Should Dealers Self-Report Legal Violations?

At the 2019 Agent Summit, a person of high rank posed the following question: 

If a dealer discovers that one of his employees is engaging in illicit activity, such as payment packing or powerbooking, should that dealer report it to a government agency? 

In the vast majority of cases, the answer is a firm “No.” In fact, it should be “Hell no.” There are rare exceptions to this assertion, however. 

WHAT MOTIVATES GOVERNMENT REGULATORS? 

Government regulators are rewarded for making cases, especially state attorneys general. In fact, promotions and salaries are often based upon how much money is brought into the agency. In addition, some regulators do not trust the private sector and seek to discipline businesses, believing that they exploit the public. This view of regulators is especially true regarding car dealers. 

If regulators benefit from sanctioning dealers and do not, on balance, trust dealers, would such regulators be, in any way, sympathetic to dealers should they self-report? The answer is no — government agents do not like dealers and they are not friends to dealers. 

There are exceptions to this central point. 

"If a dealer decides to self-report, he should do so only after he has had the opportunity to fully study the problem and fashion a complete remedy as explained below."

The first exception is if the dealer is being audited, or is audited routinely, by a government agency and the infraction might be uncovered. For example, if a dealer has been prosecuted before, and the settlement provides that the government agency will be conducting periodic audits to enforce that settlement, the dealer should consider self-reporting. Alternatively, if the dealer operates in a state where there are routine audits, and the illicit transgression will be uncovered, this course of action should be considered as well. 

The second exception would be if a dealer knows that he will be audited, or there is a high probability that an audit or investigation will be undertaken, and the problem will be identified. For example, if the dealer has received a subpoena, or expects a subpoena, that dealer should be prepared to redress the infraction. 

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The third exception is when a dealer wishes to defend himself and is being targeted along with a number of other dealers regarding similar infractions. It may be wise to seek clemency and be a cooperative witness regarding the announced investigation. 

Many years ago, this writer, on behalf of the Florida Attorney General’s Office, was involved in a statewide investigation of a particular group of dealers. This dealer group’s strategy was to offer one of its members as the sacrificial lamb to resolve the statewide investigation. 

To defend himself, this sacrificial dealer decided to help the attorney general’s office in its investigation, revealing all the violations in which many of the stores across the state were engaging. By doing so, that party received better treatment by the attorney general’s office than it would have otherwise. If any dealer is placed in this situation, it should follow this example, but should do so judiciously. It would be a rare exception. 

If a dealer decides to self-report, he should do so only after he has had the opportunity to fully study the problem and fashion a complete remedy as explained below. 

It bears repeating that dealers will always know their businesses far better than any regulator regardless of how diligent that regulator might be. Never assume that regulators know fully what violations have been made. This is another reason not to confess your sins to the state. 

TO THE CONTRARY 

The U.S. Consumer Financial Protection Bureau takes a different view. The CFPB’s Bulletin 2013-06, “Responsible Business Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation,” strongly encourages supervised entities to self-report their violations. Salient portions of this bulletin are worth quoting: 

“… Prompt and complete self-reporting to the Bureau of significant violations and potential violations is worth special mention.” 

“Specifically, a party may proactively self-police for potential violations, promptly self-report to the Bureau when it identifies potential violations, quickly and completely remediate the harm resulting from violations, and affirmatively cooperate with any Bureau investigation above and beyond what is required.” 

“It must be emphasized, however, that in order for the Bureau to consider awarding affirmative credit in the context of an enforcement investigation, a party’s conduct must substantially exceed the standard of what is required by law in its interactions with the Bureau.” 

In other words, a business is being asked to self-report a violation, but it may not necessarily receive special treatment in exchange for this self-reporting. There is no assurance that it will be treated better. In fact, it may be disciplined and fined in the same manner, as if the CFPB unilaterally identified the problem. Finally, the business must “remediate the harm” and cooperate “above and beyond what is required.” This is a very high standard to surmount. 

This writer recalls an attorney, who formerly worked for the CFPB, who argued that businesses should welcome their routinely visiting regulators since businesses could work through problems with these routine visitors. That attorney must have never heard or understood the proverb, “Never let a camel get his nose under your tent. If the camel once gets his nose in the tent, his body will soon follow.” 

Dealers should try their best to avoid having anyone from government visit their stores. Regulators will constantly be monitoring for any other violations at the store, which may be totally unrelated to their announced purpose. In an era where dealers are incredibly regulated, it’s daunting for dealers to meet all compliance requirements. Something may go amiss and woe to that dealer who allows a visiting regulator to discover it. 

The good news for franchise dealers is that they are not subject to the CFPB’s direct supervision, a point of angst for many in government. The same cannot be said for buy here, pay here dealers and many independent dealers. Nevertheless, the CFPB’s rationale would apply to state agencies as well. 

Finally, dealers who gain a marketing advantage by not following the law should not disadvantage honorable dealers who do follow the law. For example, dealers who deceptively advertise their vehicles may attract potential customers at the expense of dealers who advertise honestly. 

Honest dealers should consider notifying a government agency, such as the state attorney general, about this deceptive advertising or other violations. They can do so anonymously, which would be prudent. When this writer worked at the Florida Attorney General’s office, he received numerous anonymous examples of these violations in the mail. These violations were rectified to the betterment of the industry, especially honest dealers. 

REMEDIES 

If a dealer discovers that someone at the store is engaging in illegal activity, and consumers are harmed, the dealer should fire that employee and provide complete restitution to the harmed consumers. This is a case where the dealer’s attorney should be consulted. The consumers should sign a release indicating that they will not pursue any further legal action and, as a condition of the settlement, these consumers will agree to keep the matter private. 

Such settlements would not be a bar to attorney general action, or other government action, unfortunately. Nevertheless, should a government agency investigate the matter, after these settlements are struck, there would be far less reason for that government agency to continue its action and seek damages and restitution. 

Periodic internal audits and audits by independent third parties are always advisable. Dealer operations are complex and certain transactions should be reviewed in order for intentional acts or negligent acts to be isolated and redressed. As always, dealers should remain alert. 

Govern yourselves accordingly. 

TERRENCE J. O’LOUGHLIN, J.D., M.B.A. IS THE DIRECTOR OF COMPLIANCE AT REYNOLDS DOCUMENT SOLUTIONS.

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