When U.S. Secret Service agents showed up at Jaguar Land Rover Cincinnati, a customer wearing a T-shirt and shorts who claimed to be a wealthy energy broker was about to buy a Range Rover with a cashier’s check for $93,005.
The agents watched the deal close, then followed the buyer to his home. There, they learned he was unemployed and lived with his mother, court documents show.
The man was buying the Range Rover for a company called Automotive Consultants of Hollywood. He was to leave it at a storage yard a few days later in exchange for $500. Had the agents not seized the SUV, they say, it was destined for a buyer in China who didn’t want to pay the marked-up prices at Land Rover dealerships there.
Authorities, who say these types of transactions happen frequently, began working last year to stop the increasing flow of high-end cars overseas. But they’ve run into a significant obstacle: What the exporters are doing may not be illegal — even if the government and the automakers don’t like it, and even if so-called straw buyers are sometimes deceptive.
Most automakers prohibit sales to exporters and have charged dealers who violate the bans more than $30 million in recent years, according to court testimony.
“What they’re complaining about is competition,” said Ely Goldin, a Pennsylvania lawyer representing several exporters that have had property seized. “Why should somebody who goes into a dealership and pays top dollar for a car be legally prohibited from selling the car to whoever they want to sell it to?”
The Secret Service, customs agents and authorities in at least 11 states have been cracking down on export operations but with relatively little to show for their efforts.
They experienced a big setback in April, when a federal judge in Ohio ordered the government to return the Range Rover, a $64,000 Porsche Cayenne and $1.2 million in cash it had taken from Automotive Consultants of Hollywood. The judge, Sandra Beckwith, said prosecutors failed to provide enough evidence that the company had broken any laws. Because the vehicles were fully paid for, Beckwith also was skeptical that the dealerships, which prosecutors were portraying as victims, had suffered a loss.
One thing is certain: Exporting cars to China can be extremely lucrative, even considering the cost of obtaining and shipping them. That’s because many automakers set their Chinese sticker prices at double or triple what U.S. buyers pay. A BMW X6, for example, starts at $61,900 at U.S. dealerships but 1.06 million yuan, or $171,000, in China.
Thus, exporters say they are merely enjoying the benefits of a free market and the arbitrage opportunities that high prices and demand in China create.
“What you have is the federal government protecting foreign manufacturers’ profit margins,” said Josh Widlansky, a Florida lawyer representing Automotive Consultants of Hollywood, which says it locates vehicles for overseas clients but does not actually export any vehicles itself. “You have totally noncriminal conduct that the government is criminalizing because of these private contracts between the manufacturers and the dealerships.”
“What you have is the federal government protecting foreign manufacturers’ profit margins.”
For dealers, exporting represents a mixed bag. Sales to exporters are often easy, fast transactions at sticker price. But those who knowingly sell to exporters — or don’t do enough to screen them out, even at the risk of missing their end-of-month target — can face severe consequences from the factory. These include monetary penalties known as chargebacks, the loss of future inventory or even termination of their franchise.
BMW, Land Rover, Mercedes-Benz and Porsche — four of exporters’ most-favored brands — penalized their U.S. dealers with chargebacks totaling $30.4 million from 2008 through 2013, Secret Service Agent Morgan Morgan, who investigated the Ohio case, said during a March court hearing. Land Rover accounted for $5.6 million of that amount.
The automakers estimated their losses to be about five times the penalties they have levied, Morgan testified. And that may be a conservative figure.
One company, Efans Trading Corp., was involved in the export of 2,000 high-end vehicles worth more than $80 million to be exported to China in 2012. Efans expected to do 3,000 vehicles last year, Morgan said, before the government seized millions of dollars from its accounts and dozens of the vehicles.
Automakers maintain lists of known exporters and bar their dealerships from doing business with them. But beyond checking that list, many dealers say they have few ways to separate straw buyers from legitimate customers whom they don’t want to turn down.
Goldin, the Pennsylvania lawyer, said he is certain that some dealers knowingly deal with exporters to boost their sales numbers, then claim they were duped if audited by the factory.
At another Cincinnati dealership, Joseph Porsche of Kings Automall, one salesman sold cars to nine out-of-state buyers recommended by one man who now appears on Porsche’s list of exporters, according to court documents. All of the buyers paid with cashier’s checks.
Porsche has issued $4,800 in chargebacks against the dealership, Morgan said, including $600 related to those nine cars, five of which were located later in China. The store’s general manager, Bill Winstel, declined to comment.
Automakers’ policies for dealing with dealerships that sell to exporters vary. Porsche issues a chargeback beginning only with a dealership’s third such sale in a given year, Morgan said.
BMW and Land Rover each sent lengthy letters to their U.S. dealers in recent months outlining more stringent penalties for selling to exporters. The BMW letter, obtained by Automotive News, says dealerships linked to exported vehicles could forfeit bonuses and future vehicle allocations if they can’t demonstrate adequate due diligence. Even the first violation could be grounds for franchise termination if the circumstances are particularly egregious, BMW of North America CFO Stefan Sengewald warned.
“This practice is a serious violation of BMW center agreements,” Sengewald wrote. He said authorities are investigating, among other allegations, “potential bribery or kickback schemes involving sales by BMW center personnel.” “Center” is the BMW term for a dealership.
The letter also listed a series of warning signs that dealers should watch for in a potential buyer, such as traveling from far away to buy a specific model or paying in cash with no trade-in and no test drive. It says BMW could distribute fewer X5s and X6s to North America if many of them end up in China, where they are especially popular.
Original Article here: