Fraud in the Scotch whisky cask sector

In this episode we discuss the growing popularity of buying and selling Scotch whisky casks, risks of fraud and some advice for buyers.

Grant Strachan is a partner at Brodies LLP, with a specialist focus on the food and drink sector, and Vikki Bruce is the founding director of CaskNet, a tech start-up that is building a register for Scotch whisky casks. 

The Scotch Whisky Association has recently published updated guidance for 2025 on personal investment in Scotch whisky casks. This guidance can be accessed here.

The information in this podcast was correct at the time of recording. The podcast and its content is for general information purposes only and should not be regarded as legal advice. This episode was recorded on 06/12/24.

Transcript

00:00:05 David Lee, Host

Hello and welcome to Podcasts by Brodies. My name is David Lee, and today's episode looks into the world of buying and selling Scotch whisky casks. In recent years, Scotch whisky cask trading has become increasingly popular and the buying and selling of cask has attracted buyers from across the UK and beyond. However, it's an unregulated market and fraud is an important factor to consider, so it's vital for buyers to be aware of the risks and how to minimise them.

To discuss these issues and more, I'm delighted to be joined by two guests - Grant Strachan is a partner in the commercial services team at Brodies and has a specialist focus on the food and drink sector and Vikki Bruce is the founding director of CaskNet, a tech start-up that is building a register for Scotch whisky casks. Welcome to you both. 

If I can come to you first Grant, Scotch whisky was just a drink to be enjoyed for a long time but its popularity has soared in recent years. There's been a greater focus on rare and premium bottles and casks - what has fuelled that consumer interest in Scotch whisky?

00:01:16 Grant Strachan, Partner at Brodies

There's a lot of factors that have driven that growth and surge in popularity - the provenance, heritage and craftsmanship of whisky has always held strong appeal, not just in terms of the flavour, but also in relation to the origins and heritage of the distillery. Other factors include changing consumer habits so younger generations in particular are increasingly looking for quality over quantity. We're also seeing a growth of brand premiumisation, and there's been a noticeable trend in recent years towards premium craft products in the industry. 

Another issue here is the global appeal of whisky; the Scotch whisky industry has always had global appeal, but expanded distribution channels has really driven that growth and has facilitated the growth of Scotch whisky into new and emerging markets. On the tourism side and hospitality too, whisky producers have predominantly always had well-known distillery shops. A lot of those producers have made significant investments in visitor centres and experiences. 

Just two other points, and bringing this round to the cask market. Ultimately, collecting Scotch whisky bottles has always been a popular trend. We have seen some eye-watering sums that have been achieved for private bottling, and this is mirrored in the cask market. Now, to contextualise the cask market, whisky casks were historically traded between distilleries to balance box spirits, but it's also important to recognise and recall that a lot of distilleries really had to sell premium casks during the lean production years in the 1980s. The price that casks were retrieved for back then, were ultimately used to keep the distilleries going, so certainly the sales prices of casks and bottles has really come to the public consciousness as well.

00:03:41 David Lee, Host

So there is a lot of factors there driving that. Vikki, anything to add there on why the market's grown so much?

00:03:50 Vikki Bruce, Director at CaskNet

Yeah, absolutely. Grant has thoroughly covered a lot of those reasons. The cask market is very young and, as Grant touched on, it has emerged from the independent bottling market. If you look at Companies House and you see how old cask brokers are, they are typically no more than five to seven years old. A lot of that was driven by it becoming one of the asset classes to rival fine art, rare wine, cars, gold antiques etc. Back in the day, there were a few prices that hit stratospheric levels and that led to people who were then selling casks to claim that investors were going to get a 500% return on their investment. That's not typically standard, but at one time it was a better investment than gold, for example. Viewing it as an asset has really played a big part in the popularity but as with everything, there are cycles. The popularity of whisky has been going through a real upsurge. That's in line with emerging markets such as China and India, they have played a big role in this. Once the cask brokering side got going, that has really snowballed and they're very much drawing on these stories of big returns to tempt investors in. 

