What the finance industry should know
For finance company executives that do business with dealerships, it’s imperative to have answers to the questions below, especially to help spot problems at dealers that appear to be profitable well-run businesses.
• What are the most common types of dealership fraud?
• How many dealerships are prosecuted each year?
• What role does the FBI, FTC, and other law enforcement agencies play?
What appears to be a profitable dealer relationship may actually be the result of illegal money laundering or a Ponzi scheme. Knowing what to look for is imperative for both sales and risk management teams.
Part I: Comparing enforcement responsibilities: Investigation vs. Prosecution
It’s important to understand investigation and prosecution of fraud are two distinct responsibilities often managed by different organizations. The FBI, for example, handles the investigation of criminal activity at car dealerships. It, however, does not manage the prosecution in court. Actual prosecution is managed by a separate office; the Office of the US Attorneys (aka. USAs). Both the FBI and USAs are sub-organizations under the larger Department of Justice (DOJ). It is fair to say the DOJ manages both the investigation and prosecution of car dealerships. Of course at the top of the DOJ is the US Attorney General (USAG).
While the FBI is the most famous criminal investigation agency, in general the FBI does not work alone. FBI investigates dealership crime in collaboration with other agencies. Those other agencies may not be part of the DOJ. For example, FBI collaborates with the IRS, US Postal Inspector, and state and/or local law enforcement, such as the DMV or Sheriff Department. All these organizations are jointly responsible for the enforcement of legal dealership behavior.
Where does the FTC fit in? The FTC is another agency outside of the DOJ. Contrasting to the FBI which focuses on outright criminal activity like theft or money laundering, the FTC is responsible for more subtle issues like deception and ensuring dealerships operate fairly and honestly in the treatment of consumers. FTC investigates issues like honest advertising, proper disclosures, fairness, and transparency. This is done through the “Consumer Protection Unit”.
Further contrasting to the FBI, the FTC can do both investigation and prosecution of car dealerships! The FTC has its own in-house attorneys to handle this. The limitation is the FTC can only prosecute a dealership in civil court, but not criminal court. This means the FTC can only sue dealerships for outcomes like monetary relief and/or injunctions. If an issue merits criminal prosecution (e.g. someone may need to go to jail) then the FTC will refer it to the Department of Justice (DOJ) which can prosecute a dealership in criminal court through the US Attorney’s office.
It is also important to remember the Department of Justice and the Judicial Branch of government are very different things. The Judicial Branch refers to the administration of the Federal Courts and its judges; the US Federal Judiciary System. Meanwhile, the entire DOJ and FTC are part of the Executive Branch of government.
Part II: Recent Federal court cases: Summary and Trends
I combed through DOJ and FTC records to find court cases about car dealerships and studied the results. Here is a summary of what I found.
From a thousand DOJ documents mentioning “dealership” I found 56 unique criminal court cases taking place between 2013–2019. Here are a few highlight statistics:
• 75 percent of the time that DOJ prosecuted a case involving a car dealership, the car dealership or its personnel were accused of defrauding another party, be it the government, customers, or lenders.
• The other 25 percent of the DOJ cases held the car dealership and its owners as the victim of fraud; either the result of employee embezzlement or of a fraudulent customer that used a stolen identity to acquire vehicles.
• $76 million is the largest dollar amount of a fraud case; related to a flooring and loan fraud scheme in Illinois in 2014 that impacted 18 lenders.
• I saw a guilty plea or conviction in about 80 percent of the cases. About half of the remaining are recent announcements since 2018 and possibly still pending.
Tax evasion/money laundering was an issue in more than 33 percent of cases where the dealership defrauded others. In this kind of case the defrauded party is the United States government. A common theme among these was dealerships not honestly filing IRS Form 8300.
• The most common type of fraud activity overall was “general theft/deceit” impacting over 40 percent of cases where the dealership defrauded others. It is characterized by outright theft of money or cars. See the data table below for a plethora of examples.
• The DOJ seems to complete about eight dealership cases a year based on the “last mention” in press for each case (noting some cases are still going so this statistic may change).
I have created two tables summarizing the DOJ cases. You can access a copy at www.generalforensics.com/news or just email me for the XLS file. One table shows cases where the dealership committed fraud against another party. The other table shows cases where the dealership is the victim of fraud.
From the FTC I reviewed over 125 press releases and legal complaints mentioning “dealership”, “auto”, or similar between the years 2013 and 2019. I counted 31 unique civil enforcement actions completed against dealerships and one case that is still active and pending.
Of the 31 cases completed, eight yielded a monetary fine. The other 23 yielded a “consent order” which is a sort of settlement, where the dealership promises to be careful and not violate a consumer protection rule in the future, moreover, without admitting guilt of any current wrongdoing.
You will notice the FTC cases are about more subtle abuses and law violations. In general, the issues at hand are not so outrageous as the DOJ criminal cases. However, some cases involve brazen acts like a dealership falsely telling consumers their vehicles are subject to a safety recall in order to get them into the dealership. Overall the FTC cases are characterized by a few major themes:
• Fine print (deception) violations about the product, service, and price
• Non-disclosure of costs associated with a sale or payment contract
• False claims a vehicle is “safe” when it may have an outstanding recall notice
• False claims that all consumers qualify for an offer regardless of credit
As these cases show, to properly assess a dealership it is important look beyond sales volume and charge off rate to know if the dealer may be involved in fraud or illegal activity. By understanding the issues that law enforcement is concerned with (like tax evasion schemes) we can better monitor our own dealers and choose good dealer partners for the long run.
A final note: there are many more cases to review. Each of the 50 individual state “Attorneys General” also manage prosecutions, and we haven’t started on those yet. In the meantime, I hope this summary of federal actions will be a valuable resource. I welcome hearing your thoughts. You can reach me at [email protected] or 949-343-6792.