Selling Cars Already Sold

CASE HISTORY ANATOMY 

• The fraud: A vehicle dealership defrauds a bank by receiving financing for used cars it had already sold.
• The method: The vehicle dealership faxed the front sides of car titles to the bank but didn't have to send the flip sides, which showed vehicle sales or trades.
• The fraud examination: After a fortuitous discovery, fraud examiners reviewed hundreds of forms to discover "re-floored" vehicles.
• Lessons learned: The bank is establishing internal controls. The fraud examiners learned about the inner workings of a large vehicle dealership including its relationship with banks and floor-plan agreements.  

We love a good case history. We read cases to note the fascinating machinations of devious fraudsters. But we study cases to discover the ways the fraud examiner caught the crook and learned lessons. This new column dissects case histories for the benefits of our readers. Send your case for possible publication to: fraudmagazine@ACFE.com.

Ajax Motors was having cash-flow problems. The vehicle dealership had lost money after three damaging hurricanes. And fewer potential customers were walking through the doors because a two-year road construction project had limited access. However, Ajax's owner, Milt, wanted to continue his lavish lifestyle that included an offshore racing boat. The dealership needed cash fast.

Milt told the dealership's general manager and controller to try to deceive the local bank into lending them cash to buy used cars they had already sold. And the scheme worked for awhile. But finally a bank employee found some problems with a vehicle title, and the dealerships execs were caught. Eventually, the owner, the general manager, and the comptroller were either sent to prison or given home detention for defrauding the bank of $2.4 million. (All names in this column have been changed.)

I'm a special agent for the Florida Department of Law Enforcement. FBI Special Agent Dan Kelly, CPA, and I were called in to investigate this case. We found that the fraudsters had stolen from the bank through a scheme that exploited a weakness in a traditional "floor-plan" deal with the bank.

Such a deal enables a dealership to purchase new and used vehicles through a short-term, revolving-credit loan agreement with a bank. The dealership and the bank agree on a dollar amount based on the dealership's credit worthiness, history, longevity, and size of inventory, among other factors.

This high-dollar deal only endures because the dealership and the bank trust each other. However, as we know, fraud possibilities grow in equal proportion to the amount of necessary trust.

GETTING IN ON THE FLOOR PLAN
Specifically, the floor-plan agreement works like this: The dealership and its bank agree on a loan amount - let's say, $4 million. The dealership orders new vehicles from the manufacturer. The bank pays the manufacturer for this inventory, and the dealership pays the bank back within a few days after each new vehicle is sold. The dealership is motivated to sell the vehicles quickly because the bank's interest charges increase the longer the vehicles sit on the lot.

Used-car inventory floor-plan arrangements are slightly different because dealerships take used cars as trade-ins, purchase them at auctions, or even swap them with other dealerships' used cars. So a dealership can have cars of several makes and models on its lot. Also, dealerships might have up to seven days to repay the sum of a used vehicle to the bank. And dealerships use a different method to request funding for used vehicles.

FRAUD EXAMINATION FINDS RESALE OF CARS LONG GONE
Agent Kelley and I were called into the case when Amalgamated Bank complained to authorities that Ajax Motors had stolen as much as $2.4 million through a scheme that exploited a weakness in the floor-plan arrangement.

We first discovered that the dealership hatched the scheme through its used-car department. The dealership, which had acquired used vehicles from many sources, would request funding from the bank to buy these vehicles by listing 11 vehicles per page on a "vehicle funding request form." They would attach a copy of the front side only of each vehicle's title and fax all this information to the bank. (The bank didn't require that the dealership send the back sides of the titles, which included information on sales or transfers.)

If Amalgamated Bank received the information early in the day, it would electronically transfer the requested funds to the dealership's account by the afternoon. Later, when Ajax would sell a vehicle, it would fax all the information on a similar form to the bank along with an electronic transfer of funds in the same amount.

