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ARA Home > Automotive Recycling Magazine > March-April 2011 >Special Report on Salvage: Fleecing Consumers
 
Special Report on Salvage: Fleecing Consumers
Why Legislators Should Care About the Salvage Issue
In a 2009 CNN report, Guiseppe “Joe” Pirrone was on vacation when a relative called to say that the work truck he had purchased for his business was being seized by the police. Pirrone learned that the truck he legally bought in 2008 was actually a stolen vehicle, and he was a victim of a car cloning vehicle theft ring. While the truck was now police evidence, he is still on the hook for the $27,000 loan.

An active-duty U.S. Naval Petty Officer bought a flood car from a dealer, according to advocacy group Consumers for Auto Reliability and Safety (CARS), a national non-profit auto safety and consumer advocacy organization.

“We are helping them get their day in court,” says CARS President Rosemary Shahan. “More and more military families are being victimized by car scams. The scary part for this family is that the bacteria and toxins in flood vehicles are nearly impossible to kill. You don’t want children in cars with these active spores.” In the meantime, the family’s meager pay is being garnished for payments on an unsafe rotting vehicle their insurance company said could not be repaired due to extensive rust.

One case that was reported in the mid-1990s and sparked an escalation in the legislative debate on VIN fraud could still be taken from today’s headlines. “A young woman had just graduated from a Washington state college and set out to tour the state for the summer with her younger brother in a used Volvo. The used car dealer neglected to tell the parents who bought the car that it had been wrecked, the top had been removed, and a new top had been tack-welded on. They found this out only after a drunk driver hit the car and the top sheared off, killed the young woman, and left her brother severely brain damaged. If the parents had known it was a rebuilt total loss salvage vehicle, they would not have bought it,” says Shahan.

Unfortunately for unsuspecting buyers, bad car deals don’t come with warning labels.

While consumers reel from the consequences incurred from vehicle fraud, automotive recyclers relate to the financial impact it has on their bottom line when salvage vehicles that are intended for dismantling are bought out from under them. It is estimated from figures provided by the auctions that 30 percent, or more, of American salvage vehicles bought are exported out of the country.

There is no denying the impact this has on automotive recyclers through:

  • Over-inflated salvage prices due to unregulated access by buyers – especially international ones – to American salvage at the Internet auctions;
  • Decreased recycled auto parts inventories due to decreasing availability of salvage; and
  • Increased operating costs due to the rise in reporting requirements, regulations, and permitting imposed by state and federal agencies.

It is worth noting that the United States and Canadian automotive recycling industries together are a significant $22 billion dollar business – with the total annual payroll estimated to be $3.3 billion just in the United States. As a green industry, recycling vehicles provides enough steel to produce almost 13 million new vehicles and saves an estimated 85 million barrels of oil a year that would have been used in the manufacturing of new or replacement parts.

Auto recyclers bring economical value to consumers by providing wholesale and retail customers with quality recycled parts that range from 20 to 80 percent less than the comparable new parts. As Americans keep their vehicles longer, with the average age of a car on today’s road at 10.2 years, this is a value to cash-strapped consumers in need of parts for vehicle repairs.

To continue providing economical quality recycled parts to consumers, professional automotive recyclers must have a fair and competitive bid process for total loss vehicles for the purpose of dismantling and parts recycling. They are asking for help from legislators and regulators to achieve this and not just for themselves. A more widespread reason is the impact it has on the consumer who ultimately is the constituent (i.e.: voter) whom legislators are entrusted to protect.

Here are some of the ways the consumer is exposed to vehicle fraud, often through unregulated access by buyers to salvage.

Stealing a Car’s Identity: Car Cloning

A 2009 article on the Federal Bureau of Investigation’s (FBI) website reads, “So how big is the possible impact of cloning on consumers? Huge.”

The popularity of this crime is soaring as the consumer’s buying habits shift to the purchase of used cars in the down economy.

The FBI warns that if a consumer buys a cloned vehicle and its true pedigree is discovered the car will be confiscated, and the consumer is still responsible for any outstanding loans. If a consumer’s own vehicle is the victim of car cloning, they could be accused of a variety of offenses from parking tickets to serious criminal activity like organized crime.

