The U.S. government has a powerful weapon in its war on crime. Through civil forfeiture, the government can seize and use or sell property of a criminal acquired with the proceeds of a criminal offense.
How does forfeiture work? Let’s take a common fact situation. A dealer delivers a car and before the customer pays for it, he is arrested as part of a drug ring. The government believes that the vehicle was purchased using the funds derived from narcotics trafficking. The dealer has not done the title work. It has a small downpayment from the buyer, and it has a retail installment sale contract that it has not assigned to a finance source and that it cannot assign to a finance source since the vehicle has been seized.
The government sends the dealer a notice that it will forfeit the vehicle and sell it. The dealer objects. It files a claim to the vehicle as an “innocent owner”. Under federal law, property of an innocent owner – whether it is someone who holds title or who has a lien or other interest in the vehicle – cannot be forfeited.
The government may accept the claim and release the vehicle. If it refuses the claim, it must file a legal action to complete the forfeiture in a United States Court. At that time, the dealer can challenge the government’s suit to protect its interest.
In the legal action, what the dealer knew and when the dealer knew it will be critical. The dealer must prove it is an innocent owner, either by showing that it knew nothing about the illegal acts in which the criminal was engaged or that when it learned of them, it took reasonable action to prevent further use of the vehicle.
In response to the dealership’s claim that it is an innocent owner, the government may seek to claim that the dealer either actually knew of criminal activity or was “willfully blind” to the criminal activity. Not all federal courts agree that “willful blindness” is an allowable reason to defeat a claim of an innocent owner. In some federal courts, an innocent owner can prevail by showing it had no actual knowledge of the illegal activity. In other courts, the innocent owner must show both that it had no actual knowledge of wrongdoing and that it was not “willfully blind” to the illegal activity.
It appears that the government is being more aggressive in forfeiture actions. The government is now challenging dealers who claim to be innocent owners when the government can claim that the dealer ignored signals of suspicious behavior.
While it is questionable that negligence in responding to signals of suspicious circumstances is willful blindness even in a federal court that accepts this theory, a dealer should take steps to protect itself in light of the government’s broad forfeiture powers.
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Have a Know Your Customer policy. A Red Flag Program is a formalized Know Your Customer program. By following a proper Red Flag procedure, dealer personnel can determine whether they are dealing with a real customer or whether the customer is an identity thief who may be trying to steal the vehicle to use for criminal purposes.
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Train employees on cash handling and prevention of money laundering. Attempts to hide the true identity of the user of the vehicle, attempts to misrepresent the source of funds used to purchase the vehicle, or intentional failure to report cash in excess of $10,000 used to purchase a vehicle, can all be deemed evidence of actual knowledge of wrongdoing. Having a cash reporting and money laundering prevention system and training employees on the details of the system can protect against these problems.
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Don’t expect to solve a potential problem by assigning the retail installment sale contract. Most dealer master agreements require dealers to represent what they know about a buyer. Overlooking suspicions that may lead to a forfeiture action will result in the finance company demanding that the dealer buy back the contract.