Fraud Alert: The straw purchaser scam

By Ari Kashton

This auto dealership scam begins with an auto brokerage referring buyers with seemingly good credit scores. These buyers apply for credit online and come in pre-approved with the requisite documentations (driver’s licenses, insurance, etc.) or they may use phony credit information.

In actuality, the buyers are straw purchasers who have been paid a commission to purchase the vehicles in their name and then hand them over to the auto brokerage. Alternatively, the buyers may be identity theft victims.

Once the vehicle is purchased, the straw buyer gives the vehicle to the auto brokerage who informs the buyers that the auto brokerage will make the car loan payments. The auto brokerage then resells and/or subleases the vehicles on the black market; and (of course) discontinues the car loan payments.

Unfortunately, the lenders seeking legal recourse cannot repossess the now long-gone vehicles; notwithstanding that the straw buyers fraudulently represented as a loan condition that the vehicle would be in their possession.

The scheme is usually initiated by making many straw purchases in rapid succession at multiple dealerships. The buyers work quickly before multiple credit checks appear on their credit records.

Depending on lender agreements, dealerships can lose their finance profit if the default occurs within 60 to 90 days of the initial sale. Similarly, some lenders have included clauses in lending agreements requiring dealers to buy back the finance contracts and repossess the vehicles. Other lenders include clauses making the dealership liable for straw-purchaser fraud.

Suggested countermeasures

As a defence against straw-purchaser fraud, dealers should do the following:

•    Check the credit card applicant’s data (address, date of birth, etc.) against credit bureau information.  
•    Verify customers’ employment directly, including obtaining a direct copy of a resent pay stub.  In this regard, multiple purchasers from the same company should raise suspicions.  
•    Review lending agreements for potential liability and insurance agreements for adequate coverage.  

For business applicants, dealers should request a copy of the articles of incorporation. Handwritten articles of incorporation should be a red flag.

Ari Kashton, CA●IFA/CBV, CFE, is a senior manager in the business valuation and litigation support division of Soberman LLP in Toronto.  He specializes in investigative and forensic accounting, including, fraud investigation, investment due diligence, damage quantification and expert testimony and can be reached at 416 963 7150 or akashton@soberman.com.