Car cloning is a huge business for car theft rings. In March 2009, CNN.com reported an FBI bust of a Tampa Bay area car-cloning ring. The FBI said that the ring was operating in the United States for more than 20 years. More than 1,000 vehicles were stolen in Florida, including Joe Pirrone’s, with more than $25 million in losses to consumers and banks.

These professional car theft gangs target nicely maintained or high-end luxury vehicles, many times stolen from public parking lots. Instead of selling the vehicle for parts or as hot merchandise, popular ways to profit just a few years ago, they now do what is called “car cloning,” which brings top dollar.

Cloning a car can happen in several ways.

In one method, thieves drive the stolen car to a neighboring state and seek out a vehicle at a large dealership that is the exact make and model (and even the color) of the stolen one. They write down the vehicle identification number (or VIN) stamped on the top of the dashboard and drive off. Later, they make an exact replica of the VIN tag, pull the old tag out of the car, and pop in the new one.

They then forge a real title or other ownership documents from the motor vehicle office in the neighboring state and sell the vehicle to an unsuspecting victim for nearly full price. Since it’s legally registered and not reported stolen, it’s nearly untraceable. But there is another way to clone a VIN.

“The largest vehicle auction operator in the United States estimates that 5 million total loss/salvage vehicles are sold annually, when all sources are included,” says Automotive Recyclers Association (ARA) CEO Michael E. Wilson. “Salvage pool auctions draw many more buyers than do local auctions, and while most auction companies – and many states – require that bidders be licensed as used-car dealers or used-parts dealers not all do.”

Some auction buyers are really after the VIN so they can “clone” them. The buyers take VINs from severely damaged cars, and between the VIN and the vehicle information they have an easy way to change the identity of a stolen car, register it, and sell it.

In 2009, Alabama considered legislation to open auto salvage pools to unlicensed individuals. Speaking out against this legislation, James S. Spiller, chairman of the North American Export Committee, said, “Allowing unlicensed individuals to purchase salvage titled vehicles enables the criminally minded to purchase the paperwork necessary to support auto theft and fraud. This in turn, increases auto theft and fraud opportunities and places the public at risk.” The measure was defeated.

“Right now cloning is by far our biggest car theft challenge,” says FBI Supervisory Special Agent Ryan Toole who leads the bureau’s vehicle theft program in Washington, D.C. “The good news is it’s preventable.”

As states report to the National Motor Vehicle Title Information System (NMVTIS) – 49 states are now reporting – the information held by state motor vehicle divisions, who historically have not communicated, will now be linked.

“NMVTIS will definitely make an impact on VIN cloning,” says Wilson, “but the critical piece not being addressed is those who are buying the salvage with the intent to commit a crime will not likely be reporting to NMVTIS, therefore the paper trail will go cold. Regulating those who can purchase at the salvage auctions is the loophole that must be addressed.”

Cleaning a Bad Car’s Identity: Title Washing

Title washing is used to “erase” a vehicle’s bad history in order to conceal from a buyer that it had a salvage brand because of flood, severe accident and other damage, or theft. This crime is on a significant rise as more Americans buy used cars.

In May 2010, the California Department of Motor Vehicles announced that four employees were arrested “on multiple counts of fraudulently processing driver licenses and affecting a title-washing scheme that involved stolen/embezzled high-end vehicles.”

A November 2010 San Antonio News-Express article reported an elaborate scheme involving title-washed salvage vehicles. A federal grand jury indicted 19 people in three states, accusing them in a scheme involving 800 fraudulent Texas vehicle titles that cheated lenders out of at least $3 million.

Some of the cars with rigged titles were exported to other countries, including Lebanon.

The group is said to have fraudulently “washed” the original owner and financial lien-holder off of the title by filing fabricated paperwork and certified mail receipts alleging that the original owner and lien-holder had been served with notice of the mechanic’s lien. With clean Texas vehicle titles in hand, they sold many of the vehicles to unsuspecting buyers or third parties.

