United States: New Hampshire Prosecution Threatens Auto Export Industry

Last Updated: June 12 2013
Article by Ely Goldin, Patrick J. Egan and Fatima Abbas

Luxury automobile manufacturers like Mercedes, Porsche, and Lexus have dealerships throughout the world. However, that doesn't mean that a new luxury automobile is sold for the same price in a Cherry Hill, New Jersey dealership as it would be in a dealership in Moscow, Russia. The price in Moscow and other foreign jurisdictions, for the same vehicle, may be tens of thousands of dollars higher. Some of that price difference is most likely related to legitimate additional costs that come with export and sale of automobiles in a foreign jurisdiction. However, a good portion of the difference is driven purely by profit. Manufacturers charge more because that is what the market will bear. Is that unfair? Most people would say no. If a luxury car maker can sell the same car in Russia or China for $20,000.00 more, why shouldn't he?

By the same token, a car buyer looking for a new luxury car in Russia or China knows that the same car is available for sale in the United States for $20,000.00 less. So instead of buying a new luxury car at a local dealership in Moscow or Beijing, a foreign car buyer seeks to purchase the same car in the United States and save himself a good deal of money. Is that unfair? According to a recent federal criminal prosecution in New Hampshire, the answer is "yes."

The New Hampshire Prosecution

On April 16, 2013, the United States District Court for the District of New Hampshire unsealed an "Information" filed by the New Hampshire U.S. Attorney's office against Frank Ku and Danny Hsu, who reside in California. According to the Information, the defendants and their company CFLA, Ltd. purchased luxury automobiles from dealerships in New Hampshire, titled them in New Hampshire in the names of straw buyers and then exported these vehicles to Chinese purchasers who had pre-ordered and pre-paid for the vehicles. The Government alleged that Ku broke the law in two ways. First, the Information alleges that he committed mail fraud in violation of 18 U.S.C. §1341 by using the U.S. Postal Service in furtherance of his "illegal scheme." Second, the Information alleges that Ku filed false export declarations which stated the automobiles were "used" when, according to the Government, they were "new" under U.S. Customs regulations (19 C.F.R. Part 192).

While the filed Information is sparse on facts, the mail fraud count apparently arises from allegations that Ku caused straw buyers not only to purchase luxury cars for re-sale abroad but also had them register themselves as New Hampshire residents who then obtained New Hampshire driver's licenses under false pretenses. The fraudulent export declaration count arises, in part, from Ku's representation on a shipper's expert declaration that the exported automobile was "used" as opposed to "new". But this begs the question: why is this representation false? Isn't it common sense that a car becomes used the second it is driven off the dealer's lot? It may be common sense but the export regulations appear to say otherwise.

The Export Regulations

The export of any and all merchandise from the United States must comply with all United States statutes and regulations related to exportation. The relevant regulations applicable to the export of automobiles are found at 19 C.F.R. §§192.0-192.4. Notably, these regulations do not prohibit the export of new cars. Instead, they establish rules for exporting used cars. According to these rules, a person attempting to export a used car must present to Customs certain enumerated documents that clearly identify the vehicle and the Vehicle Identification Number. 19 C.F.R. §192.2(a). The enumerated documents may be Certificates of Title or a Manufacturer's Statement of Origin (an "MSO"). See 19 C.F.R. §192.2. The regulations define the term "used" as "any self-propelled vehicle the equitable or legal title of which has been transferred by a manufacturer, distributor or dealer to an ultimate purchaser." See 19 C.F.R. §192.1. The term "ultimate purchaser" is defined as the "first person, other than a dealer purchasing in his capacity as a dealer, who in good faith purchases a self-propelled vehicle for purposes other than resale." See id. Thus, using the Government's logic, because Ku and Chin's straw buyers had intended to re-sell the automobiles all along, they were not "ultimate purchasers" within the definition of the export regulations. Therefore, since a car only becomes used when sold to a proper "ultimate purchaser", legally they were new, not used. And, since Ku and Chin listed these vehicles as "used" on his Shippers Export Declaration, they allegedly committed a crime.