What happens after that is another subject. We live in a digital age now whereby it's very easy for broker A in one country to speak to buyer B in another country. This is one of the reasons that things are getting slightly messy is the lack of regulation and that anybody can be a broker and they're selling to buyers all over the place. Typically, when we started looking at this a few years ago, casks were quite an elitist product, as many investments are. It's only something that people with extra money can actually afford to do, but nowadays there's a there's a lot of 'new make' spirit on the market so somebody can buy a cask for £1500 and that makes it much more accessible.

00:06:42 David Lee, Host

Let's imagine then that I've got £1500 and I want to purchase a cask of Scotch whisky, how do I go about that?

00:06:56 Vikki Bruce, Director at CaskNet

Most purchases will happen through a broker. People can buy direct from distilleries - some distilleries have a cask buying programme. It tends to be newer distilleries who have a cask buying programme because most people will know that to build a distillery is quite expensive, and you can't sell whisky until it's three years old. So, they've got a bit of a bit of a problem in their cash flow therefore for three years at least ,so instead they sell casks as investments, which then gets them some revenue. 

So, you can buy through a distillery through their own programme, but most people will buy through a broker. It’s a product which doesn’t tend to sell buyer to seller without the input of a broker. So when you buy a cask, you will be pitched to by the broker and pass over your cash, there should be a contract in there and then you will be given something called the delivery order which actually, was scrapped by HMRC in 2006 - and again this is one of the reasons that we've got problems in the cask trading market. 

Most buyers never see their cask. A lot of cask owners are not in Scotland. All casks of Scotch whisky must be kept in Scotland, so buyers from around the world typically won't necessarily see their cask, and if they're sent a photograph of a cask, that is not exactly proof. The cask then gets registered with the warehouse and should be put into the new owner's name with the warehouse. A lot of brokers will keep the cask under their name in their account, which is not fraudulent, but it's not good practice.

00:08:43 David Lee, Host

We'll come back more later, Vikki, to what CaskNet is doing and regulation of the market. In terms of the buyers, Grant, what are those legal and regulatory considerations that potential buyers of whisky casks should be thinking about?

00:09:04 Grant Strachan, Partner at Brodies

Yes, absolutely, David. Before I answer that question, I'd like to pick up on two of the points that Vikki made in relation to the process at the outset. The majority of sales are through brokers, it is of course possible to buy from producers directly, and that does tend to be a well-trodden path. A lot of new distilleries will sell casks containing new make spirit that generates cashflow for the distillery and that would be a direct arrangement between the buyer and typically, the producer. For the sales of either older or rare and premium casks, brokers are involved - and there is very much an issue that we will get into the weeds of in terms of the regulation of brokers and some unscrupulous, bad actors that are circulating in the market, because as Vikki said, it's an unregulated market. 

However I would like to emphasise that there are several, very reputable brokers in Scotland. A reputable broker has real value, brokers will have intricate knowledge of the cask market, that includes knowledge of the cask profile, recent cask trades, knowledge of when specific casks may reach a premium pricing point or indeed when the market dips. Fundamentally they also establish relationships with the brand owners and with the producers. In short, a reputable broker will be on the pulse. They can offer a buyer significant value and allow that buyer to procure certain casks that are often not advertised or promoted by the buyer. 

Now, as Vikki said, there is not a formal process. Currently this is an unregulated market. There's no common register of casks or their owners. I know that Vikki is steering the ship to try to change that. Often casks are not sold with a logbook containing historic records to verify their provenance, and there is an HMRC system that tracks the excise movement and controls but that ultimately is not a publicly accessible register, and indeed it's not intended to provide a database of all cask owners.

In terms of the legal and regulatory issues for potential buyers, there's both legal issues and some practical points that I'll touch on. First, a buyer needs to obtain comfort that they can receive legal title to the goods. The delivery order is the gold standard to achieve that. Now, the delivery order was scrapped under the Finance Act of 2006 and without getting into the regulatory weeds of what that entails, it is still used and is a widely used industry term of art that ultimately documents the transfer of ownership of casks held in in a warehouse. 

