Don't let the fine wine fraudsters have another vintage year

The current boom in wine investment is giving scammers the chance to con investors out of thousands of pounds. By Matthew Wall

Fine wine investment fraud is the latest in a long list of scams and frauds costing UK consumers over £38bn a year, according to the National Fraud Authority. Returns on fine wines, such as Château Lafite, Château Mouton Rothschild and Château Margaux, have far exceeded those achieved on the stock markets over the last decade, thanks to the rising demand from increasingly affluent emerging economies such as China.

According to the Wilson Drinks Report, the Liv-ex Fine Wine index has risen 225 per cent since July 2001, compared to just 5 per cent for the FTSE-100. Even between 2005 and 2010 the wine index rose 188 per cent, compared with 1 per cent for the FTSE. And where there are high investment returns, there are fraudsters.

Gavin Partington, communications director for the Wine and Spirits Trade Association (WSTA), says: "Wine investment fraud has been on the increase recently because the market for fine wines has been so staggeringly successful compared to returns on the stock market. We have come across several cases of fraudsters who have set themselves up as legitimate wine investment companies. I can't talk about individual cases, but I can say losses from this type of fraud run into millions of pounds."

Buying fine wine while it's still in the barrel – "en primeur" – means that investors can purchase the product far more cheaply compared with when it is bottled two or three years later. (Well-known brands from Bordeaux and Burgundy can increase their value several-fold once the vintage has been bottled and released to the general public.) Legitimate wine merchants will then keep the bottled wine secure in temperature-controlled "bonded warehouses" – so you may not even see your investment for many years.

This is a perfect scenario for fraudsters because they can charge money up front; the investor doesn't expect physical delivery of any product; and it will be years before the fraud is discovered. "The delay between order and delivery does make life very difficult for many consumers wanting to invest in wine," says Partington. "They have to put a lot of trust in businesses, which is why we lay down strict guidelines for our members and try to educate consumers on the questions they should ask before investing. It's about due diligence."

Alun Griffiths, buying director for wine merchant Berry Bros & Rudd, warns: "Anyone can set themselves up as a wine expert and adviser on wine investment. It's not regulated by the Financial Services Authority. Fraudsters obtain shareholder lists, then simply cold-call people, emphasising the tax benefits, for example. They'll sound very plausible, but you should never deal with cold callers. There's absolutely no protection for investors, I'm afraid."

Griffiths advises would-be investors to check out the credentials of any wine investment company and be wary if it is a recent start-up. They should also check the prices quoted against published information on specialist websites such as WineSearcher.com and the Liv-Ex Fine Wine 100 Index (live-ex.com).

The high prices – a bottle of 1986 Château Lafite-Rothschild Pauillac costs around £750 – attract counterfeiters, too, faking labels and passing off plonk as fine wines at auction. The owners of the French Domaine Ponsot label discovered some of their own Clos Saint Denis burgundy at auction claiming to be pre-1982 vintage – impossible since that was the first year they had produced it.

At the other end of the price scale, Barking & Dagenham council trading standards officers this month seized 220 bottles of fake Jacob's Creek, a brand owned by drinks giant Pernod Ricard, which were being sold in off-licences and shops throughout Essex.

Corporate ID theft – fraudsters passing themselves off as legitimate companies – is also a problem. In April fraudsters faked a wine merchant's website and email address, placed orders with one of its French suppliers, and made off with £10,000 worth of wine before the fraud was detected. "There's plenty of anecdotal evidence to suggest corporate ID theft is on the rise," warns Partington.

And this month two men admitted conspiracy to defraud after running a Leeds-based wine scam – SurplusWines.co.uk – purporting to sell cheap wine from restaurants that had gone bust in the recession. In just five days a Belgian fraudster, Denis Lefrancq, took in £380,000 for wine that was never delivered. He then shut down the operation and fled to Prague where he was arrested. His partner, Jeremy Gillis, helped set up the business and even put adverts in newspapers.

The rise in wine fraud has prompted the WSTA, which represents 340 members in the drinks industry, to launch its own fraud prevention unit, working with police and customs to combat identity theft, counterfeiting and wine investment fraud. WSTA members will share information about actual or suspected fraudulent activity within the trade and work closely with Operation Sterling, the Metropolitan Police's economic prevention and disruption unit.

It isn't just the fine wine industry that fraudsters are targeting, however. The latest fraud alert from the National Fraud Intelligence Bureau (NFIB) concerns websites selling designer perfumes that are never delivered, or are counterfeit. The Action Fraud helpline has received 28 such reports this year.

It seems unwary shoppers can still be lured into giving away their debit and credit card details to fraudsters hiding behind legitimate-looking, well-designed websites, often masquerading as well-known brands. A "co.uk" web address is no guarantee that the company is based in the UK, so foreign–based fraudsters can often get away scot free.

Detective Superintendent Tony Crampton, director of the NFIB, says: "Customers should check the http address has 's' at the end or that there is a small padlock in the browser window indicating it's secure. Most fraudulent sites will not show either."

Ticketing fraud is also high on the police's agenda, following Take That's current tour. Fans who spent money on unofficial sites lost hundreds of pounds when tickets never materialised. The Action Fraud helpline was bombarded with complaints, which the NFIB analysed, and City of London Police arrested a 41-year-old man earlier this month. Losses from online ticketing fraud are now thought to be nearly £170m. The problem with ticketing websites is that tickets are often not delivered until two weeks before an event, giving fraudsters months to carry on the fraud before it is discovered.

Harry Watkinson, a spokesman for the City of London Police, says: "We've also seen a significant increase in the amount of land banking fraud recently." This is where property investment companies persuade investors to buy small plots of land in the hope that planning permission will be granted by the local authority, thereby increasing the land's value. Often the land being sold could never be developed because it is an area of special scientific interest, inaccessible, or simply non-existent. Last year the Financial Services Authority closed down five land banking firms who had lost investors £42m. The FSA is also investigating a further 20 firms and estimates that total losses through land banking fraud top £200m.