages and Tobacco. Typically, the TTB doesn’t share information on investigations – or even their existence. However, in this instance, the TTB stated, “We thought we would go ahead and let folks know that we are serious about enforcing a level playing field.” To this end, Southern Glazer’s, the largest wine and spirits distributor in the United States, was fined $5 million last month by the US Department of Justice for its role in a "pay to play" scandal in Pennsylvania. Another distributor and a Maine distillery both paid $2 million in fines, and a wine importer paid a $200,000 fine. A former director of marketing for the Pennsylvania Liquor Control Board (PLCB) pled guilty to fraud in connection with the case and faces up to 20 years in prison.
Since by now you’re contemplating the bottom of your glass, we’ll save stories of death from counterfeit alcohol for another time. In the meantime, drink up. But if you are wondering, “Do I or anyone I know have a problem?” call us.