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Millions Of Dollars Seized Along With BMWs, Porsches And Mercedes In Government Crackdown On Vehicle Exports
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(Image credit: Getty Images Europe via @daylife)
When Edward Sweet went to pick up his new car at McDaniel’s Porsche, a luxury car dealership in Columbia, S.C., one Saturday last April, he didn’t need to bother with financing. After filling out the required sale paperwork and handing over a bank check for $70,528, Sweet drove off the lot in a brand new black Porsche Cayenne sports car.
Most people who just bought a sexy new sports car would probably want to take it for a spin. But Sweet drove directly to a Lowe’s parking lot about a mile away, where he and a friend, Martin Burke, waited for about an hour until a vehicle transport truck showed up.
As the men began loading the Porsche onto the truck, U.S. Secret Service agents and others from South Carolina’s Electronic Crimes Task Force closed in, seizing the car before it could be transported to a port in New Jersey, where it was to be loaded on a ship and exported to China.
The Porsche is one of hundreds of luxury vehicles seized in recent months by the federal government in a multi-state crackdown on vehicle brokers who bag huge profits by using straw buyers to purchase cars in the U.S. and then reselling them in China, often for twice the price. In addition to parking lots full of Porsches, BMWs, Mercedes and Range Rovers, the U.S. has seized millions of dollars from the bank accounts of brokers and their affiliates around the country, claiming the funds represent ill-gotten gains from alleged money laundering and wire fraud schemes.
In recent weeks, the government has begun forfeiture proceedings in at least five federal lawsuits in South Carolina, Texas and Ohio. U.S. attorneys involved in the cases declined to comment, citing ongoing criminal investigations, and other U.S. officials were unavailable because of the government shutdown.
The widening probe follows the first successful prosecution of a major vehicle-exporting operation last May in New Hampshire, where two California men pleaded guilty to federal mail fraud charges and violations of U.S. customs laws. The defendants, Frank Ku and Danny Hsu, admitted to scheming to export 93 vehicles worth more than $5.5 million that they and people they hired bought in 16 states. They were fined $5,000 and sentenced to three years probation. The government recovered 14 of the vehicles at California’s Port of Long Beach.
Demand for luxury cars and SUVs is exploding in China, as Chinese buyers are becoming more affluent. But prices are often at least double what the vehicles would go for in the United States because of tariffs and other fees and because that’s what the market will bear. The Porsche Cayenne, for example, has a base price of about $150,000 in China, compared to about $50,000 at U.S. dealerships. Even with the added costs of shipping a car overseas, exporters can make a handsome profit by undercutting legitimate dealerships in China.
Using a broker to buy a vehicle is perfectly legal in the United States. Many individuals and companies purchase their cars through an agent. It gets tricky, however, when the broker intends to resell the vehicle to a buyer overseas.
Vehicle manufacturers legally export more than 1.5 million U.S.-built cars a year to more than 200 countries. In 2011, that included 136,000 exports to China, five times the number exported in 2009. But manufacturers generally prohibit their U.S. dealers from selling new cars to individuals or companies intending to resell them outside the U.S. because such exports hurt their foreign dealer networks and make it difficult to issue recall and safety notices. In addition, regulatory standards differ by country. China, for example, has different fuel standards, so cars sold there require a specially designed fuel filter. Cars intended for sale in the U.S. that are exported without the manufacturers’ authorization might perform differently in foreign markets, potentially harming the manufacturers’ reputation.
“It’s illegal for anybody other than an original equipment manufacturer to export new cars overseas,” said BMW spokesman Kenn Sparks. “We remind all our dealers to make sure they know it’s a violation of their franchise agreement” to sell cars to anyone who intends to export them. In fact, manufacturers often penalize dealers that violate such restrictions, even unwittingly, by charging them fees, revoking incentives and limiting the number of vehicles they receive from the factory in the future. To combat the risk, many dealerships keep a list of known exporters and make new car purchasers sign “no-export agreements.”
Used cars are different, however. U.S. Customs laws and regulations allow anyone to export a used vehicle, as long as it is properly titled and is accompanied by the necessary paperwork. U.S. officials argue that the targeted brokers have devised elaborate schemes to circumvent the manufacturers’ no-export policy by generating a trail of transactions intended to portray new cars as “used.”
For example, brokers often use straw buyers recruited on Craigslist or other social media sites to make the purchase on their behalf using funds drawn on a local bank. This misleads the dealership into believing that the straw buyer is the true ultimate purchaser of the vehicle, and that the vehicle is not being purchased for export. The straw buyer turns the car and title over to the broker and pockets a commission of several hundred dollars.
Josh Widlansky, a Florida attorney representing Automotive Consultants of Hollywood, a California vehicle broker whose bank assets were seized in Ohio, says his client isn’t breaking the law. “We perceive it as a legitimate business. My client buys cars and sells cars. It’s no different than other dealerships. These are certified vehicles, there are no funny loans, the cars are fully paid for when they leave the dealership. He sells them to his clients who do whatever they do with the cars.”
Widlansky also argues that the government is stretching U.S. Customs laws to create a case against vehicle exports. “The statute has nothing to do with it being illegal to export vehicles. The legislation was created to stop the export of stolen vehicles. Now the government wants to fit a square peg into a round hole. That is not the intent of the statute. In fact, there’s a lot of language that says it’s ok to export as long as it’s not stolen.”
Customs officials have said in documents related to Automotive Consultants’ case that vehicles bought for immediate resale overseas are still considered new and thus cannot be exported. In the end, it’ll probably be up to a judge to decide the definition of a “used” car and who is the “ultimate buyer.”
