Once Again, Know Your Customer

The Federal Trade Commission’s Red Flags Rule requires a dealer to know its customer in a credit transaction.  For a number of reasons, it is important that a dealer know its customers no matter what types of transactions are going on.  Let’s take a recent example.

Thirty used car dealers recently found out the unfortunate consequences of doing business with bad guys.  On December 15, 2011, the federal government filed a 75-page civil forfeiture action which stems from an investigation by the DEA and other federal agencies.  The complaint filed in the United States District Court for the Southern District of New York alleges that from January 2007 until early 2011 persons working with Hezbollah, a designated Foreign Terrorist Organization, developed an elaborate scheme to launder money by transferring funds from Lebanon to the US in order to purchase used cars, which were then shipped to West Africa and sold for cash.  The proceeds of the car sales were then transferred, along with proceeds from narcotics trafficking and other crimes, to Lebanon. The lawsuit seeks the forfeiture to the government of all property that is traceable to the money laundering offenses, including the assets of the thirty used car dealers.   

According to the complaint, nearly $250 million was wire transferred from Hezbollah to the dealers in Connecticut, Florida, Massachusetts, North Carolina, Maryland, Oklahoma, Georgia, Tennessee, Ohio, New Jersey, and Alabama. Through this forfeiture action, the government has frozen the dealer bank accounts, it seeks to take the dealers’ assets, and it essentially has shut down those dealers.  The used car dealers’ assets and properties are alleged to have been involved in illegal money laundering transactions.  

What did these dealers know and when did they know it?  At this stage of the case, it is hard for an outsider to know that.  What we do know, however, is that without having to file criminal charges against these dealers, the government has put them out of business by freezing their assets.  These dealers have learned the hard way about the awesome power of a government forfeiture action.

The government’s forfeiture power can extend to many types of assets owned by a dealer.  Real or personal property involved in a money laundering transaction may be forfeited to the United States.   The term ‘involved in’ has been liberally interpreted by the courts.  Thus, property subject to forfeiture can include the land on which the illegal transaction occurred, a bank account to which the proceeds were deposited, vehicles allegedly purchased with the proceeds, and the like.  While the United States Supreme Court has upheld various constitutional limitations on the governments forfeiture authority, the ability still exists for the government to seize and forfeit an entire business based upon violations of the money laundering statutes which occur at the business. 

Do you think that the government has a heavy burden of proof to wield this awesome weapon?  Think again. To support a civil forfeiture of property, the government need only show that there is probable cause to believe that there is a substantial connection between the property and the criminal activity.  The burden then shifts to the owner of the property to demonstrate otherwise.  This less rigorous standard of proof in civil forfeiture cases, combined with the government=s ability to seize or freeze assets pending a resolution of the forfeiture action, give the government tremendous power to shutter a business before it can even mount a defense.

This case should be a cautionary tale to any dealer that sells vehicles to buyers outside of the United States that has ever asked the question, “Once I have the buyer’s funds in my bank account, what could go wrong?”  The thirty dealers who are now out of business can answer that:  “plenty!”

  1. Franchised dealers who sell new cars to out-of-country buyers risk violating their franchise agreements and subjecting themselves to penalties from their franchisors.

  2. But even for new car dealers selling used cars to foreign buyers, and for independent dealers, the dangers are very real.  Make sure that your employees have been trained in cash reporting and the prevention of money laundering.

  3. While following your Red Flags Rule compliance procedure with a foreign buyer may be complicated since US data bases that you use may not help, you should nevertheless follow it to the extent you can. 

  4. Make sure that you know the identity of the buyer, and make sure that there are no signs of a suspicious transaction. Stop any deal that is suspicious.

  5. An OFAC check is a must.  You may not do a transaction with someone on the blocked persons list of the Office of Foreign Assets Control.

  6. Make your parts department aware of the dangers.  The same processes that landed these dealers in hot water can be used for parts purchases.  There are markets for parts in foreign countries, so bad guys can buy parts in bulk for redistribution in foreign countries to launder money. 

Perhaps the evidence will show that the used car dealers involved in this case knew exactly who they were dealing with and what they were doing.  Or the evidence may show that they were careless in dealing with the foreign buyers that turned out to be bad guys.  It does not matter.  Through civil forfeiture, the government has put them out of business.  Doing business blindly with someone whose money is transferred to your account is a bad practice that can cost you your dealership.  Always know your customer