A buyer should try to obtain a delivery order, and as part of that process, really doing your homework, looking under the car bonnet and doing appropriate diligence. That can either be through inspecting the casks yourselves or using a representative to do that for you, making sure that the records match up and that a visual inspection of the cask matches the records held at the warehouse. Appropriate contractual relationships need to be put in place as well, especially if it's not possible to obtain a delivery order. The buyer really needs to obtain comfort that they are obtaining legal title to the casks.

A couple of practical issues on that. Clearly there's a significant capital outlay when a buyer is purchasing a cask so they want to understand what they're buying as well. So, for example, is storage included? Typically storage costs will be included for up to 12 months or beyond. Storage is typically a peppercorn rent, but it is still a charge, so buyers would want to understand if that is covered. Casks are covered under the warehousing insurance policy, but if a buyer is purchasing a rare premium cask for a significant sum, it may be that the value of that cask exceeds the premium under the warehousing policy, so it might be appropriate then for the buyer to take out further insurance. 

Now I'll come on to this later, but perhaps a misunderstood concept is that casks are duty deferred, not duty exempt so as soon as a cask is removed from a warehouse, it triggers the payment of duty, so a buyer should understand what their objectives are. A buyer will have different objectives if they just want to hold on to a cask for future investment or if they want to bottle that later. 

Now that leads me on to a very important issue here which has been arising in recent years; that of naming rights. If a buyer wants to bottle a cask, either for resale or for private use, they need to be aware of any specific restrictions concerning what they can put on the label and what an independent bottle can say about that cask. Essentially, a cask that is sold with full naming rights would allow the buyer to state the name of the distillery of origin but unless you've obtained specific permission from that cask owner, you can’t include the logo or the trademark of that producer. 

Also, if you don't have explicit rights to naming rights, a producer could try to exert their rights to prevent you from naming that distillery when the product is bottled. Now clearly this can go to pricing, so if a cask is sold with full naming rights, it potentially presents a more attractive investment opportunity in terms of future returns than a whisky cask sold without naming rights. 

Vikki, I know that you've dealt with this quite a lot, do you have any thoughts on the naming rights piece? Have I captured that succinctly?

00:15:58 Vikki Bruce, Director at CaskNet

Absolutely. Something that we deal with constantly is this request for what naming rights does it come with and if you scour Google, you won't find anything documented about what exactly naming rights are. There's a very clear legal implication if you call a bottle by the name of the distillery, versus distilled at such and such a distillery, you're sort of treading on the passing off laws there and you can get into hot water. That's a very important subject.

00:16:38 David Lee, Host

Vikki, Grant was talking there about the importance of reputable brokers and how they play an important part in the market. What about those slightly less reputable practitioners? Are there people out there trying to make a faster buck? What are the impact of those fraudulent practices on the market and its reputation?

00:17:07 Vikki Bruce, Director at CaskNet

It's a real scale of also what's going on there and Grant has given a brilliant insight on the complexities of buying casks and of working with a broker, distiller or being the cask owner and working with the warehouse. It's not that straightforward and there's some fantastic brokers and that goes without saying, but there are unfortunately a lot of fraudulent players. There are also a lot of brokers who can't pronounce a distillery name; they don't know about things like naming rights. They don't know about the difference between duty exempt and duty deferment or how the insurance work. All they are is salespeople selling a product on – and that's not good enough. 

And that's where if we don't get regulation in place which you know, regulation takes obviously a long time to be brought in, at least we need one of the authoritative bodies, to help us put in place very clear guidelines, so that the buyer can do their due diligence. 

The first place that anybody thinking about buying a cask of whisky should look is on Companies House - see what the directors of that company were doing before. It takes five minutes - do your homework, it's so important. This is why the brokers have such a bad reputation because people are getting into a real mess and are being promised returns which aren't materialising etc. I don't think that the whisky industry itself actually is suffering, but perhaps that's something that will happen further down the line.

