World exports of Scotch whisky are currently estimated at over £5.9 billion. Over the last 10 years, the secondary market of brokers offering investors the chance to buy and sell casks of whisky has increased significantly. However, the fast growth of this market has led to challenges for investors and widespread concerns about the potential for fraud. In this article, we explore some of the current challenges in the market and discuss our recommendations for investors interested in this unusual asset class.
The transfer of legal title to casks
The storage of cask whisky in excise warehouses is governed by the Warehousekeepers and Owners of Warehoused Goods Regulations 1999 (WOWGR). WOWGR means that cask whisky can be stored, bought and sold in duty suspension, with duty charged when a cask is released for bottling. Under WOWGR, warehouse owners and entities which hold whisky in warehouses pursuant to their trade must be authorised by HMRC. Private individuals can buy, sell and store whisky casks in excise warehouses, provided that they do not do so in the course of business (in which case they would require a WOWGR licence).
It is standard industry practice for the transfer of legal ownership in casks stored in duty suspension to take place through use of a ‘Delivery Order’. While the format of a Delivery Order varies, the term broadly describes the process of notifying a warehouse owner of a change in cask ownership so that the owner can update its inventory and comply with HMRC reporting requirements. The Delivery Order is accepted in the industry as evidence of legal title to a cask. Importantly, other documents purporting to demonstrate ownership may have no legal effect.
One of the unintended effects of WOWGR is that some warehouses are unwilling to store casks on behalf of private investors without a WOWGR licence. In this situation, an investor is unable to obtain a Delivery Order from the warehouse owner. Some brokers (which do hold WOWGR licences) therefore offer to store casks in a warehouse on the investor’s behalf. Importantly, in this scenario, legal title does not transfer to the investor but remains with the broker. While this transaction structure is used by several reputable brokers, it can cause issues for investors who are unable to demonstrate legal title to a cask if a third party disputes ownership or a broker becomes insolvent.
Concerns regarding fraud
The rapid growth of the secondary investment market has seen a variety of new brokers offering investors the chance to buy and resell casks with the promise of high returns. In November 2023, the Advertising Standards Authority issued an enforcement notice to cask investment firms after finding “misleading and socially irresponsible” advertising. The enforcement notice required all advertising to state that whisky cask investments are unregulated and that the value of investments can go down as well as up.
As well as promising high returns on investment, some brokers have been criticised for relying on WOWGR to avoid transferring legal ownership of casks to investors. Where legal ownership is not transferred to an investor, but is instead retained by the broker, this can increase the risk of fraud and insolvency. In 2022, a British man was arrested by the FBI in connection with defrauding US investors of $13 million through various cask investment schemes. In July 2024, the City of London Police launched a fraud investigation into Cask Whisky Ltd, a cask trading company which is now in liquidation.
Lack of market regulation
A further consideration for investors is the lack of a regulatory body. Neither the Scotch Whisky Association (which regulates the production, marketing and export of Scotch whisky) nor the UK Financial Conduct Authority has responsibility for the secondary investment market. Investors faced with issues therefore have no recourse to the Financial Services Compensation Scheme.
Avoiding common pitfalls for investors
These market challenges mean that buyers should be cautious and take proper advice before entering into transactions:
- Due diligence: We recommend investing time to undertake comprehensive due diligence on the seller and cask. Investors should consider using brokers and sellers with strong track records in the industry. Buyers should carefully consider the provenance of and legal title to the cask - is there an unbroken chain of ownership evidenced by previous Purchase Orders? Where a seller is located outside of the UK, it may be considerably harder to seek legal redress if title issues arise at a later date.
Buyers should also request a ‘regauge’ to ascertain the amount and strength of the spirit remaining in a cask. Are there any restrictions on naming the whisky? Certain distilleries carefully control naming rights and the value of a cask can be depressed if it has to be bottled under a trade name.
- Legal title: Buyers should ensure that they obtain a Purchase Order as part of the transaction. Furthermore, a well-drafted purchase agreement can protect a buyer in the event that legal title to a cask is disputed at a later date. Particular care should be exercised where a seller or broker retains legal title to a cask and/or structures the transaction through a trust or bailment arrangement.
- Changes to WOWGR: Changes to the WOWGR regime coming into force in March 2025 will remove the requirement for owners of goods in excise warehouse (who hold goods in the course of their business) to hold a WOWGR license. Warehouses may therefore be more willing to accept casks owned directly by investors. Investors should review their investment portfolio and consider obtaining a Purchase Order for any casks currently in the ownership of a broker.
- Insurance: Adequate insurance arrangements can often be overlooked. Where a cask is to be covered by the warehouse owner’s policy, a buyer should verify that coverage extends to the entire purchase price of the cask. If a buyer is responsible for arranging its own insurance, they should work closely with a specialist broker to ensure the coverage covers the variety of risks associated with cask ownership.