The question is how did these Texas criminals gain access to the salvage vehicles in the first place?

Consumers seek the help from CARS with title-washed “chop shop” vehicles, where the front and back of a car literally comes from two different crashed cars. “One buyer who bought a so-called ‘Certified’ GM car from a used car dealer,” relates Shahan, “was actually able to locate photos of the two cars that were welded together to make his car. People like this gentleman pay extra to buy a ‘certified’ car for peace of mind and the warranty. However, once the true history of a car is revealed, all warranties are voided and the buyer is stuck with a piece of junk and a car loan because the dealerships have the legal edge in their contracts, and people rarely sue.”

Title washing incidents spiked following Hurricane Katrina when car dealers got stuck with an excess of flood-damaged vehicles. The CARS organization still hears stories of flood cars that were sold to unknowing buyers, such as the naval officer and his family. Approximately 570,000 vehicles were affected by the 2005 hurricanes. An Experian study revealed that approximately 20,000 to 30,000 of these vehicles were moved to other states. At the time of the report, 45 percent of those vehicles were given clean titles.

A lack of communication between each state’s titling agency makes it easier to title wash a car’s identity. Transferring a salvaged vehicle to a state that does not recognize the brand clears the title. If this does not work, the unscrupulous seller will move it from state to state until the branding is gone. However, once a vehicle is reported to NMVTIS, it remains in the database, regardless whether the title has been washed -- a major benefit of the system.

To further complicate things, the “salvage title” definition varies from state to state. According to CARFAX, “A Salvage Title [called a Total Loss Vehicle] is issued on a vehicle damaged to the extent that the cost of repairing the vehicle exceeds 75% of its pre-damage value. This threshold may vary by state. Some states treat Junk titles the same as Salvage, but the majority use this title to indicate that a vehicle is not road worthy and cannot be titled again in that state. These states use Salvage titles to identify stolen vehicles: AZ, FL, GA, IL, MD, MN, NJ, NM, NY, OK, and OR.”

Some salvage title vehicles can be repaired by professional, legitimate collision repairers and then re-titled after proper motor vehicle inspections. But the car is usually issued a rebuilt title, which significantly reduces its value. This is why criminals want it washed – to increase the profit margin. Furthermore, the average car buyer is not looking to purchase a rebuilt car.

Ultimately consumers are unknowingly driving title-washed vehicles that are not safe.

Scamming a Car’s Identity: Curbstoning

We’ve all seen cars parked along the curb marked “For Sale.” Some deals look too good to be true – and to the naive consumer they might be. Plenty of legitimate private sellers park cars to sell them, yet it is up to the buyer to properly check the VIN history to determine if the car is a legitimate good deal.

Curbstoners are scam artists who sell multitudes of vehicles, many with serious issues that affect both their safety and value. Buyers are often more comfortable purchasing from a private seller rather than a dealer. While curbstoners pose as the owner, the car is usually not titled to them, which violates state laws requiring a dealer’s license. The Internet electronic sales posting boards are becoming the new “curb” (called Internet Stoning) with criminals listing their deals on Craigslist, eBay, and other local classifieds websites.

The prosecution of scammers is still quite limited. Last year, the New York State Police working in conjunction with the New York State Department of Motor Vehicle Field Investigation unit reported the arrest of five individuals for Unregistered Itinerant Vehicle Collector, a misdemeanor. Yet reports like this are still too few and far between.

In the end, victims find themselves with vehicles that cost more to repair because of rolled back odometers or in dangerous rebuilt wrecks.

“Curbstoners buy cheap damaged cars, make minor cosmetic fixes to them, and sell them for a quick profit while avoiding any licensed dealer regulations,” says Wilson.

“They don’t restore safety components that were likely damaged when the car was wrecked. The modern motor vehicle is a highly complex product, and the repairs must be done according to professional collision repair industry standards. If not, the repair could fail, causing harm to all who travel our streets and highways.”

Besides ripping off consumers, curbstoners rob local, state, and federal governments by avoiding the payment of proper taxes. When selling the vehicle, they usually skip the line on the title that asks for his or her name, which enables them to avoid sales and income tax.

