Ever visited a used car lot and wondered where the all the salespeople were? No, this is not the beginning of an elaborate 800-word joke. Thanks to ultra-cheesy television commercials, the used car salesman inhabits a dark and dirty place in Americans’ hearts. When we visit a used car lot, we expect the rigamarole and even plan for it. As a consumer, if you have to find a salesperson to show you a vehicle, a mental trigger should go off that something is amiss. The same holds true for financial institutions in that mental triggers should go off when those same used car dealers open new commercial accounts with large cash deposits.

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

This type of money laundering chain is complicated and relies on trust. That is a big ask in any criminal activity, but particularly in the car business. The majority of used car lot owners are simply not financially or savvy enough to generate much profit from these associations 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 Know Your Customer standpoint and following the established regulations.

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A good credit union might consider providing robust customer service by counseling his or her new commercial clients on how to stay one step ahead of the law by making sure that they are aware of and complying with the many regulations related to used car dealerships, some of which include the following (fairly) new additions:

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

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

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

3. Red Flags Rule: This new and complicated regulation primarily targets identity theft, and requires each financial institution and creditor to own a written Identity Theft Prevention Program that is designed to detect, prevent, and mitigate identity theft (the regulation includes automobile dealers in its definition of creditor). A used car dealership’s ITPP program must achieve four objectives to be taken seriously by regulators:

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

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

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

In addition, certain disclosures must be presented to consumers clearly and in a form they can keep. Some examples of these disclosures 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 fine of $5,000 and/or maximum imprisonment of one year.

Credit unions should know who they are doing business with in order to halt illegal activities, but then KYC programs aren’t that easy to implement. In the meantime, try this – the next time the owner of a used car dealership opens a new commercial account in your establishment, treat it as an opportunity to provide diligent customer service. Make sure that new customer understands the regulations they are expected to comply with, help them understand new regulations and offer to help them through the compliance process – for a fee, of course. Encouraging and helping your new clientele stay compliant will not only help them as a business owner in the long run, it will help the credit union by attracting better customers and pushing away those who have no intention of playing by the rules.

Richard Paxton is founder/CEO of Alacer Group. He can be reached at 425-281-5889 or richard@alacergroup.com.

Instant Insights /

4 Regs to Know Before Banking With Used Car Dealers

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