By Katherine L. Moore JD, MS

We all love our spirits. I’m originally from North Carolina and like any good Carolinian knows, NASCAR, a sport millions of people love, owes its roots to that love of spirits. During prohibition in the 1920’s and 1930’s moonshiners and bootleggers would modify their cars for peak speed and performance so that they could transport alcohol and elude federal Prohibition agents and local law enforcement.

These rum runners raced alcohol all over the south. What many people do not realize, is that after the repeal of prohibition, stockcars were still used to transport illicit alcohol to evade excise taxes and regulations. Not much has changed, moonshiners are still active.

Bootleg Alcohol
Two bootleggers crash after a pursuit by Capitol police in 1922. Photo Library of Congress

All over the world adults love spirits. Alcohol distribution is a multi-billion-dollar business with implications across the food and beverage, music and entertainment, as well as the tourism and resort industry.

Most savvy consumers know that in any restaurant, bar or night club the big money is made at the bar. Ounce per ounce the best return on any establishment’s investment is the $20 martini not including tip. We all happily pay the alcohol tab to soak in the ambiance and enjoy conversation with friends and family. From a business perspective, this means that every ounce has a monetary value. Every part of the supply chain that gets that ounce into the glass of the consumer has a vested interest in that return on investment.

As a Juris Doctorate, Master of Science, I am Certified in Data Analysis and Fraud Analytics. When I try to explain the algorithms that I have created to search for fraud by analyzing data, most people’s eyes glaze over. To me however, it is a profession that is intriguing, rewarding, fulfilling and exciting. I have worked on BP oil spill claims, insurance cases, medical cases, in which I have uncovered billions of dollars in fraud.

I am like the Private Eye who worked in the non-descript office during Prohibition days never knowing what would be involved in solving the next case. The difference between me and the 1930’s P.I., is that I have the extra benefit of data. Like the old-time private detectives and revenue agents who did stake outs of country roads waiting for the moonshiners to speed by, I do my share of old school detecting, but I primarily stake out the data.

Bar expensive brand Spirits
Bar serving premium brand spirits, a $20 martini or drink is not uncommon. Photo

A few years ago, I was tasked with the review of a supply chain anomaly in the import and distribution of distilled spirits from a large, international company (International Company) to the Caribbean including the Dominican Republic. Like all reviews, I never know what I am going to discover. It became abundantly clear very early in the process that there were multiple accounting inconsistencies in this case. What ultimately unraveled was a large scheme that included tax evasion, SEC violations, counterfeit alcohol, counterfeit tax stamps and organized crime.

Upon initial review of the documentation nothing seemed particularly concerning. Reviewing discussions among internal personnel at the company revealed that at least one or two people had questions about the supply chain. The supply chain conversations, questions and responses provided to the executives were relatively mundane, seemed reasonable and in keeping with the regular course of business. The invoices told a different story.

Every company’s processes are different, but in the distribution channel some things are standard for large, international companies shipping containers of product all over the world. First, there is a manufacturer. This entity produces the goods. The manufacturer can be anywhere in the world and may, for different reasons, have multiple manufacturing locations. Then there is a distributor. This entity is regional. The distributor can be an entirely different entity, a wholly owned subsidiary or some hybrid. The distributor is tasked with getting the product to the retailer and will have a log regarding the movement of the product. Typically, shipments are tracked by container, pallet, crate and SKU numbers.

History and Insight on #AlcoholFraud and #Bootleg liquor from @VectorAnalytic a Certified Fraud Examiner Click to Tweet

First, I noticed that SKU numbers along with a container number were repeating. Then I noticed that the billing cycles for these repeating SKUs were anomalous. When management would question these inconsistencies, the warehouse clerk provided plausible but not entirely satisfactory explanations.