A 2010 case study by www.StopCurbstoning.com examined the financial impact of this crime on a city and state, using one single real-life case as an example, namely Mohammad A. Sheikh who was arrested by California Department of Motor Vehicles investigators on 12 felony counts of perjury and filing false documentation in connection with curbstoning.

The study found that the cities in which the perpetrator operated lost over $56,000 in sales tax revenues alone, and the state of California lost $168,000. Other financial costs included lost license revenue, lost local business, and potentially increased emergency response burdens due to unsafe vehicles.

“Because there are so many curbstoners out there, even small things add up to a lot,” says Charles Redden, president of AutoTec, one of the companies behind the effort to stop curbstoning. “Take the annual state license fee for used car dealers. In California it’s $176 for the first year and $126 to renew. But for every thousand curbstoners, that’s over a quarter-million dollars every two years.

“With local governments increasingly strapped for cash, enacting and enforcing anti-curbstoning laws can be a quick way to boost revenues and enhance their communities at the same time.” (Read the full report at www.stopcurbstoning.com/case-study/ca/.)

Consumer Groups Rally Behind Increased Salvage Restrictions

In an effort to encourage support to limit the unregulated buyer’s access to salvage, ARA recently hosted a Consumer Summit for representatives of two national consumer advocacy groups and state consumer affairs offices held at AAA Auto Salvage in Rosemont, Minneapolis. The event promoted a greater understanding of the dangers facing consumers related to unregulated buyers at salvage pools, titling, branding, interstate transfers, and to share information on NMVTIS. The event fostered a commitment from all to work with ARA on these issues.

The National Consumers League (NCL), America’s oldest consumer organization, representing consumers and workers on marketplace and workplace issues, supports efforts to better regulate the access to salvage.

NCL Executive Director Sally Greenberg, who attended the event, says, “I wish every lawmaker could tour a modern automotive recycling facility. They are impressive. The AAA Auto Salvage facility that we toured has a phenomenal set-up, very green by recycling oil and more, and nothing left in a trash heap. The parts are professionally handled and recycled back into the automotive parts marketplace. What auto recyclers do is important.

“I am a big supporter of automotive recycling industry’s concerns about salvage fraud and VIN fraud, like title washing. It’s a long-standing issue – that of rebuilt total loss wrecks – not to mention that phony VINs are in huge demand in organized crime. There needs to be stronger support for enforcement efforts to stop VIN switching, odometer spinning, and other crimes.”

The CARS organization is an outspoken advocate of closing the gaps in access to salvage. Testifying before Congress in March 2008 in support of H.R. 5312, a proposed bill that never became law, CARS President Rosemary Shahan said, “According to the U.S. Department of Justice, auto-related frauds rank among the nation’s top property crimes. … According to a report commissioned by the [DOJ, the National Motor Vehicle Title Information System that is designed to] help curb illicit activity involving stolen and damaged autos would save the American public between $4 billion and $11.3 billion per year. … Frauds involving the illegal sales of damaged autos cost consumers billions of dollars each year. According to Experian, approximately 7 million vehicles that were deemed to be a total loss, because they sustained severe damage in wrecks or floods, are now re-registered and being driven on our roads. … Dealers themselves acknowledge that auto salvage frauds, including ‘title washing’ across state lines, is a serious problem that needs to be addressed.

“In California alone, more than 1,690,000 vehicles currently registered for use on our roads have had their titles branded as ‘salvage,’ indicating they were so severely damaged it would not pay to properly fix them ... [they] pose a serious threat to public safety.”

Shahan also warns that the number of consumers who now have upside-down car loans because the value of their used car is not what they thought is growing. “Many have gone to trade the car in and discovered it had a total loss salvage title history. This contributes to negative equity in auto loans. Auto industry analysts estimate that six million consumers are being kept out of the car market because this issue.”

The National Automobile Dealers Association (NADA), a group that represents more than 17,000 new car and truck dealers, is a strong supporter of the NMVTIS database for many of the same reasons. “Automobile dealers have absolutely no interest in having rebuilt wrecks, flood damaged vehicles or stolen cars on their lots. Period,” says Bailey Wood, spokesman for NADA. “Dealers know they are unsafe for their customers and for their employees. We want these vehicles off the road and out of the marketplace, permanently.”

