• Counterfeit Wine Food Fraud Part I: The Challenge of Enforcement and Prosecution with a Review of the Wine Spectator Article

    by John Spink • December 2, 2015 • Blog • 0 Comments

    ffi blog V2 No53 wine fraud 2“Counterfeit wine is almost as old as wine itself, a problem that [Roman Philosopher] ‘Pliny the Elder’ decried in first-century Rome.” A wine expert stated that “If someone is faking Miraval, a $25 rose, I could be drinking counterfeit rarities.” This is a review of the November 30, 2015 Wine Spectator Magazine article of the investigation and prosecution of a major wine counterfeiting operation in the USA. The focus of the Wine Spectator story was on the collectable, rare wines ($1,000+/bottle) but there is discussion of more common wines.

    The report on Food Fraud counterfeit wines provides insight on the very complex investigations and the priority-setting challenges for law enforcement.

    Wine Spectator Article

    Wine Spectator is a leading English-language magazine that covers wine. Its recent cover story was about the Food Fraud counterfeit wine case of Rudy Kurniawan who was arrested in Los Angeles in 2012 and who received a 10-year Federal sentenced in 2013 for wire and mail fraud. “The FBI believes Kurniawan made more than $130 million in sales this way. These fakes were often well-crafted blends of old wines from poor vintages and young wines, designed to fool experts even when they opened and tasted.” (Note: the DOJ.gov press release states $30 million.)

    Also “No one knows exactly how large the [overall product] counterfeit problem is, but a report by the International Chamber of Commerce projected that more than $1.77 trillion worth of counterfeit goods will be traded worldwide in 2015, up from $550 billion in 2008” [Note: this estimate and report was the subject of a previous article reviewed in a previous blog post]. The Wine Spectator article did mention several wine Food Fraud incidents. There were no mentions of health hazards. The incidents mentioned were:

    • $2.8 million for 400+ bottles ($7,000 per bottle)
    • $60 million for 1.8 million bottles over 10 years (arrested for importing 1.4 million liters of table wine and bottling it as Brunello and Chianti Classico — 60 shipping containers) ($33 per bottle)
    • $4 million for 20,000 cases ($16 per bottle)

    Food Fraud for a product like wine can fall into several categories, with a range of consequences, which lead to priority setting by law enforcement. To classify the investigation, rare wines were more categorized as “collectables” and directed to the FBI/ DOJ artwork forgery investigators. “They were collectable. Whether the collectible at issue is art or antique or wine.” As with many counterfeit cases it is difficult to prosecute unless the seller knowingly sells a fake. For example, in a US Chamber of Commerce/ Coalition Against Counterfeiting and Piracy,  the law firm Tory’s stated that “every” counterfeiter they prosecuted stated they were just diverting genuine product – so the counterfeiters say “prove it.” “[The DOJ’s] biggest question was whether Kurniawan was a counterfeiter or had been duped into selling fakes he’d purchased unknowingly.” If there was a health hazard (e.g. illnesses or deaths) – or even a vulnerability that violated FSMA or FD&C – this would have been a priority for FDA and even FBI.

    A major base of evidence and insight for this investigation and prosecution was from a previous private investigation funded by “William Koch, the energy company billionaire and avid wine collector who in 1985 purchases four bottles of wine he understood to be 18th-century Bordeaux once owned by Thomas Jefferson.” A 2003 Forbes article noted that a single Jefferson bottle was insured for $225,000. In a 2011 California Court of Appeals document Koch vs Kurniawan identifies five bottles from 1934 to 1949 that cost a combined $75,000. “’Koch was a great resource,’ says Wynne. ‘He had been defrauded and had no problem saying. ‘I’m the victim’.”

    The investigation and prosecution was helped by Kurniawan’s naiveté when a raid found his entire counterfeiting operation… in his house. All that evidence – and the case – was almost thrown out because the search of the house was conducted for a “protective” sweep looking for other dangerous criminals. The article noted that Rudy and his mother were the only people home. The situation did not seem to be very dangerous:

    “Rudy Kurniawan [38 years old], a man of slight build, with piercing eyes under heave brows, stands there is his silk pajamas.” He was standing in front of his house in “This leafy, suburban Los Angeles neighborhood just east of Pasadena, is the home to the Santa Anita horse track and the city’s botanical gardens.” “His mother, who owned the house and lived there with her son, was asked to stand beside him. To make sure the house was empty, [the FBI special agent] Wynne ordered some of his men to perform a protective sweep.”)

    The case and prosecution hinged on that critical “smoking gun” of the seizure of the “counterfeiting paraphernalia.”

    Also, less than 10% of federal cases actually to a trial, so this was a major resource commitment for the federal court and attorneys.