I then noticed that the mistimed billing was often accompanied by tax payments and duty payments that did not quite match either. At the same time, this company was plagued by the occasional destruction of alcohol shipments by the authorities because they were deficient in the proper customs stamps. I quickly came to realize that either my Spanish was a little shaky and I was misconstruing everything, or the company was having a spate of incredibly bad luck or something off kilter was happening here. The data told me the truth.

Shipping containers
Shipping containers are used to import and export alcohol brands worldwide

After cross-referencing some of the repeat SKUs it became clear that some double billing for certain alcoholic beverages was occurring. The reason was not immediately apparent, but after pulling out my calculator the answer became clear. Certain containers could hold more bottles of liquor. Additionally, this alcohol was taxed at a higher rate per ounce than other accompanying spirits.

As a result, a crate of bottle ‘A’ which contains 24 bottles of 25.4 ounces each has a higher tax value than a crate of bottle ‘B’ which contains 20 bottles of 25.4 ounces each. This is particularly true where in the Dominican Republic, spirit ‘A’ had a higher rate of tax per ounce. Therefore, a container full of crate ‘A’ spirits was a higher value container.

Once I understood the value differential, I felt comfortable that the duplicate invoices were not a coincidence. Delving deeper into the data, my theories proved correct. International Company’s alcohol was distributed by a subsidiary that was partially owned by International Company and partially owned by a popular, local politician, who had a shaky business past.

International Company was shipping large quantities of alcohol to the distributor. The distributor was warehousing the shipments for the company. The company was channel stuffing. Additionally, the higher volume containers were being double taxed, and the warehouse was skimming the extra tax income and utilizing it to issue dividends to this public company’s shareholders.

Swim up Pool Bar
Cocktails at a resorts swim up bar

The distribution company and its local representatives were engaging in its own dubious business practices with local stores and resorts. The local arm of the distribution company was making deals with resorts to undercut the company and competitor companies. The local arm of the distributor was skimming alcohol from the warehouse, offering cut-rate prices to local resorts while mixing in counterfeit alcohol to increase their side profit.

When the local executive for the company stumbled upon the distribution/warehouse scheme he feared for his safety. To its credit, when International Company confirmed the distribution scheme they understood and recognized that their executive may in fact be in danger and they provided him with security and an armored car.

Fraud takes many forms. Often its effects are not just monetary in nature. It is possible that many people have died in the Dominican Republic and Caribbean because of this fraud scheme and others like it that mixed fake alcohol with authentic beverages to increase profit. Fraud in the consumables market contains significant, inherent risks. Unregulated commodities can be mixed with anything and the lack of oversight in its production can lead to additional contamination.

NASCAR’s origins of stock cars racing through the mountains in the dark Carolina night to supply some speakeasy on the coast with whisky conjures up romantic images of fast cars and good times. The dark side of these stories have been forgotten.

No one ever hears about the people who went blind, became disabled or died drinking some of that moonshine. It was often distilled in automotive radiators made of lead that contained residual components of antifreeze. Improper distillation also produces methanol, which is poison for human consumption. Although some became experts at distilling, many were novices trying to cash in on a product that was in demand which led to undocumented deaths and health issues for the consumers.

We all love our spirits and that will never change. A solid supply chain management process, watchful fraud analytics and know your client provisions can prevent not just reputational damage but can literally save lives. Initiatives that encourage collaborations and partnerships with independent entities and the public can serve to alert manufacturers of issues before they spin out of control and instill consumer confidence.

Katherine L. Moore
Katherine L. Moore JD, MS, CFE

Katherine L. Moore is JD, MS, Certified Fraud Examiner who specializes in large scale complex white-collar fraud. Her prior reviews have included identifying large insurance, medical and billing schemes. Katherine wrote the fraud analytics for the BP Deepwater Horizon oil spill and discovered the Mikal Watts scheme among others. Currently, she is working with individuals and agencies addressing issues of mortgage, probate, guardianship, estate and elder fraud. Contact Vector Analytics  Katherine on Linkedin or via twitter @VectorAnalytic