00:18:57 David Lee, Host

Grant, coming back to you, we've touched on this idea of the unregulated market and what protections are out there, anything that you've not touched on so far that offers any additional legal protections for buyers? It is quite unusual to buy something of significant value but not be able to see it. It's not something that somebody from Amazon's going to come and ring your doorbell and hand over, sp what protections are there?

00:19:32 Grant Strachan, Partner at Brodies

I think you've touched on a few critical issues there. Certainly, in terms of the protections we've seen more proactive enforcement in recent years. Some regulators that historically have not been so engaged in the sector such as the Advertising Standards Authority, has taken more robust action against, shall we say, overzealous brokers, promising significant returns. 

Indeed, in January last year, the ASA issued an enforcement notice that was targeted against 2 brokerage companies that were promising significant returns. The ASA - in their ruling - link that to the enforcement notice and give very clear direction as to what information needs to be provided to customers. So for example it was on topics such as providing clear and transparent terms and conditions, giving an appropriate warning statement and disclaimer that the capital value of the whisky could go down as well as up, and ultimately making sure that buyers have complete transparency on the process. Any statements that are promising significant returns could potentially be misleading. 

We're also seeing law enforcement taking a more robust approach. A widely reported case that's ongoing just now is through the City of London police who are currently investigating an alleged cask fraud. Now, clearly, criminal prosecution against fraudulent actors is and should be sector agnostic, but what this pending investigation shows, is that the law enforcement agencies are alive to threat and will take robust action. 

Just going back to the cask market and the types of things that buyers need to be aware of. I think Vikki's touched on these already in terms of things like the delivery orders, I've discussed some of the issues around transfer of ownership - clearly these are paramount but I think ultimately, buyers need to undertake that appropriate diligence and seek professional advice if they're not comfortable that they're getting that transparency from the intermediary that's involved.

00:21:58 David Lee, Host

Vikki, you said you don't think necessarily the reputation of the wider industry has been affected, but this area has maybe been a little bit of a Wild West in its early days. How is the industry responding to the challenges posed by potential fraud or just operators who don't know what they're doing? What is CaskNet doing specifically to try and assist with that?

00:22:23 Vikki Bruce, Director at CaskNet

The ASA and the City of London police are the only two authorities who have raised their heads above the parapet at all. We've spoken at length to HMRC who has said it is not our problem. Interestingly, it is the problem of Defra, because this is a product which goes into the human food chain. So actually, traceability is something that Defra are responsible for and there isn't necessarily traceability, and we know that because we've been sent for example, casks which are purported to be one thing and upon closer examination, are not. That's actually a counterfeit cask. That's slightly different from selling what is known in the industry as 'a ghost cask'. So, I'm going to sell you this cask, here's the delivery order. The cask either doesn't exist or there are multiple orders and an ill-educated buyer won't know how to check that the cask has been transferred to them. 

Everybody knows that the problem is there. What are we doing about it? I've written a white paper, which is currently with the Home Office. I've spoken in front of national security, cybersecurity, spoken in front of the FBI and Secret Service, which is quite fun. Speaking to the police, because it does sit in their wheelhouse, particularly Police Scotland. The reality is slightly different, and we were defrauded of a very large sum of money recently and we didn't get anywhere with action fraud. So how that looks in terms of if somebody does have a bad experience - and it doesn't matter if it's £1,000 or £100,000. You have got to be confident in the system that you're going to get some recourse. 

What we feel very strongly, is that the answer to all of this is a digital transfer of ownership. Much in the same way that the ownership of a car would transfer through the DVLA. There are several ways of looking at this: giving a cask a passport and you would refer to a log book, but then also digital transfer of ownership, so we're not relying on delivery orders, which essentially people can make on their computer on Word. So, you know that's a really difficult one to police until it gets into the warehouse conversation. So, you know, we're pushing it as hard as we can, but it's like pushing water uphill, quite frankly.