In fact, NADA has helped to lead the legislative push for a national database established in the Clinton presidency to permanently red-flag rebuilt wrecks, flooded vehicles, and stolen cars. “NADA wants a database that is current and accurate.” As a part of the NMVTIS Advisory Board, NADA President Phillip Brady offers guidance to the DOJ on what is helpful to dealers in order to combat VIN fraud. “While we encourage the public access to the database, consumers are not on the front line of this issue,” says Wood, “the dealers are. We would like to see a commercial product that allows auto retailers to look up 20-30 car VINs at one time.”

Shahan believes that protecting the American public from total loss salvage vehicles can benefit consumers worldwide. “We need to protect our domestic market first,” Shahan says. “Then we can go to rest of the world and show them how we did it and improve protections against salvage fraud in other nations.”

Identity Theft Protection for Vehicles

NMVTIS, a Department of Justice (DOJ) program, is the identity theft protection for vehicles and the answer to consumer vehicle fraud, everyone hopes. This national database, which requires insurers in all 50 states to provide data on total loss vehicles that is updated at least every 30 days, will “significantly deter vehicle title fraud and reduce the number of buyers who bid on vehicles at local salvage auctions for criminal purposes,” says Wilson.

The NMVTIS information – reported primarily by auto recyclers, salvage yards, salvage pools, and insurance carriers – and its availability to titling agencies, law enforcement, insurance carriers, and prospective buyers of vehicles will result in a reduction in trafficking in stolen vehicles and a reduction in title fraud.

Further, the car buyer’s ability to check for indicators of a vehicle’s safety will reduce the number of unsafe vehicles on the roads. An inquiry into NMVTIS will show the vehicle’s title, odometer, and brand history (salvage or otherwise) as well as indicate whether the vehicle has been reported stolen.

The American Association of Motor Vehicle Administrators (AAMVA) estimates that it will ultimately reduce fraudulent insurance payoffs by more than $200 million per year, prevent 60,000 branded titles from being washed every single year, and add up to $11 billion in yearly savings in fraud avoidance.

Ultimately, CARS would like to see more funding provided to promote NMVTIS to the consumer, and ARA agrees. “Not enough consumers know about NMVTIS,” says Shahan. “This is the least expensive, most current, and most important data a consumer should know about a used car. It should be the first place to go when buying a used car. If the title is clean in NMVTIS, then the consumer should still get the car inspected. If they would like to get more detailed information about its history, they can get a report from CARFAX or Experian.”

“We want people to use this database,” says ARA President Doug Reinert. “The more people who know about it, the more effective a tool it will be to deter crime and keep salvage vehicles in their natural end-of-life cycle, being properly dismantled for parts by professional auto recyclers.”

ARA is also playing an integral role in the future development of NMVTIS. Representing ARA, Wilson is a member of the NMVTIS Advisory Board, a group formed from key stakeholders to advise the DOJ in the ongoing administration of the system. ARA also hosted representatives from DOJ and the Bureau of Justice Assistance, who have a stake in NMVTIS, at their 2009 annual convention to inform members and answer questions about the reporting requirements.

The (International) Stolen Car Market – Salvage Vehicle Connection

The salvage fraud discussion is not complete without mentioning the rising and expansive global trend of vehicle theft. Recent U.S. vehicle theft statistics are significant with serious implications to the consumer:

  • The FBI’s 2009 Uniform Crime Report shows that there were an estimated 794,616 thefts of motor vehicles nationwide, with 72.1 percent of all motor vehicles reported stolen being automobiles.
  • Nationwide, nearly $5.2 billion were lost overall to motor vehicle thefts. The average dollar loss per stolen motor vehicle was $6,505. The arrest rate for motor vehicle theft is 26.8 per 100,000 inhabitants.
  • The FBI report estimates the number of motor vehicle thefts declined 17.1 percent when compared with data from 2008, 35.7 percent when compared with 2005 figures, and 31.5 percent when compared with 2000 figures.
  • According to the DOJ, only 63 percent of vehicles reported stolen are recovered.