When Ajax fell on hard times, Milt the owner had to come up with some quick working capital. He instructed the general manager (GM) and the comptroller to "go to the closet" - an on-site storage site for current-year sales - and select "deal jackets" of vehicles sold in the past. (A deal jacket contains the entire history of a vehicle from the time it was received through the sale including loan applications, prior owner's information, copies of title and registration, and salesman's records.)

They would copy the titles of the sold vehicles and send them to the bank with funding request forms. Amalgamated Bank unwittingly would fund the requests and deposit money into the dealership's account.

Ajax would have some working capital for a time but then would have to "re-floor" more vehicles to repay the bank for the previous fraudulent requests. The hole deepened.

THE SCHEME TOPPLES
As with many faulty schemes, all things must come to an end. In this case, the ending was somewhat comical.

One day, Amalgamated Bank received funding-request forms and copies of vehicle titles from Ajax Motors. A bank representative saw that a bank senior vice president's name was on one of the vehicle titles. At the water cooler, the representative mentioned to the VP how nice it was that the VP had recently purchased a new car from the dealership. The VP said he didn't know what the rep was talking about. The rep got the title and showed the VP that it contained his name, and the year, make, and model of the vehicle. The VP said that he had indeed purchased the vehicle from the dealership but in the previous year!

The rep and the VP scanned recent funding request forms and found three vehicles that had been re-floored. The rep, VP, and a bank auditor were on the dealership's doorstep early the next morning.

Milt said he had made "errors in judgment" and admitted that he had re-floored several other vehicles. "Can I go to jail for this?" Milt asked.

The bank quickly filed motions with the court to request that the dealership be placed into receivership, which the court did. The receiver took over the dealership; fired the owner, general manager, and the comptroller; and ordered a deep-dig audit.

Agent Kelly and I were given the keys to two mini-warehouses full of seized dealership records. We waded through the mountain of records in the stifling metal stall during Florida's midsummer heat.

We identified re-floored vehicles by matching records with information on funding request forms that the dealership had sent to the bank. We were greatly helped by the dealership's general manager and comptroller's habit (bless their hearts) of marking a re-floored deal jacket with the initials "rf" so they wouldn't select the same vehicles for re-flooring.

With this evidence and the sworn statements of several dealership accounting department employees in hand, we secured federal indictments against the dealership's owner, general manager, and comptroller. The general manager and comptroller entered guilty pleas and testified against the dealership's owner. The dealership's owner took his case to trial.

Milt, the dealership's owner, was found guilty and sentenced to 135 months in federal prison, five years probation, and was ordered to pay $1,066,851.90 in restitution to the bank. The court ordered the general manager and comptroller to pay restitution to Amalgamated Bank equal to their last year's pay from the dealership, and gave them six months of home detention to be followed by five years probation. The government ordered all three defendants to be jointly liable for a forfeiture money judgment in the amount of $3,854,653, which included costs from the court, attorneys, the receiver, and others.

Before the fraud's discovery, the bank's only internal controls were periodic on-site vehicle inventory inspections by an outsourced company. Often, the number of vehicles at the dealership wouldn't agree with the count maintained by the bank. The dealership would say that the missing vehicles were at the body shop, out as loaners, or at the local auction. The inventory company believed the dealership and never followed up on these missing vehicles.

The bank has added several internal controls since this fraud occurred:

• The bank can now generate a report that will show any vehicle that appears on more than one funding-request form.
• The bank now requires copies of the fronts and backs of the vehicle titles to be sent with the funding request forms.
• The outsourced company that conducts inventory inspections at the dealership will now have to account for all inventory and not take the dealerships' word, on the locations of vehicles.

Special Agent William Miles, CFE, is a 38-year law enforcement veteran in Florida. He's served the past 24 of those years with the Florida Department of Law Enforcement. Miles, a CFE since 2001, serves on the board of directors for the Tampa Bay ACFE Chapter.  

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