Apr. 25, 2012 - Issue #862: The Real Deal

The Real Deal

Wine fraud and the arrest of Rudy Kurniawan

There's an oft-quoted joke in the wine business that Las Vegas restaurants sell more bottles of 1982 Château Pétrus every year than were ever actually made by the top Bordeaux winery. It's an unfounded claim—albeit a disturbingly believable one—but nevertheless highlights a widespread problem in the wine world: counterfeits.

Wine fraud is often considered a problem that only wealthy collectors need to worry about. After all, like Pétrus, the most expensive wines are usually the most counterfeited. (This usually takes the form of either bottles with fake labels, or authentic empty bottles re-filled with something else.) These wines are often sold at the big auction houses in major centres like London, New York and San Francisco, so how could it possibly affect someone buying a $15 bottle of Argentinean Malbec from their local wine shop?

Last month wine enthusiasts around the world were rocked by the news that one of their most prominent members was arrested for fraud: Rudy Kurniawan, a 35-year-old Indonesia-born wine collector, was arrested on March 8 and charged with five counts of wire and mail fraud, including selling $1.3 million of fake wine. If convicted of all charges, he faces 20 years in prison.
Arriving on the American wine scene in the early 2000s, Kurniawan claimed to be the son of a wealthy Chinese businessman and that "Kurniawan" was an assumed name. Despite these mysterious origins, he quickly rose to power as a regular buyer and seller of the most expensive wines at auctions throughout the United States. Kurniawan enjoyed a privileged life that precious few can claim: his mansion in Arcadia, California had a Lamborghini, a Mercedes-Benz and a Range Rover in the garage; he racked up $16 million in American Express bills between 2006 and 2011 and ran up $11 million of debt in 2007 alone; his elite clientele included billionaire William I Koch; and, in what is now a hilarious case of dramatic irony, he had a recognized "talent" for sniffing out fake wines and was often asked to be arbiter over the veracity of prized bottles.

Kurniawan had also been living illegally in the United States since 2003, when an immigration court ordered his deportation. Inside his mansion, investigators found reams of labels for some of the most expensive wines in the world (Château Pétrus, Domaine de la Romanée-Conti, Château Lafleur), corks, foils, rubber stamps with vintage dates and bottles in various stages of the counterfeiting process. Clearly, he had been at it for quite some time.

Though most people bought into Kurniawan's playboy lifestyle—prior to his arrest, numerous magazines and websites ran laudatory, if cryptic, profiles on him—an incident in 2008 sparked the investigation that ultimately led to his downfall. At a Manhattan auction, Kurniawan consigned 107 bottles labeled as 1929 Domaine Ponsot, a famous winery in France's Burgundy region. But Domaine Ponsot did not start bottling their wines until 1934—prior to that year no bottle had ever born the Ponsot name. You'd think a professional counterfeiter would at least check that the wine he's faking actually exists, but apparently it didn't matter anyway since no one else noticed the blunder until Ponsot itself came forward.

Of course Kurniawan claimed ignorance, and his friends and business partners staunchly defended him. But the winery didn't buy it and neither did the FBI. Over the next few years, Laurent Ponsot, current proprietor of Domaine Ponsot, worked closely with a special division of the FBI that specifically investigates incidents of fraud in the art and collectibles world.
 

Ponsot's aid was invaluable in helping the FBI build a case against Kurniawan, and this involvement highlights some of the biggest impacts of wine fraud: the damage to the reputation of producers whose wines are counterfeited, as well as the ongoing efforts their proprietors must exert to catch and prevent fakes.

Many of these producers have started using anti-counterfeit technology on their labels; several top Bordeaux producers, including Château Margaux and Château Palmer, have experimented with radio-frequency identification (RFID) tags, used for verification as well as for recording the temperature of the bottle while it is in transit. Producers in Spain's Rioja region have started using holograms on their labels, even for wines that only retail around the $20 to $50 mark. Invisible ink, special seals and bottle etching are also commonly employed, and the number of wine producers investing in such anti-counterfeit measures is steadily rising. Both the damage to a winery's reputation and the use of anti-counterfeit technology raises the producer's bottom line, meaning that the customers will end up paying for fraud no matter what level it occurs at.

The prevalence of counterfeited collector wines also serves to keep the prices of these wines expensive, so most people have no hope in hell of ever affording one. While some might not care about this, it's a real shame for wine enthusiasts without an unlimited disposable income.


Though exact figures can never be known, the global estimate of the wine fraud market is between $6 million and $30 million. That's a lot of lost tax revenue, as well lost investment income in regions where fraud is rampant. Emerging markets like China, Russia, India and Brazil are particularly notorious: Canadian icewine producers  estimate that they lose up to half of their sales due to counterfeits in such markets; Ontario winery Vineland Estates notes that it had built up $250 000 of icewine sales in China which was subsequently reduced to just five percent of that total within only five years.

Yet, while the numbers of the total cases of wine fraud as well as the lost revenue caused by this fraud suggest that the problem is very significant and widespread, the general consensus amongst those in the industry is that it isn't actually that big of a deal—at least not around here.

Local wine store owner Gurvinder Bhatia believes that the Albertan and Canadian liquor industry are quite safe from fraud, and is not overly concerned that fake bottles might end up on his store's shelves.