Don't Ask – Don't Tell

But why did the defendants need to go through this elaborate process just to export some luxury cars and make some money. The answer lies with auto manufacturers. Mercedes, Porsche, Lexus and others want to protect pricing in foreign markets. Because supply, demand, and competition from other manufacturers vary by jurisdiction, they stand to make significantly more money per auto sold in these foreign jurisdiction and the export of less expensive identical models into these countries undercuts their profits. To protect their foreign pricing policies, many luxury car manufacturers prohibit U.S. dealers from selling new cars to buyers who intend to ship the cars overseas for resale. See Mercedes Benz' Export Agreement Policy.

But car dealers employ salespeople. And salespeople are in the business of selling cars. So in many cases, as long as a buyer is not obvious about his intentions and as long as the dealer has plausible deniability about the possibility of export, a dealer will gladly sell a car to a buyer. But, if that buyer comes back to the same dealer ten times in one year and purchases ten identical black Mercedes Benz sedans, a dealership or its salesperson may have a difficult time maintaining plausible deniability with the manufacturer who may refuse to sell and/or "blacklist" the buyer.

Enter the straw buyers. Straw buyers are typically individuals who purchase new cars from dealers at the request of an exporter, like Ku. They are agents hired and paid by the exporter to purchase cars from dealers. They typically purchase one or two vehicles from a specific dealer with certified funds provided to them by the exporter (who either receives the money from a foreign purchaser or self-finances the acquisition). Most professional exporters inform buyers that they should not lie or make any factual misrepresentations to the dealer about their intention. Rather, the process generally works on a "don't ask don't tell basis" where neither dealer nor buyer discuss the purchaser's ultimate plans. The dealer and salesperson are happy to make the sale and the buyer is happy to make the purchase. The automobile is titled in the straw buyer's name who then drives it off the lot and to a destination. Once there, the car is transported to a port, cleared through customs for export, and shipped overseas via ocean carrier. The straw buyer receives a fee for their time and services.

Notably, there is nothing inherently illegal or unlawful about purchasing a car through an agent. In most cases, the cars are purchased with clean funds, all sales taxes and state registration fees are paid, and the vehicles are titled and insured in full conformity with applicable state laws and regulations. The problem arises in allegedly false statements. In the New Hampshire case, the Government alleges that straw buyers were falsely registered as New Hampshire residents which enabled them to obtain New Hampshire driver's licenses. These driver's licenses probably helped the dealers maintain plausible deniability since a New Hampshire buyer purchasing a car from a New Hampshire dealerships raises fewer export suspicions than say a California buyer trying to purchase a car from New Hampshire. More importantly, however, the use of New Hampshire as a purchase jurisdiction probably lowered the exporter's acquisition costs since the vehicles did not require mandatory car insurance for the short period between purchase and export and since New Hampshire residents who purchase New Hampshire cars do not have to pay sales tax. Therefore, the Government's theory is the straw buyers were not real New Hampshirites and that the use of the U.S. postal system to establish allegedly false residency is mail fraud. Similarly, the declaration that a vehicle is "used" when they were supposedly "new" is also a misrepresentation which, according to the Government, violates the law.

Conflicting Views

But is the New Hampshire U.S. Attorney's Office correct? Is a new car purchased by an intermediary for export overseas a "new" car that must be labeled as such on an export declaration? Consider for example, a pair of recent related letter opinions published by the U.S. Customs and Border Protection ("CPB") agency which espouse a potentially contrary view. Both opinions dealt with a Florida company called Mobizz IT Solutions, LLC ("Mobizz") who requested a determination as to whether the vehicles it was exporting could be classified as "used" pursuant to 19 C.F.R. § 192.0- 192.4, the same regulations relied upon in the New Hampshire prosecution. The factual scenario presented to the CBP was as follows:

Mobizz is a Delaware company doing business in Florida. It purchases new cars from American dealers and immediately facilitates the export of these cars to a dealer in Brazil. The Brazilian dealer later resells these vehicles to another party. Mobizz is the actual purchaser of the vehicles in the U.S. According to the opinion, the certificates of title (or in some cases the MSOs) are issued in Mobizz's name prior to export. Mobizz is not a licensed car dealer under any applicable U.S. federal or state law.

