Under normal circumstances, the legal issues related to selling a vehicle on the export market have to do with titling and registering a vehicle as well as customs and export regulations. However, there are other legal issues that may arise when buying a car in the United States and shipping it overseas for sale.
Recently, buyers of vehicles in the United States have been the subject of considerable press coverage concerning criminal investigations against exporters who primarily were engaged in selling luxury vehicles purchased in the United States for shipment overseas.
In 2014, there was a wave of news reports of crackdowns by Federal and State law enforcement on individuals engaging in what is known as arbitrage.
For those unfamiliar with the term, arbitrage means: “the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.” (1)
For anyone engaged in buying a car from the United States and selling it to an underserved market, this is arbitrage. However, buying a car from an auction and shipping it overseas is what we can consider a good (legal) form of arbitrage.
There are some forms of arbitrage, which could skirt the boundaries of some very technical laws in the United States, and that involve purchasing a vehicle from a dealer and selling it abroad through a strawman buyer.
The likely reason for this crackdown rests on the fact that these export schemes may violate federal laws. Particularly, the use of straw buyers who pose as consumers who will use the vehicle in the United States. The reason straw buyers factor into these transactions rests in the fact that most dealers agree with manufacturers that they will not sell their vehicles for export.
An Exemplary Story
A recent article in Automotive News outlines the practice that was the subject of the crackdown.
U.S. Secret Service agents showed up at Jaguar Land Rover Cincinnati, as a customer wearing a T-shirt and shorts and 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 living with his mother, as 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. (2)
According to the Robert Ray, an attorney representing exporters in a case involving an exporting company based in Memphis, Tennessee, who was exporting luxury vehicles to China, as quoted on Car and Driver: “The government is not contending that the exporting of vehicles themselves is unlawful,” says Ray. The legal theory behind these civil-forfeiture actions (they are not yet criminal cases) is that, because a buyer signs an agreement when buying a vehicle that it won’t be exported, those who do export them are purchasing those machines fraudulently.” (3)
This issue has been somewhat unnerving among the vehicle exporting community. For example, last year, federal prosecutors and agents with the Secret Service and the Department of Homeland Security initiated widespread efforts to crackdown on “gray market” export business, responsible for sending as many as 35,000 new luxury cars a year to China from the United States.
Federal prosecutors in half a dozen states — New Hampshire, New Jersey, Ohio, New York, Texas and South Carolina — have filed criminal or civil actions seeking to put a halt to the resale of luxury cars to China. Prosecutors have frozen bank accounts containing the proceeds from auto sales and seized hundreds of cars, some waiting to be shipped from cargo ports in Newark, Staten Island and Long Beach, California.
Auto exporters have fought back stating that there is nothing inherently illegal about purchasing an automobile or taking advantage of a natural arbitrage opportunity created by disparate pricing policies, and that the no-export policies themselves are unlawful and constitute an unfair restraint on trade.
Auto exporters are finding that their protests against the crackdown may be gaining an audience in the courts. The New York Times recently reported that a luxury car exporter’s two-year legal battle to recover a Porsche Cayenne and $120,786 seized by authorities has ended with federal prosecutors in South Carolina agreeing to return the property and drop a civil forfeiture lawsuit.
At least a dozen other similar settlements have occurred in nine states, where federal prosecutors have reached agreements with other small companies involved in buying luxury cars in the United States and reselling them overseas. In many of those cases, federal authorities in South Carolina, Florida, Georgia and Ohio settled the disputes by returning all of the seized cars. (4)
For now, it looks as if those engaged in arbitrage are not at risk of prosecutors further escalating their efforts to stop the practice of exporting luxury vehicles abroad. What these cases really illustrate is that the transactions that involve dealers and overseas markets will likely be scrutinized, but criminal prosecution and civil forfeiture may only be reserved for the most extreme cases.
For exporters who purchase vehicles through an auction, the risk appears to be next to nothing, as this type of transaction was never targeted to begin with. The reaction initially when law enforcement began their crackdown was to assume all forms of arbitrage would be targeted. However, this fear was unfounded.
The primary motivation behind efforts to prosecute these cases was at the behest of car manufacturers protecting their markets in the United States and with the use of strawman buyers. All of these practices are not par for the course in normal arbitrage situations and should be viewed as not a risk.