    Law Enforcement Conundrum: Priority Setting

    The Wine Spectator article covered the investigation and noted “The case was a first [counterfeit wine] for federal law enforcement…” (Note: a search of the DOJ.gov website resulted in only this case.). The investigation took 21 months from the raid to the wire and mail fraud conviction. The court case took 8 months. Beyond the time and effort for this type of case, expertise is often a problem where “The Justice Department did not have any wine specialists in its ranks.” The government expertise was lost since the FBI investigator retired and the article stated he now worked for the bank HSBC. An internet search found the DOJ Assistant US Attorney now a shareholder at the law firm Stearns Weaver since 2014.

    In general there is a challenge to prioritize complex or non-violent cases. If this had been classified an intellectual property rights counterfeiting case, rather than a collectables/ art case, it would be been handled by the DOJ Cyber Crime and Intellectual Property Section (CCIPS). A review of the 2015 DOJ press-releases for Cyber Crime and Intellectual Property Section (CCIPS) resulted in 70 entries comprised of:  4 pornography cases, 28 intellectual property rights/ counterfeiting, and 34 cyber-crime/ trade secret theft (we did not review for duplicate cases). The DOJ 2014 Annual Review stated that there were over 12,000 cases “favorably resolved” in FY 2014.

    There is citizen interest for increased enforcement but a lack of support for diverting other law enforcement resource or for raising taxes. From one of our previous survey reports:

    “Related Law Enforcement Priority-Setting. It was found that 55% of Michigan residents thought the “government” should do “more” to combat product-counterfeiting and 71% of the overall sample did not support increased taxes to cover the additional activity. Also, of the 55% that thought the government should do more, 82% of them did not support diverting resources from other crime fighting activity and 76% of them did not support increased prison time if it meant other types of prisoners would be released.”

    Additional insight on law enforcement priority setting can be gained from a November 2015 New York Times article on cyber-stalking. “[The lead detective] knew that [the criminal] was causing real harm, but he didn’t seem to have good options. “The ordeal [of one incident] cost the taxpayers of Ontario [California, USA] $6,500, yet it was sometimes difficult for the Ontario detective assigned the case to justify spending time on it. ‘I have felony cases sitting on my laptop,’ he says. ‘Why would I take this cyber case, tracking all these records, trying to find a guy who’s in another country?’.” To note, the criminal pleaded guilty to 23 counts and sentenced to 16 months in youth jail and will be released in 8 months at age 18.

    DOJ Priorities

    To review all Food Fraud, product counterfeiting, and this collectables case in more detail it is important to consider the overall DOJ priorities set by Congress. The publically stated – and US Congress approved — DOJ priorities for US law enforcement. For 2014 these were:

    • Priority Goal 1, National Security: Protect Americans from terrorism and other threats to National Security, including cyber security threats.
    • Priority Goal 2, Violent Crime: Protect our Communities by Reducing Gun Violence using smart prevention and investigative strategies in order to prevent violent acts from occurring.
    • Priority Goal 3, Financial and Healthcare Fraud: Reduce financial and healthcare fraud.
    • Priority Goal 4, Vulnerable People: Protect vulnerable populations by increasing the number of investigations and litigation matters concerning child exploitation, human trafficking, and noncompliant sex offenders; and by improving programs to prevent victimization, identify victims, and provide services. This includes goals to open investigations concerning non-compliant sex offenders, sexual exploitation of children, and human trafficking.

    Collectables and rare wine, or even intellectual property rights counterfeiting, were not on this priority goal list. The victims did not fall under the definition of “Vulnerable People.”

    Overall Review

    The future support for this type of investigation is challenging for many reasons:

    • No health threat (and no public safety or violence threat).
    • The crime classification was collectables/ art
    • There were few victims
    • Victims were not a “vulnerable people”
    • This was a complex case especially compared to a felony drug or weapons charge
    • The type of evidence was novel for the courts, complex to explain, and vulnerable to be dismissed.
    • The nature of the evidence and case led to an actual trial and appeal – fewer than 10% of federal cases go to a trial
    • There are already limited resources for collectables/art or even for product counterfeiting cases. DOJ prosecuted 28 intellectual property cases nation-wide in 2015.
    • Not a “Priority Goal” area for DOJ.

    It is always interesting to review details of Food Fraud cases that make it to court and that result in a criminal prosecution. It is important to review these details to understand how enforcement and prosecution can contribute to prevention. Law enforcement and the courts are under tremendous pressure, with constrained resources, and they need to be diligent in their focus on the priorities set by the Congress, which is national security, violent crime, financial and healthcare fraud, and vulnerable people – specifically, sexual exploitation and human trafficking. This is important insight that underscores the importance of companies focusing on prevention. Law enforcement and prosecution play a critical role in combating Food Fraud but the most efficient and effective countermeasures – for companies or countries – are prevention. FFI.

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