00:25:16 David Lee, Host

If you're talking there, Vikki, about a cask passport or a log book - who should be involved and is CaskNet effectively filling a role that should be done by a national body?

00:25:36 Vikki Bruce, Director at CaskNet

Well, that's exactly right. We have found a few precedents where a private company is adopted by a government body – and using the DVLA analogy is a helpful framework - all we really need is for them to say here's the legislation, every transfer of cask ownership must be logged on this system. It doesn't matter who builds the system or who owns it, as long as everybody is obliged to use that one system, and that then provides the traceability. 

The existing system was built for an industry process which covers tobacco, spirits etc. This marketplace, which is customer-  facing, Grant touched on the EMCS earlier, as a way of the warehouses giving information to HMRC, that's got nothing to do with Joe Bloggs who owns a cask and yet, suddenly it's become part of that picture and it doesn't work for the whisky industry. It was not designed to work for Joe Bloggs. In an ideal world, there would be an entire system overhaul and HMRC would be broken down and rebuilt for the whisky industry and the cask market. That's never going to happen. I think the last time it was done was about 1979.

00:27:19 David Lee, Host

Thanks, Vikki. Let's come back to Grant - Vikki said the issues we've discussed are very much in the wheelhouse of the police. So what might happen to anyone found to be undertaking fraudulent practices in this area? What penalties are there, and are there any other ways in which that fraud can be addressed?

00:27:44 Grant Strachan, Partner at Brodies

Very much so. Vikki raised an important point there about the whisky market generally, there does seem to be a gap. It's important to emphasise that Scotch whisky is regulated in the production and the labelling and the promotion of whisky, but where there is some sort of lacuna here is the protection afforded to consumers in the cask purchase market. 

Now to answer to your question, David. Fraud is fraud. It's a criminal act, and the police and law enforcement agencies clearly have the power to prosecute and recent examples show that they are doing so. That's not geographically restrictive - we seen cases of prosecution in the US a few years ago, for fraudulent activity in the cask market and related to earlier, the ongoing investigation into alleged fraud that's been undertaken by the City of London Police. 

To shed some light on that and not specific to these examples that I gave, but in terms of the situations and scenarios whereby fraud could materialise…there's misleading advertising and then there's fraud. Unscrupulous intermediaries will offer non-existent casks, so buyers that don't undertake the diligence or don't obtain professional advice could be exposed to that level of fraud; i.e. where a broker promises a cask that simply doesn't exist and the money disappears and the buyer never receives their cask. It's a muddled area and we've been aware of practices historically, whereby a broker can promise a cask to a buyer and that buyer client understands that they're receiving and purchasing a specific cask of a certain age, profile and provenance from a named distillery. 

The problem is that that broker does not have, and cannot affect legal title to that cask and once money changes hands, if that broker tries to then procure that cask there are situations where that cask has either been sold, damaged, lost, or simply does not exist. The broker is  then in a situation where they're scrambling to try to find a similar or replacement cask. 

In my opinion, what that broker should be doing in that situation is being open and honest with the purchaser, and offering them a full refund. That's what would happen under normal consumer protection laws and indeed, a consumer would have those rights to demand a full refund. The problem here, is that often buyers do not know. So, if they don't have that level of visibility, that situation would only materialise if and when the buyer said to the broker and to the warehouse, I want my cask now bottled and they realise that they don't have the cask which they thought they were purchasing.

00:31:08 David Lee, Host

Where are we heading, Grant? Where are we heading in terms of whisky cask trading? What have we got coming over the hill that might make a difference to some of these manifold problems that you've both outlined today?

00:31:25 Grant Strachan, Partner at Brodies

I will lead this one - I know that Vikki's got a perspective on this as well. With effect from March 2025, there are going to be some substantial changes to the WOWGR (The Warehousekeepers and Owners of Warehoused Goods Regulations) rules. So effectively what the new rules will do, is bring the position back to what it was in 1999, before the WOWGR regulations were created. The changes that are taking effect are not new law. 