In the first letter, which issued on October 2, 2012, the CPB determined that Mobizz must declare what any customer would consider to be a new car as "used" on the shippers export declaration.1 The CPB reasoned that under 19 U.S.C. §1627a and its corresponding regulation found in 19 C.F.R. §192.1, Mobizz was, in fact, the "ultimate purchaser" of the vehicles within the meaning of the law because it was the first person—other than a dealer—to acquire title to the vehicle. And, according to the CBP, since title passed prior to the vehicle's exportation, the new car became a "used" car and must be reported as such on the export declarations.

A few weeks after the first ruling, Mobizz moved for reconsideration (presumably, Mobizz was seeking the opposite conclusion which raises a host of other interesting questions). During reconsideration, Mobizz argued that the vehicles it exported were "new" because Mobizz fell into the definition of a "dealer" under 15 U.S.C. §1231(e). As defined in 15 U.S.C. §1231(e), a dealer is a person, located in the U.S., "engaged in the sale or distribution of new automobiles to an ultimate purchaser." Thus, according to Mobizz, the fact that it was not a licensed dealer under the laws of any particular state was immaterial to whether it was an "ultimate purchaser" under the CPB Regulations.

By ruling dated February 20, 2013, the CBP disagreed with Mobizz's limited reading of 15 U.S.C. §1231(e).2 Specifically, CBP found that 15 U.S.C. §1231(e) must be read in conjunction with 15 U.S.C. §1221(c) which defines an "automobile dealer" as a person or any form of business enterprise resident in the U.S. "operating under the terms of a franchise and engaged in the sale or distribution of passenger cars, trucks, or station wagons." Since Mobizz was not a franchised automobile dealership, the CBP reaffirmed its earlier holding that Mobizz was not a dealer. The CBP also reaffirmed that, because Mobizz was not a dealer, Mobizz became the ultimate purchaser of the vehicle it purchased in Miami.

Mobizz further argued that export advice offered by the CBP on a website suggested that Mobizz's vehicles should have been classified as "new". The website in question indicated that a vehicle is considered "new" for export purposes if: (1) the manufacturer, distributor or dealer retains legal or equitable title to the vehicle at the time of export; or (2) the manufacturer, distributor or dealer has transferred legal or equitable title to a dealer who purchased the vehicle in his capacity as dealer. Again the CPB found that, because Mobizz was not a dealer, its vehicle exports were "used" and thus subject to 19 C.F.R. § 192.0-192.4.

Given these two CBP decisions, there appears to be a conflict between the New Hampshire U.S. Attorney's Office and the CBP's construction of the term "used" and "ultimate purchaser" under 19 C.F. R. Part 192. According to the New Hampshire U.S. Attorney, a vehicle does not become "used" under 19. C.R. Part 192 where an individual purchases a vehicle in New Hampshire with the intent to immediately export that vehicle to China because that individual cannot be termed an "ultimate purchaser," i.e. a "first person, other than a dealer purchasing in his capacity as a dealer, who in good faith purchases a self-propelled vehicle for purposes other than resale." See 19 C.F.R. § 192.1. In direct contrast, the CBP found that an individual who purchases a car in Miami, with the intent to immediately export that vehicle to Brazil, is an "ultimate purchaser" and the vehicle is "used" and thus subject to 19. C.F.R. Part 192.

Barring the type of manifestly unseemly activity in the New Hampshire case—providing false information for driver's licenses and automobile titles amongst other alleged wrongdoing—individuals or companies seeking to export recently purchased U.S. cars are faced with a critical uncertainty: are their vehicles "new" or "used" under federal law. As illustrated by the New Hampshire case, this uncertainty has serious implications for exporters because they may face criminal prosecution under 13 U.S.C. §305 for submitting misleading export information through a Shippers Export Declaration ("SED") to further an illegal activity. Exporters also may face a $500.00 civil fine under 19 C.F.R. §192.3(a)-(b) for failure to comply with the regulations set forth in 19 C.F.R. Part 192.

