Bar News - June 21, 2013
Municipal & Governmental Law: Vehicle Export Schemes Harm Dealerships and ‘Straw’ Buyers
By: Michael Gunnison
Municipal government lawyers should be aware that New Hampshire has become a target for vehicle exporters.
Many local government officials have witnessed recent activities, such as car registrations, that are part of illegal automobile export schemes. These schemes, which victimize local car dealerships but earn substantial profits for out-of-state swindlers, are now squarely on the radar of the NH State Police and the US Department of Homeland Security.
In a typical case, an exporter solicits a number of local residents to make “straw” purchases of new luxury vehicles at local car dealerships, in exchange for a few hundred dollars. After purchasing the cars with the exporter’s funds, these local straw buyers are directed to file state title applications and to register the cars locally in their own names.
The cars (usually high-end BMW, Land Rover, Mercedes and Porsche models) are immediately transported by truck to ports in places like Long Beach, Calif. Once the titles are issued by the state and mailed, the straws are directed to forward the titles to the exporters. Upon receiving the titles, the exporters use them, together with Shippers Export Declarations (SEDs), to make it appear that the cars are “used” and, therefore, eligible for export under US Customs Regulations. The cars then ship via freight forwarders to countries such as China, where new luxury vehicles can fetch double their US sticker prices, or more. So, what’s the problem?
First and foremost, the export scheme may violate federal laws. In criminal cases recently prosecuted in US District Court in New Hampshire, United States v. Ku and United States v. Hsu, two California men were charged with mail fraud (18 U.S.C. § 1341) and misusing SEDs (13 U.S.C. § 305(a)(2)) for operating such a scheme. After fraudulently acquiring New Hampshire drivers’ licenses and enlisting a number of local straw buyers, the defendants made material false representations to automobile dealerships to purchase cars they otherwise could not have purchased if their intention to export was disclosed. The scheme was intended to circumvent the diligence of car dealers, whose dealership agreements with manufacturers require them to prevent sales for export to overseas markets.
When criminal rings use straws to buy up and export the dealers’ stock in trade, the authorized dealers are victimized, as they lose all their expected service business, and they may incur a variety of manufacturer-imposed penalties. These include loss of bonuses, a reduction in future car allocations, and monetary penalties called “charge backs” – a form of liquidated damages. For these reasons, authorized dealers often require customers to sign statements at the time of sale attesting that the cars will not be exported.
If out-of-state fraudsters can enlist straws from the local dealers’ territories to buy the cars for them and falsify documents, it is more likely they will succeed in thwarting the dealers’ efforts to prevent losses and maintain their businesses. In the Ku and Hsu cases, the scheme operators lied to the dealers, obtained titles by submitting false documents to the NH Division of Motor Vehicles (NH-DMV), and instructed their straw buyers to do the same.
The scheme operators’ goal of obtaining titles from NH-DMV is essential to the success of the schemes. The Code of Federal Regulations (CFR) allows owners of used vehicles to ship their vehicles to overseas destinations. To ship a used vehicle, the export declaration or SED must be accompanied by a copy of the automobile title, which establishes ownership and demonstrates that the vehicle is used. Everything from soliciting straws, falsifying DMV paperwork and lying to local car dealers is designed to obtain titles – the key documents that allow the cars to ship abroad. The title makes it appear to US Customs that a “used” vehicle is being shipped.
In fact, 19 CFR § 192 defines a “used” vehicle as “any self-propelled vehicle the equitable or legal title to which has been transferred by a manufacturer, distributor, or dealer to an ultimate purchaser” (emphasis added). The CFR further defines an “ultimate purchaser” as “the first person, other than a dealer purchasing in his capacity as a dealer, who in good faith purchases a self-propelled vehicle for purposes other than resale.”
In a case where an exporter acts in bad faith to obtain new cars for resale abroad, the cars clearly do not qualify as “used.” But when the scheme operator presents to US Customs the title, along with the SED, the title serves as a smokescreen to evade the customs regulations and facilitate an export that could not lawfully take place under the applicable CFR provisions. These exporters know that at our busiest ports, US Customs will ordinarily judge whether a vehicle is “used” simply by checking whether the car is titled in New Hampshire or another state.
New Hampshire is an attractive venue for export schemes to operate, because there is no sales tax or mandatory insurance. This means that the perpetrators incur fewer up-front costs when they operate here. Practitioners in New Hampshire may be consulted by clients who have been solicited to participate in an export scheme as a straw buyer. Other clients may potentially see a profit to be made by operating an export scheme themselves. In both cases, the clients’ best course is to resist the temptation to make a quick buck.
Straw arrangements are used by criminal organizations in a wide variety of situations to gain financial advantage by means of deception. Accordingly, anyone solicited to act as a straw should decline the invitation. Some exporters specifically target people of limited means to do their bidding, including people who receive some form of public financial assistance. As one might expect, they stand to lose their benefits if municipal officials discover that they have recently registered several new Porsche Cayennes in the course of a few months. The straw victims may also face state title fraud charges, as well as serious tax problems.
Export schemes will continue to attract law enforcement attention for the foreseeable future. In addition to the harm caused to local businesses, federal authorities will appropriately scrutinize the source of funds used to purchase the vehicles. International money launderers are constantly on the lookout for opportunities to launder proceeds of international organized crime, and export schemes offer obvious opportunities.
While no illicit source of funds was detected in the Ku and Hsu cases, and no jail time was imposed at sentencing, the defendants are now convicted felons and subject to federal probation supervision. In addition, 13 luxury cars valued at a total of $750,000 were seized at the port of Long Beach and forfeited in administrative proceedings. In sum, these export schemes cheat local car dealerships, disrupt DMV operations, and leave everyone, including straw buyers, open to many potential problems down the road.
Michael J. Gunnison is an Assistant US Attorney in Concord. The views expressed in this article do not necessarily represent the views of the Department of Justice or the United States.