Ever visited a used car lot and wondered where the all thesalespeople were? No, this is not the beginning of an elaborate800-word joke. Thanks to ultra-cheesy television commercials, theused car salesman inhabits a dark and dirty place in Americans’hearts. When we visit a used car lot, we expect the rigamarole andeven plan for it. As a consumer, if you have to find a salespersonto show you a vehicle, a mental trigger should go off thatsomething is amiss. The same holds true for financial institutionsin that mental triggers should go off when those same used cardealers open new commercial accounts with large cash deposits.

The list of potential crimes taking place within a used cardealership could include, but are not limited to, identity fraud,human trafficking, fair lending abuses and more … with moneylaundering topping the list. If you pay attention to the news, youknow that used car lots have now emerged as one of America’s mostpopular money washing vehicles. In a typical scenario, a criminalapproaches a used car dealer and offers to provide cash to purchasevehicles, usually at a price above the sticker so the dealer cancash in, too.

This type of money laundering chain is complicated and relies ontrust. That is a big ask in any criminal activity, but particularlyin the car business. The majority of used car lot owners are simplynot financially or savvy enough to generate much profit from theseassociations and they end up taking a fall when the chain breaks,which in most cases happens at the financial institution. That is,if the credit union is conducting its due diligence from a KnowYour Customer standpoint and following the establishedregulations.

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A good credit union might consider providing robust customerservice by counseling his or her new commercial clients on how tostay one step ahead of the law by making sure that they are awareof and complying with the many regulations related to used cardealerships, some of which include the following (fairly) newadditions:

1. Form 8300 and Reporting Cash Payments of Over$10,000: The majority of business owners recognize thatcash deposits in excess of $10,000 draw attention from the IRS.Hence the existence of Form 8300, which the business owner mustfile by the 15th day after the date the cash transaction occurred.The penalties for not filing are harsh. According to the IRS, “Ifyou willfully fail to file Form 8300, you can be fined up to$250,000 ($500,000 for corporations) or sentenced to up to fiveyears in prison, or both.”

2. Office of Foreign Assets Control: This is avery important new regulation and one that targets terrorism,financial fraud, human trafficking, money laundering and more. TheOFAC requires car dealers to cross check their customers’ namesagainst the Specially Designated Nationals List — a “list ofindividuals and companies owned or controlled by, or acting for oron behalf of, targeted countries. It also lists individuals, groupsand entities, such as terrorists and narcotics traffickersdesignated under programs that are not country-specific.”

The penalties for non-compliance are extremely harsh and includeup to 30 years in jail, fines up to $10 million againstcorporations, $5 million against individuals and civil penalties ofup to $1 million per incident. With the severity of these penaltiesin place, helping new clients understand the context behind thisregulation and how to stay compliant could add huge value to therelationship.

3. Red Flags Rule: This new and complicatedregulation primarily targets identity theft, and requires eachfinancial institution and creditor to own a written Identity TheftPrevention Program that is designed to detect, prevent, andmitigate identity theft (the regulation includes automobile dealersin its definition of creditor). A used car dealership’s ITPPprogram must achieve four objectives to be taken seriously byregulators:

• Identify red flags applicable to the dealerships’ customerdemographics;
• Incorporate those red flags into its ITPP program;
• Respond appropriately to any detected red flags; and
• Ensure the program is periodically updated to reflect changesin identity theft risks.

The penalties for non-compliance are less severe than thepenalties listed for the above offenses, but since fines areassessed per violation, they can add up. The FTC said it can seekboth “monetary civil penalties and injunctive relief for violationsof the Red Flags Rule. Currently, the law sets $3,500 as themaximum civil penalty per violation.”

4. Regulation Z (Truth in Lending): Accordingto the Federal Reserve, the Truth in Lending Act is designed toensure that car buyers are given the opportunity to compare creditterms more easily and in a more transparent manner. BeforeRegulation Z’s enactment, consumers were faced with a vast array ofcredit terms and rates from competing creditors, making itdifficult to compare loans side-by-side because the terms and rateswere often presented in the different formats. Now, all creditorsmust use the same credit terminology and expressions of rates.

In addition, certain disclosures must be presented to consumersclearly and in a form they can keep. Some examples of thesedisclosures include the following, according to the FDIC:

• The identity of the creditor making the disclosures
• The amount financed
• A separate, written itemization of the amount financed
• The finance charge
• The annual percentage rate of interest
• A payment schedule
• The total number of payments

The penalty for not complying to Regulation Z is a maximum fineof $5,000 and/or maximum imprisonment of one year.

Credit unions should know who they are doing business with inorder to halt illegal activities, but then KYC programs aren’t thateasy to implement. In the meantime, try this – the next time theowner of a used car dealership opens a new commercial account inyour establishment, treat it as an opportunity to provide diligentcustomer service. Make sure that new customer understands theregulations they are expected to comply with, help them understandnew regulations and offer to help them through the complianceprocess – for a fee, of course. Encouraging and helping your newclientele stay compliant will not only help them as a businessowner in the long run, it will help the credit union by attractingbetter customers and pushing away those who have no intention ofplaying by the rules.

Richard Paxton is founder/CEO of Alacer Group. He can bereached at 425-281-5889 or[email protected].