Scams and schemes create enforcement morass at ports

November 12, 2018 12:00 AM

AUTOMOTIVE NEWS ILLUSTRATION

Range Rovers, above right and getting searched at left, are in demand on the black market at U.S. ports, top.

On August, U.S. Customs and Border Protection officers visited two freight forwarders near Los Angeles. They were accompanied by Lou Koven, a special agent with the National Insurance Crime Bureau, and Terrill Bealey, an investigator with the California Highway Patrol's Foreign Export and Recovery Team.

They were looking for new vehicles that intelligence indicated were stolen and ready to be shipped out of the country before their loans had been paid off.

They found nearly 60 cars on the premises, where shipping agents prepare the export documents required by U.S. Customs and load the vehicles in containers to be trucked to the massive Los Angeles/Long Beach port complex.

Back in their office, Koven and Bealey ran the VINs through the insurance crime bureau, national law enforcement and CarFax databases to match against stolen-car reports and look for other clues of suspicious activity.

After checking with finance companies to verify a first-payment default, Bealey submitted stolen-vehicle reports, and Customs quickly placed holds on 23 Mercedes-Benz GLS 450 and Land Rover Range Rover SUVs, prohibiting the forwarder from moving them.

The high-end vehicles were then seized, brought to a Customs warehouse to be checked for narcotics and other contraband and finally sent to a police tow yard, where they were released to lien holders.

Customs, in announcing the recovery Oct. 31, said the vehicles had an estimated combined value of nearly $1.9 million.

It's all in a day's work for CBP's outbound enforcement team at the twin ports, where 700 to 1,200 vehicle titles are reviewed each day to ensure compliance with U.S. export laws and regulations. The agency's automated targeting system uses anomaly detection to sort through vast amounts of cargo information to flag suspicious shipments.

Demand for luxury items, including cars, over the past decade has increased because Asia has created more superwealthy individuals who are accumulating wealth at a faster pace than anywhere else.

Black market

The insurance crime bureau is a nonprofit agency that works with law enforcement and the insurance industry to prevent theft and fraud. Koven and Bealey are embedded with CBP's local auto desk and have helped train officers in how to detect signs of vehicle theft in export paperwork.

Their challenge is separating legitimate shipments from illegal ones in the murky area between criminal fraud and breach of private contracts, in which automakers try to discourage the export of new vehicles bought at U.S. dealerships and criminals try to sneak vehicles out of the country in violation of a law that bans exports of vehicles with pending liens.

The activity is driven by wealthy buyers in China and Russia willing to pay a large premium for certain luxury vehicles that are scarce or have features that aren't readily available at home, according to law enforcement officials and attorneys familiar with the black market.

At the top of the list are the Mercedes GLS 450, especially in black, Range Rovers, BMWs and, to a lesser degree, Lincoln Navigators, Cadillac Escalades, Chevrolet Tahoes and Chevrolet Suburbans.

"They're not looking for the VW Passat," said Aaron Jacoby, head of Arent Fox's automotive practice.

Around the country, specialized brokers feed this demand using a variety of schemes to buy new vehicles from dealerships and evade corporate rules or law enforcement.

In many cases, the deals aren't illegal, but they may violate automakers' anti-export policies.

Koven, a vehicle theft investigator with the Los Angeles Police Department for 35 years, said he and his colleagues only go after exports of vehicles that are actively financed, in cases that often involve false documents showing the vehicles are paid off, or in cases of identity theft.

The intermediaries typically engage straw buyers who answer ads on Craigslist, eBay and classified sections of local newspapers offering $1,000 to $3,000 to buy vehicles from dealerships, either with their own credit and promises to pay off the loan or cash they are provided for the down payment, Koven told Automotive News.

"They really target older people who may be on fixed incomes, have good credit" and are looking to boost their income, he said. Then they disappear, leaving the victims stuck with the payments.

In some cases, brokers set up shell corporations that pose as leasing companies for Uber operators or other fleets.

Car theft rings typically spread their purchases among many dealerships to avoid raising the stores' suspicion.

Fraud defense

Dealerships can take steps to minimize the chance of export scams — or any fraud — that could lead to violations of their franchise agreements, attorneys and fraud experts say.

Investigate any sudden sales uptick for a particular type of vehicle, especially if the same person handled each sale.

In identity theft cases, there often are discrepancies between names and other information. Do a follow-up customer survey. If the buyer expresses ignorance of the deal, there is a problem.

Use automated risk management systems that employ artificial intelligence to learn patterns of misrepresentation and prevent default on high-risk applications.

Accept only identification that clearly shows the person's face.

Verify employment and income directly with the employer.

Take advantage of fraud awareness training and supporting material offered by captive finance companies.

Pay attention to alerts from finance companies about fraud trends in your region and brief all sales and finance personnel.

At the port, criminals may take a chance and simply smuggle the vehicles by misrepresenting the containers' contents on the export declaration. Otherwise, they generate fake documents to convince Customs that the vehicles have been paid off and are eligible for export.

Scammers often scan a paper title on which the lender has marked that a lien was satisfied and use software to alter the bank, owner, VIN, address and other information before submitting it to a state division of motor vehicles to have the lien removed from the records.

In most cases, the dealerships take the hit unless they can show that the lender knew of the straw purchase, was sloppy checking credit information or was somehow complicit in falsifying information, Jacoby said.

No trade law prevents a person who owns a car free and clear from shipping it overseas. But automakers frown on the practice because it's difficult to respond to recalls and warranty issues in terms of contacting the owner, having the correct parts on hand and complying with regulations when vehicles are built differently for each market. It also undercuts sales for dealers in the foreign country, Jacoby said.

Dealerships are prohibited under their franchise agreements from exporting vehicles themselves or from knowingly selling to someone who is going to export.

To police those contract provisions, automakers aggressively track VIN activity at ports. It is common for them to try to claw back incentives in export cases, which can cost a luxury store hundreds of thousands of dollars, said Jim Appleton, president of the New Jersey Coalition of Automotive Retailers.

"This can wreak havoc with a dealer's balance sheet," he said.

To avoid liability, many Ferrari and other exotic brand dealers ask customers to sign an agreement that they won't export the vehicle for one year, Jacoby said.

Sometimes, dealerships are complicit in an export scheme, or someone in the sales department takes a kickback to look the other way on suspicious transactions, such as when the same buyer repeatedly buys the same model in a short period.

But most of the time, dealerships are duped and argue they shouldn't be forced to police buyer behavior because they have no way of knowing whether someone plans a post-purchase export.

Fewer cases against dealers

The situation is better for stores in California and New Jersey because the law requires an automaker to prove that the dealer knew, or should have known, that the vehicle was going to be exported.

In those states, at least, automakers today don't bring as many export cases against dealers.

"Now they are charging back and battling in the more obvious cases where they have a real chance of proving it versus before they would try and charge back all the time," Jacoby said.

The aggressive enforcement often puts Customs in the awkward position of helping automakers enforce their private contracts.

"This whole effort to squash the gray market keeps recurring in many manifestations," said lawyer Robert Becerra of Miami. "The auto industry is trying to control their distribution channels to the ultimate detriment of consumers."

In the last three years, the Justice Department has scaled back prosecutions of straw-buyer export cases unless there is clear evidence of criminal activity.

In February 2017, a jury in federal district court in New York ruled against prosecutors in a civil forfeiture lawsuit. It ordered the government to return luxury cars and $3 million in cash that was seized from the bank account of Efans Trading Corp., of Memphis, Tenn.