At the moment, often warehouses do not exceed the transfer of ownership for each private broker, and what that effectively means is that cask sales are recorded and held under the name of the broker. Historically, buyers have struggled to reclaim their cask if a dealer disappears, or if that dealer goes into liquidation. What these new rules are going to establish, is a mechanism whereby a private buyer can demand the warehouse to effectively open an account on their behalf. 

Casks are held at warehouses and there's thousands of casks at a warehouse, but the owners are a select few numbers of larger producers so typically, a lot of warehouses will not open accounts for private buyers because it is an administrative headache. This means that those casks are then registered and held under a revenue trader or through a brokerage account. So, there's a layer of separation with buyers that don't have access to the warehouse directly. These new rules effectively pair that back, so they would, in principle, allow a private buyer to demand that a warehouse deals with them directly.

00:33:27 Vikki Bruce, Director at CaskNet

I think it's a real double-edged sword and I'm delighted that this change will mean that buyers can hold their casks under their own name. I think that's incredibly important, but obtaining a WOWGR is something you need to do as a revenue trader. It's a hoop that you have to jump through and it means that you are registered with the government, you're with HMRC and you have been given permission to act as a revenue trader. There's a real grey area because nowhere is it specified what number of casks makes you a trader as opposed to a collector, buyer or owner. Everybody generally understands that number to be five casks. 

That 'hoop' will now be removed, so anybody can become a trader, but not everybody automatically gets a WOWGR. You do have to submit a business report, you have to have two letters of intent etc. so, there's a process you must go through, but that's now going to be removed. So, while I think it's a real positive for the buyer, I think it's a real negative in terms of putting some sort of control in place for brokers.

00:34:41 David Lee, Host

We will just come to summing up now. To anyone listening who doesn't know what WOWGR is, it is The Warehousekeepers and Owners of Warehouse Goods Regulations 1999 – which is why there clearly is an acronym for it because that's just taken about thirty seconds to say! Let’s have a final comment from you both. Are you optimistic that everything that you've discussed today and everything that's going on, can bring more certainty into this market and that over the next few years, buyers of whisky casks can have more comfort that the legal, regulatory and protections and industry support is out there for them when they're looking to buy a cask? 

I'll come to you first, Grant, briefly, then to you, Vikki.

00:35:41 Grant Strachan, Partner at Brodies

I think some of the regulatory developments over the last two years show the impetus for more scrutiny, especially on bad actors and overzealous brokers, and that can only be a positive thing. In particular, the scrutiny by the ASA and some of the published law enforcement activity does show a step in the right direction. It remains to be seen in terms of the regulatory changes to WOWGR, how that will unfold. I can absolutely follow Vikki's concerns in relation to the impact this might have both in warehouses and potentially putting a bigger focus on the role of warehouses in a transaction that to which they are ultimately performing an administrative exercise. So, I think there are some legitimate concerns there, but from my perspective and as a lawyer, certainly the more robust enforcement action from regulatory and law enforcement agencies is a step in the right direction.

00:36:45 David Lee, Host

Vikki, are you optimistic that we're moving in the right direction?

00:36:50 Vikki Bruce, Director at CaskNet

I’m not. I just think there's a real sort of apathy from the authoritative bodies, which is a real shame, I don't think there's industry support. People should talk to their lawyer. It's a purchase just like any other purchase, you know, do your due diligence and just don't take the word of anybody. Don't take the word of me. Do your own research.

00:37:25 David Lee, Host

Brilliant. Thank you very much to Vikki Bruce of CaskNet and to Grant Strachan of Brodies for their fantastic insights today on this fascinating topic.

Will we get more useful regulation into this market and greater industry engagement, or will we continue to push the water of life uphill for a while to come?  

This episode was part of Podcasts by Brodies, where some of the country's leading lawyers and special guests share their Enlightened Thinking about big issues and developments affecting the legal sector and what that means for organisations, businesses and individuals across the various sectors of the UK economy and wider society.

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