Fake Lottery Tickets, Cars and Compliance: How Can they Possibly be Related?

In early January, 2020, a dealer in Texas agreed to sell a vehicle to a consumer for a forged lottery ticket. The ticket wasn’t legitimate but the real problem with this dealer’s behavior was that he was engaging in a less than honorable transaction with the consumer. The consumer said that she wasn’t able to cash the ticket because it would be garnished by the government for back owed child support. The consequences for this disreputable behavior were:

• The dealer lost the car and had to report that it had been stolen.
• The dealer wasn’t paid the $5,000 asking price for the car.
• The dealer wasn’t charged criminally, but could possibly have faced some form of legal sanctions.

This problem could have been totally avoided if this dealer had had a basic ethics code, and observed it. It isn’t clear from the article, but if the dealer utilized his Red Flags program, this consumer’s identity may have informed the dealer not to engage in the sale. The moral of this tale is that adopting and administering a sound compliance program may have avoided this entire problem. The year of 2019 is replete with examples of failed compliance programs.

A basic compliance plan
Compliance is certainly conformity to the requirements of the law but a compliance program extends this concept further to include an ethics program and trying to immunize the business against uncertain legal peril and numerous legal risks. Compliance responsibilities include all departments of the store and must be comprehensive. In the car business, compliance requires oversight over so many regulated activities that perfect compliance is rarely attained, creating inherent regulatory risk and corporate liability. Hence, there is a need for a dynamic compliance program.

Compliance should be reactive: dealers need to react purposefully in discharging their legal duties. However, dealers also need to be proactive and prepare for indeterminate problems. There are compliance efforts which are not directly required by law but protect dealers from possible legal problems such as being the victim of a crime.

Addressing compliance issues is similar to car repairs: do it now when the cost is minimal or do it later when the cost is exorbitant and the dealership is the subject of a legal action. It is a form of necessary insurance.

A good compliance program should redound with litigation control. Such a program should include the following, at a minimum:
• Establish a written compliance program with an oversight board.
• Know what the minimum legal and regulatory requirements are, both federal and state.
• Appoint a compliance officer to implement compliance policies and practices.
• Be certain that employees understand what practices are illegal through routine compliance training.
• Implement a standard process for all transactions using technology when appropriate to automate the compliance regimen. Consistent and uniform protocols reduce error and risk.
• Rely on reputable vendors who can substantiate their due diligence regarding compliance. They can be valuable sources of compliance information.
• Create and implement an information security program for all electronic and paper records.
• Follow record retention rules for the various deal documents. Avoid storing customer information (both hardcopy and electronic records) longer than necessary.
• Documents should be reviewed periodically to ensure that they continue to meet the requirements of the law, regarding mandated formats and disclosures, and comport with the dealer’s business practices.
• A written ethics statement should be signed by all employees and prominently displayed for customers to behold. It should be strictly observed.

The rearview mirror: 2019 examples of dealers being “ripped off”
The lottery ticket example cited above is an example of some of the cases of dealers being victims of frauds. These cases are not always reported, as dealers may not be the most sympathetic victims for the media. One pundit summarized this viewpoint in reporting on the lottery ticket case: “You know who never gets scammed, but deserves to get scammed? A [used] car dealer.” Nonetheless, dealers are scammed. But, once again, if they had a sound compliance program these incidents would be drastically reduced. A compliance program not only protects the dealer from external legal threats but internal ones as well. The following list is a sampling of these cases from the past year.

  • Employee embezzlement occurred in approximately 51 percent of all dealerships.
    • A study indicated that most dealers are the victims of this crime. As with lending institutions, these matters are rarely reported and may be settled privately to avoid bad publicity.
  • Dealer employees engaged in repurchase fraud utilizing service contracts.
    • Routine business protocols and audits should eliminate such actions.
  • Fraudulent identification information was used to purchase vehicles.
    • A Red Flags program combats this risk.
  • Vendor sold fraudulent goods to dealer
    • Dealers should implement a vendor management program.
  • Police officer arranged financing through dealer but kept money and didn’t buy car
    • Compliance protocols should apply to everyone who engages in business with the dealer, law enforcement officers and others included (see below).
  • Illegal aliens used fake IDs to buy cars.
    • The remedy is OFAC and Red Flags programs.
  • Consumer purchased a Ferrari at one Mercedes Benz dealer, remotely, and had a second Mercedes Benz dealer evaluate the car – led to $5,800,000 in a damages lawsuit against the second dealer
    • There is no compliance exception for luxury vehicle purchasers, as with police officers.

The rearview mirror: 2019 list of dealer prosecutions and lawsuits
There are over 150 ways that F&I managers can defraud consumers. Across the dealership, there are many other ways to violate the law as well. The year of 2019 didn’t produce many surprises but there were a few. As with the previous list, compliance protocols would reduce these liabilities and cases. The exceptions, of course, are the cases where the dealer management intentionally violates the law. Compliance programs would be of no concern to them but their tenure in business will be short-lived. Attorneys use the Latin expression in tort law Res ipsa loquitur which means that the thing speaks for itself: no further explanation is required. Some of the following examples from 2019 fall under this Latin description:

  • Numerous cases of odometer rollbacks
    • Remarkably, there were numerous cases of odometer fraud. Evidently, digital odometers can be altered through use of electronic devices readily purchased on the internet.
  • Dealer failed to pay sales taxes
  • Title frauds and violations
  • Selling vehicles with serious recalls
  • Sell service contracts but dealer didn’t submit payment
  • Out of trust
  • Dealer damaged engines for OEM warranty payments
    • A fraud on the manufacturer
  • Falsifying credit applications
  • Numerous cases of false advertising
  • Bank fraud
  • Fake dealers defrauding banks – DOJ prosecution
  • Military sales of non-existent cars
  • Indicted former NIADA president allegedly faked sales and credit applications
    • This was a high-profile case.
  • Dealer employee stole ID from his store and purchased a car at another store
  • Fail to honor warranty
  • Spot delivery deceptions (yo-yo transactions)
  • Straw sales with inflated prices where there were defaults and financing source had to repossess cars at far less than the initial underwritten value

Conclusion and the good news
What does one learn from these examples as one looks to the new year? Forewarned is forearmed, or, as the Bible admonishes in Ecclesiastes “nothing is new under the sun.” If dealers know what types of compliance issues exist, and what potential litigated risks are lurking, they can prepare for them. That is the good news. Knowledge is power. In these cases, applied knowledge is power when a dealer implements a sound compliance program.


Terry O’Loughlin, J.D., M.B.A., director of compliance for The Reynolds and Reynolds Company, has nearly 30 years of legal and regulatory experience in motor vehicle-related fields. From 1989-2006, O’Loughlin served with the Florida Office of the Attorney General, investigating and prosecuting automobile dealers, manufacturers, and financing and leasing companies. He led a task force that examined more than 100,000 motor vehicle files and settled with over 1,600 vehicle dealers for more than $15,000,000.00. O’Loughlin helped to draft and served as mediator of Florida’s Motor Vehicle Lease Disclosure Act. He has served as a consultant to the Federal Reserve Board’s Leasing Education Committee and has routinely advised numerous states’ agencies on motor vehicle fraud. Admitted to both the Pennsylvania and Florida Bars, O’Loughlin graduated from the University of Pittsburgh and received his graduate degrees from the University of Dayton.