While the FBI reports reflect that motor vehicle theft is in sharp decline, it is interesting that salvage and title fraud is on the rise. Because vehicle title fraud is a state issue, the FBI can only say: “It’s difficult to estimate how many cars are cloned, but we know it’s a significant percentage of the cars stolen in the U.S. each year. Only one in three stolen cars ever makes it back home.”

The question is, then, if only 63 percent of stolen cars are recovered, or one in three vehicles, where are the other 37 percent?

The National Insurance Crime Bureau 2006 data shows that 40 percent of all auto thefts occur in or around ports and border communities, and it is still the trend according to law enforcement. The FBI reports that more than 200,000 stolen vehicles are exported illegally from the United States every year. That leads us to believe that close to one-third of all stolen cars leave American boundaries for foreign countries.

How are they getting out of the country? For what purposes? It seems all these numbers are adding up.

“International law enforcement is seeing the black market funded by salvage fraud,” says Shahan, which provides VINs and paperwork to export cars. Results of an Internet search on “international car theft” yields many reports of busted rings all over the world.

If you believe that the use of stolen vehicles from the United States – and other countries – by terrorists to commit crime or fund their activity is over exaggerated, it is obvious that the FBI doesn’t agree with you. The first image on their website is a burned out car with the headline “Counterterrorism Operations.” It is guaranteed that this vehicle was not entered in NMVTIS or any other country’s VIN database.

A 2005 Boston Globe article reported that “the FBI’s counterterrorism unit launched a broad investigation of U.S.-based theft rings after discovering that some of the vehicles used in deadly car bombings in Iraq, including attacks that killed U.S. troops and Iraqi civilians, were probably stolen in the United States, according to senior government officials.”

In 2007, the UK’s biggest car theft ring, said to be funding terrorism, was called “a sophisticated and professional conspiracy” by Judge Richard Foster, who said the scale of the conspiracy was unprecedented and could prove to be just the “tip of the iceberg.” This ring reportedly shipped the stolen cars to Mombasa, Kenya, where most would then go to Uganda.

A Canadian news website, http://cnews.canoe.ca, reported in January 2010, “High-end cars and SUVs stolen in Canada could be financing global terrorism, warns the Insurance Bureau of Canada. Investigators are tracing more and more vehicles stolen in Canada to unlikely destinations like Nigeria, Lebanon, and Eastern Europe, where it’s suspected that they’re being sold to finance terrorist groups.”

Yet, many car theft rings are just out for the profits. In 2007, The Washington Post reported the “break up of a major East Coast car-theft ring that allegedly stole more than 1,000 luxury vehicles in the one year and shipped them to West Africa and the Middle East. In West Africa, where luxury cars are scarce and import taxes are high, the vehicles are resold for up to twice their retail value, netting members of the ring millions.”

While federal law enforcement agencies tackle complex crime networks here and around the world, the ARA believes that lawmakers should focus on establishing needed controls on the access to salvaged vehicles in the United States, which provides criminals with VINs and paperwork to export cars.

Circle Back to Solutions

With unrestricted access to salvage pools in the United States, auto recyclers struggle to remain competitive – the available product is shrinking, and the costs to do business are rising. While they meet their industry obligations, they know the buyer bidding for the same salvage on the next computer is not.

Consumers pay for vehicle fraud with higher taxes, insurance rates, financial loss due to scams, and sometimes with their lives. Action must be taken.
The question that Joe Pirrone should ask every time he writes a check for the loan on a truck he no longer possesses, or the Naval Petty Officer whose meager wages were garnished to pay for a rotting bacteria-ridden flood car, or the grieving parents who unknowingly purchased a rebuilt wreck for their daughter that resulted in her death and permanent injury to their son, is:

Will United States legislators continue to allow the unregulated pillaging of the American salvage market when it is not safe for the consumer or good for the automotive recycling industry?

Caryn Smith is the editor of Automotive Recycling magazine.

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