"I think we should be cautious of wines that are coming into this province that aren't coming directly from the wineries," states Bhatia. "We don't operate in a vacuum, so it brings in the question of the validity of a lot of these collector wines. But so long as you can show that there is integrity in that chain of possession, I think it's very easy in this province to alleviate concerns of our clients."
This sentiment is echoed by another owner of a local wine store, Annabelle Evaristo: "I think as a country that doesn't consume as much wine as our friends down in the south, I think we are pretty good. But the more high-end product you sell, the more worried you should be about this."

Despite the quantity of high-end wine at auctions and on store shelves in the US, the American wine industry also considers itself well insulated against fraud of any significant magnitude—and yet Kurniawan was able to freely sell counterfeits for almost a decade. Wine fraud is clearly a systemic problem in every market, and yet it only tends to be widely discussed in the wake of high profile incidents. 

One can only hope that the Kurniawan case will incite a serious, thorough investigation into the global wine fraud problem. It will be interesting to see if any other arrests are made—Kurniawan may have been an independent agent, but moving that amount of fake wine suggests that he may have been part of a larger criminal network, or at least had a couple partners.

But regardless of what happens with that case, one thing remains certain: they're totally gonna make it into a movie.

 

Wine Fraud Facts

• Global estimate of counterfeit wine is between $6 million and $30 million
• The EU estimates that between one percent and nine percent of all liquor is counterfeit

Fraud and the Liquor Control Board of Ontario (LCBO)
• LCBO is one of the world’s largest single purchasers of liquor, with almost 22 000 products for sale
• In March 2011 the LCBO pulled several cases of fake Amarone (a highly-praised Italian wine). The wine only retails for around $35. No one was arrested or held responsible
• In January 2012 the LCBO fired two employees, Francois Agostini and Andrea Smallwood, for allegedly stealing $1.6 million by exploiting the Diplomatic Sales Program. Agostini oversaw this program, which provides liquor to diplomats without tax or duty at  savings of up to 40 percent.Over six years, Agostini allegedly got away with 1618 cases of liquor by making fake sales to fake diplomats, selling the liquor out of the back of a truck in Stouffville. The incident is currently under investigation by the OPP and the Alcohol & Gaming Commission of Ontario; no charges have been laid

Cellared in Canada ... or not
• The term “Cellared in Canada” can be applied to a wine that is made from a percentage of foreign, imported grapes or grape must (pre-fermented grape juice) The percentages of foreign content varies by province.
• British Columbia = up to 100 percent foreign
• Ontario = up to 60 percent foreign (30 percent must be Ontario grapes). By 2014, this will have changed to up to 100% foreign, same as BC
• Many of Canada’s largest wine producers—Jackson-Triggs, Mission Hill, Peller Estates, and more—import wine from foreign lands and then market it under the "Cellared in Canada" label.
• The term has been widely criticized as misleading, but there are no plans to eradicate it

 

Major Incidents of Wine Fraud

Red Bicyclette / Pinotgate:
• In 2010, French wine broker Ducasse Wine Merchants passed off cheap Merlot and Syrah as harder-to-make Pinot Noir
• Ducasse sold the wine to wholesaler Sieur d’Arques, which in turn sold 18 million bottles’  worth to American company E & J Gallo.
• Gallo sold the wine under the 2006 vintage of its Red Bicyclette label as 85 percent Pinot Noir
• Red Bicyclette retails for $8 per bottle
• Authorities estimate that Claude Courset, owner of Ducasse, made €7 million through the scam
• Courset and 11 others were convicted  of the fraud charges

Georges DuBoeuf Blending Scandal"
• The so-called “King of Beaujolais” was fined €30,000 in July 2006 for illegal blending.
• His estate mixed different wines of varying quality in order to disguise the bad 2004 vintage.
• DuBoeuf claimed the incident was an accident due to human error.
• Supposedly none of the blended wine was marketed or sold.

Billionaire’s Vinegar:
• In 2006, American billionaire William I Koch filed a lawsuit against wine collector and trader Hardy Rodenstock for four bottles of wine that had allegedly belonged to Thomas Jefferson, but were revealed to be counterfeit.
• The bottles originated with Rodenstock, whom Koch claimed had been orchestrating an ongoing scheme to defraud wine collectors.
• The matter remains unsettled in court.
• In 2008 Random House published a book on this incident, entitled The Billionaire’s Vinegar, written by Benjamin Wallace.
• The film rights were bought by a Hollywood consortium.

Mont Tauch:
• In 2010, 400 000 counterfeit bottles of this premium French wine were released in the Chinese market.


Counterfeiting Methods
Relabeling:
• A fake label is applied to a bottle that looks similar to the real one.
• Inexpensive and easy for a single person to accomplish, due to modern printing technology.
• The best counterfeits will also have fake corks and foil capsules, as the corks of top wines are stamped with the vintage date and the foil capsules may contain identifying markings.
Recycling:
• Obtaining an authentic bottle and refilling it with something else, then selling it as the real thing.
• Somewhat more expensive, as it requires more tools (re-corking machine, replacement wine), and empty bottles of premium wines are worth a lot on the black market. An empty bottle of 1982 Château Lafite-Rothschild (a top Bordeaux producer) will fetch $1500 on the black market. A full bottle of this wine can fetch over $6000 at auction

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