The popularity of Scotch whisky casks as an investment continues to soar, but in an unregulated market where there is no regulatory authority or code of conduct to govern those that operate within it, carrying out due diligence has never been so important.
The recent BBC documentary Disclosure: Hunting the Whisky Bandits shone a spotlight on the impact of fraudulent actors operating within the Scotch whisky market - exposing fraudulent cask operations and hearing from investor victims who have lost significant capital sums.
It is critical to have clarity and transparency of the purchase process when buying casks. Fundamentally, a buyer needs to be comfortable that the cask being purchased exists, that title can and will be transferred to them, and that they will acquire the right to sell or bottle that cask in the future.
Clarity on cask ownership is equally important, to ensure that a buyer is protected in the situation where a cask broker, acting on behalf of a buyer, enters into insolvency. This is a particularly acute issue following the recent news that the prominent whisky broker - Whisky Merchants Trading Ltd together with its linked companies Cask88 and Braeburn Whisky - has entered insolvency proceedings.
One of the ways to tackle these risks, is to make sure that you – the potential buyer - is clued up on the process, so here are some core legal, commercial and practical points to bear in mind;
1. A good broker will bring great value to the process, through their sector knowledge and relationships.
A broker's role is to purchase casks directly from a brand owner and subsequently sell those casks to a buyer-client; or introduce buyer-clients to a distillery that wishes to sell a specific cask.
2. Research your broker, thoroughly.
It is worth emphasising that the majority of whisky brokers are reputable businesses. However, prior to undertaking due diligence on the proposed cask, you should research your potential broker.
A reputable intermediary will hold strong relationships with brand owners, acquired through years of working in the sector and developing relationships with those distilleries and that should be evident, both from their website and when you speak to them.
3. Be familiar with the details needed to establish your cask's existence and location.
Each cask should be capable of being identified by reference to a unique cask number linked to the warehouse. Note that Scotch whisky casks can only be held in a bonded warehouse in Scotland and the HMRC maintains records of approved warehouses. Although this list is not publicly accessible, the Bonded Warehouse Keepers Association provides a list of members on its website.
4. Make sure you can prove you own your whisky cask.
A delivery order remains the standard method of transferring legal title in the Scottish whisky cask industry. This is distinct to the often-cited “certificate of ownership”, which often accompanies cask purchase agreements, but is not the same as a delivery order. Ultimately, the transfer of ownership requires acknowledgement by a warehouse of a buyer's title to the cask. Some warehouses may accept alternative documents other than a delivery order to evidence the transfer of title. For that reason, proactive warehouse communication is of the utmost importance to evidence a buyer's title.
Often a contract of sale (or cask purchase agreement) will be signed to govern the sale and purchase process. This is a helpful document that should set out the specifics of the sale.
5. Don't forget insurance.
In particular, buyers who purchase a rare and premium cask should confirm that the warehouse insurance coverage will be sufficient to cover the cask value. Specialist insurance coverage should be considered here.
6. Be mindful that the cask purchase is only the initial cost.
Whisky casks are classified as excise goods and are subject to duty suspension if held in a bonded warehouse. Casks can be traded freely in a bonded warehouse and owners of duty-suspended casks held in a warehouse may sell their stock in duty suspension at any time.
However, once a cask is taken out of a bonded warehouse, the cask is no longer treated as duty suspended (except when transferring it to another bonded warehouse facility). So, if you decide that you'd like to have the cask contents bottled at a future date, you need to bear in mind the additional duty cost, plus bottling costs too.
7. Bottling your cask is an option – but be aware that it carries additional legal considerations.
Note that the Scotch Whisky Regulations 2009 prescribe very specific requirements on the maturation, export and labelling requirements for ‘Scotch whisky’. For instance, it cannot be exported from Scotland, other than in a bottle labelled for retail sale.
It's also worth being aware of any restrictions that apply to the future bottling of a cask. Certain distilleries enforce 'naming rights,' that prevent a future bottler from referencing the distillery of origin. This may impact future cask valuation. For instance, a cask owner may be restricted from referencing the distillery in which the whisky originates and can include reference only to the distillery location; i.e. Speyside. These are issues that should be clarified during the purchase process and when corresponding on the cask sale agreement.
8. Identify your exit options at the outset.
Whether you want to bottle the contents of your cask, or resell the cask, a reputable broker should be able to provide flexibility to create the best exit structure for your investment.
9. Seek out information from recognised industry bodies.
While the Scotch Whisky Association is not responsible for the regulation of casks that are purchased privately, it has recently published updated guidance explaining the cask purchase process and the importance of buyer due diligence.
10. Seek legal advice from an expert who knows the sector and its nuances.
Investing in a whisky cask is like any other investment. Do your homework, ask the right questions and speak to trusted experts before making your decision.
Listen to Brodies' podcast 'Fraud in the Scotch whisky cask sector' now.