Who Are the Victims?

Assuming that the New Hampshire U.S. Attorney's office is correct, that a car is not "used" if an individual purchases it with the intent to immediately export it, who are the victims of this crime?

According to the New Hampshire U.S. Attorney, one possible victim is the local U.S. dealer who "unwittingly" sells a new car for export. This local dealer, according to the Government, "may incur financial harms including significant charge penalties... known as 'charge backs'...." See Ku Information at ¶ 3. However, the manufacturers did not actually impose any chargebacks on the New Hampshire dealers that sold these vehicles; a fact which is not terribly surprising for those familiar with the auto industry. The New Hampshire dealers sold cars to New Hampshire buyers who titled them in New Hampshire. Even though the cars were earmarked for export, manufacturers rarely impose charge backs where the dealer sells automobiles in its franchise-designated "area of influence" ("AOI").

Another theory advanced in the New Hampshire case was that the exporters deprived local dealers of service revenue that they would have earned had the automobiles not been exported. This theory seems to be speculative. A new luxury car can be serviced at any dealership. A New York resident may choose to purchase a car in New Jersey because he is able to get a better deal and have it serviced at a New York dealership closer to his home. There is no guarantee that a dealer who sells the car will necessarily profit from future service revenue.

The New Hampshire Information also suggests that the manufacturer is also a victim because export "causes numerous problems in the manufacturer's distribution market, creates market infringement issues. . . . and results in further problems relating to recall and registration and service." See Ku Information at ¶ 2. Portraying manufacturers as "victims" for purposes of criminal prosecution based on a violation of a technical export regulations seems like a stretch. If Mercedes' profit on an E-350 in China is $5,000.00 less, why is that a tangible harm that needs to be protected under U.S. law? Did Congress and CBP intend to protect a German manufacturer's foreign pricing policies? Probably not. Further, what the New Hampshire U.S. Attorney refers to as "market infringement" can just as easily be called good old-fashioned "competition."

Furthermore, could it not be credibly argued that these exports add value to the U.S. economy? A Mercedes manufactured in Germany and sold in China has little impact on the United States. However, the export of a U.S. purchased Mercedes to China creates revenue for the dealership, commissions for the sales person, sales tax revenue, registration and title fees for the state in which the car is sold, transportation fees paid to a U.S. trucking company, fees paid to the freight forwarder and common carrier for shipping the vehicle and, not to mention, export fees paid to the federal government. And isn't the ultimate beneficiary the Chinese consumer who actually buys something from America (for a change) and is able to save a few thousand dollars?

Finally, manufacturers are perfectly capable of implementing and enforcing their export policies against dealers. They have implemented export policies which dealers are bound by. Some of these policies now require the equivalent of a mini-background check on anyone who tries to purchase car outright without financing. Furthermore, to the extent that an exporter, by concealment of his intent to export, induces the dealer to violate the policy, the dealer may seek civil remedies such as rescission of contract. See Kaufman v. Audubon Ford/Audobon Imports, Inc., 903 So. 2nd 486 (La. App. 4th Cir. 2005) (finding that a buyer's concealment of his intent to export was sufficient to vitiate car purchase contract for want of consent). Buttressing civil remedies, however, with a criminal prosecution is a completely new and alarming paradigm.

What Does the Future Hold

The New Hampshire case appears to have been the first of its kind and is generally perceived as somewhat of a test prosecution. The defendants in the New Hampshire case accepted a plea bargain and were sentenced to three years' probation. Because the plea had already been worked out when the Information was unsealed, the United States District Court for the District of New Hampshire did not have the opportunity to squarely address the conflict between the legal position taken in the Information and the seemingly contrary view espoused by the CBP. It remains to be seen whether prosecutors outside New Hampshire will jump on the bandwagon. It will also be interesting to see how courts react once the apparent conflict is brought to a head. Exporters in any subsequent prosecutions may very well have an interesting defense.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ely Goldin
Patrick J. Egan
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