Vehicle cloning, auctions and the insurance industry

Allegations of money laundering and organised crime arise from vehicle cloning, vehicle salvage auctions and the increased number of vehicle write-offs by insurance companies.
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Published: Monday, June 9th 2014
General
JOHANNESBURG - The connection between vehicle cloning, vehicle salvage auctions and the increased number of vehicle write-offs by insurance companies is concerning, if not sinister, and it appears to be a growing problem. “Vehicle cloning has become an issue in South Africa, as there remain a lot of opportunities [for it] in the process after the salvage [has been] obtained,” Hugo van Zyl, chief operating officer at the South African Insurance Crime Bureau (SAICB), told Moneyweb. “At this stage the police are working with various motor dealers and bodies on a case by case basis, and we are aware of regular investigations at different levels within the process to address organised crime and especially vehicle cloning,” he said. It would appear that vehicle cloning has been made easier by the fact that vehicle salvage is more readily available to the public, mainly via auctions. Syndicates purchase wrecked vehicles and then transfer the particulars of the wrecked vehicle onto a stolen or hijacked vehicle. There are also greater numbers of vehicles being auctioned because insurance companies are repairing fewer accident-damaged vehicles and writing more of them off, due to the high cost of repair to these vehicles. Instead of selling the salvage to panel beaters and second-hand car dealers, as was historically the case, these cars are going under the hammer. “The auctioneering model realises more income on salvage, which is beneficial to the client due to better returns than the previous model of salvage that [motor] dealers provided,” Santam spokesperson, Donald Kau said. He said clients benefit because the return on salvage is directly linked to the client’s claims ratio and lowers their risk profile. “There has been a tendency to write cars off as ‘uneconomical to repair’ at a lower threshold, therefore more of these cars are available,” commented Viviene Pearson, general manager of insurance risk at the South African Insurance Association (SAIA), a member body for the short-term industry. The reason for this is that a weak rand has significantly increased the cost of parts to repair cars, insurers argue. The SAIA Code of Salvage provides, as a guideline, that if damage to a car exceeds 60% to 70% of the value of the motor vehicle, the car will be regarded as uneconomical to repair and be written off, but still maintain Code 2 (‘Used’) status and be considered “structurally sound”. Santam, no doubt along with other insurers, has elected to apply a 50% uneconomical to repair threshold as a means of curbing costs, selling the salvage to vehicle auction companies. One fairly large second-hand car dealer told Moneyweb that a number of insurers had canceled contracts with them in favour of contracts with auction houses because auctioneers offer more money for the salvage. Mutual & Federal, Hollard and Outsurance were contacted for comment on this and we await their responses. Sold! It has been alleged by some in the insurance industry that the reason auction houses can pay more for vehicle salvage is because these cars fetch high prices on auction. Moneyweb recently attended an auction hosted by SMD, one of the largest auction houses in South Africa. We saw 43 vehicles being auctioned, collectively fetching close to R2.2 million, excluding document handling fees and VAT. Buyers are charged R5 000 to participate in the auction, which can be refunded if they don’t find the car they want, and there were easily 50 individual buyers at the auction. These auctions take place around the country and are frequent (in June almost daily and sometimes twice in one day). You can also participate online. Of the 43 cars auctioned, 40 were classed as Code 2 vehicles even where (granted, to an untrained eye) a number of them looked more like they should be declared “permanently unfit for use” (Code 3) or “permanently demolished” (Code 4). The most expensive bid was for a Code 2 BMW X6 Sport, which had keys, could start and went for R250 000. Van Zyl of the SAICB explained that Code 2 vehicles do not need a police vehicle clearance certificate when being re-registered and only need to be roadworthy. Insurers are ultimately responsible for coding vehicles, since they become legal owners of the salvage. “We are confident that insurers are correctly coding vehicles, as skilled assessors evaluate each vehicle on a case-by-case basis, in line with the Code of Salvage,” added Van Zyl. Allegations of money laundering The problem is that car thieves are buying wrecked vehicles on auction to secure VIN numbers and legal documentation, only to then steal an identical vehicle in better condition and allegedly sell it north of our borders before it can be traced, let alone identified as a clone. The vast majority of people attending the above auction were foreign nationals. One of the secondhand dealers said that he could no longer afford to buy cars on auction because of the high prices being offered by foreign nationals. He suggested alleged money laundering. “We are reluctant to comment on any company’s involvement in money laundering without firsthand knowledge,” Van Zyl said in response to a question on this. Pearson said that the SAIA knows that vehicle cloning via auctions is happening and the association is addressing it, together with its members (insurance companies) and the salvage industry. “The SAIA’s Code of Salvage has been updated on a regular basis to address gaps and loopholes,” she confirmed. The difficulty, said Pearson, is that if there is a legitimate buyer who has all the necessary documentation, there is no way of knowing that he or she is a thief. But an insurance industry insider who would not be named argued that salvage companies chose to ignore vehicle cloning because they were making so much money out of it. However, SMD maintains that it is compliant with the Consumer Protection Act (CPA) and the Financial Intelligence Centre Act (FICA). MD Jan van Wyk noted that all buyers are identified either by means of a South African Identity Document (ID) or a valid passport and traffic register number. To receive the relevant vehicle documentation, they must submit a change of ownership notice to a licensing office and then register the car in their name within 21 days of purchase. All this falls under the jurisdiction of the Department of Transport and the new owner would be registered on the National Traffic Information System (eNaTIS). “Licensing regularly endeavors to eradicate corruption at their offices where cloning occurs. As no companies have access to the eNaTIS system, the problem is localised at licensing,” Van Wyk said. “A large number of foreign nationals do indeed buy vehicles from SMD,” he confirmed. “We mark clients who buy multiple cars in their private capacity to the Financial Intelligence Centre (FIC) under the Suspicious Transaction Report. Some are registered dealers with company registration numbers and are registered for VAT.” He said that SMD works with licensing and the South African Police Service (SAPS) to resolve cloning issues and reports all cash transactions over R25 000 to the FIC, as per FICA rules. Pearson said that the SAIA was considering doing a salvage management audit of its members, but it was on hold for the moment. This article was written by Hanna Barry for MoneyWeb: