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hit & run
by amena bakr
car buyers lost millions when the alleged capital
utilization schemes of two distributors came crashing down, leaving
buyers with nothing to show for their payments except a handful
of receipts. how did it happen and what’s to say it won’t
happen again?
you don’t always get what you pay for. police raided the
showrooms of two car distributors in cairo late last year after
their owners fled with millions of pounds worth of car deposits.
customers, who had trustingly paid deposits for their new cars,
were shocked to discover that not only would they not receive the
cars they paid for, but that they would also not be getting their
money back.
police began an investigation into two car distributors, al-rabea
for car trade and al-forsan, after receiving a mountain of complaints
from individuals who claimed they paid the required deferment payments
for their new cars, but after months of waiting still had not received
them. “the scene at [the different] police stations was just
ridiculous,” says efaat abdel atti, dealer of havee cars and
head of the cairo car dealers unit at the federation of egyptian
chambers of commerce (fecc). “this brought to everyone’s
attention that these companies were seriously doing something wrong.”
by the time the prosecutor’s office had completed its investigation
and ordered the two distributors shut down, customers and dealers
had been defrauded of an estimated le 66 million. al-rabea’s
owner, karim nashaat, accused of defrauding le 16 million from customers
and dealers, was arrested at the airport on january 28 after a month-long
manhunt.
meanwhile, police arrested two of al-forsan’s three co-owners,
brothers tarek bayoumi and sherif bayoumi, while a third brother
and ceo of the company, mohamed bayoumi, is believed to have fled
the country. the three men were accused of defrauding customers
and dealers of more than le 50 million.
in the lightning-fast trial that followed, a cairo court found al-forsan’s
owners – including one brother tried in absentia – guilty
of stealing clients’ deferment payments and failing to deliver
their cars within the agreed upon period. on february 17, the court
sentenced the three men to three years in prison each. “i
really hope that they all go to prison and stay there because, apart
from taking people’s money and not giving them cars, they
didn’t pay us for two months,” said a former al-forsan
employee, speaking to business monthly on the condition of anonymity.
crash course in fraud
investigators are still trying to piece together the details, but
some suspect the car distributors were fronts for capital utilization
schemes – where the perpetrators temporarily divert money
collected through legitimate business activities into other, often
illicit, trading activities in an attempt to increase their profits.
the individuals whose money is collected are often completely unaware
of how their money is being used – until something goes wrong.
the owners of al-rabea and al-forsan appear to have diverted the
deposits of car buyers into other investments, but when those investments
headed south their capital utilization schemes began to unravel.
they no longer had the money to pay the car dealers from whom they
acquired the cars, nor the paperwork to transfer ownership of the
cars to the buyers. “unlucky for them, they lost the money
and the cycle of lies could not be kept up any longer,” says
abdel atti.
in egypt, cars are supplied to distributors by dealers, who retain
all the paperwork, including the customs release certificate, until
the distributor – or in the case of installment payments,
the bank – provides the full payment for the vehicle. “once
a dealer such as myself gets the money from a distributor, i hand
him all the necessary paperwork for licensing,” he explains.
“before that point, the car is useless unless you’re
planning to cut it up.”
distributors are an important marketing tool for car dealers, allowing
them to reach a larger and more geographically diverse audience
of potential buyers for their brands than through their own, smaller
network of showrooms. this is particularly useful when trying to
sell cars to the masses or introduce relatively unknown brands to
the market, explains abdel atti. “we have this new wave of
chinese cars coming into the market and we need to disperse them,”
he says. “the best way to do this is giving them to distributors.”
the marginally lower prices offered by al-rabea and al-forsan attracted
many customers and boosted sales. “if the market price of
the car was le 105,000, al-forsan would sell it for le 100,000,
which really attracted the crowds,” abdel atti says.
ashraf maher, branch manager of car distributor grand motors, is
not so sure the convicted businessmen maliciously planned to defraud
consumers and car dealers from the start. he believes al-forsan’s
owners simply got into debt over their heads and the capital utilization
scheme they concocted came crashing down before they could break
even. few, if any, realized how bad the situation really was until
it was too late. “it was really a shock for all of us in the
market to hear about this,” admits maher. “we would
never imagine that something like this would happen as both companies
seemed to be doing well.”
he points out that al-forsan had invested enormous amounts into
advertising campaigns that it hoped would attract more customers
and generate sales to offset its losses. “al-forsan took out
huge ads in the newspapers and these ads were the main way they
built so much confidence with buyers,” he says, citing the
company’s aggressive ad campaign in al-ahram’s weekly
automobile supplement. “millions of pounds went into this
ad campaign, but i guess they still couldn’t cover the huge
losses they experienced as a capital utilization company.”
a former employee of al-forsan, who spoke to business monthly on
the condition of anonymity, said in the months preceding the closure,
angry customers had come to the showroom demanding their cars. “we
had hundreds of complaints both over the phone and in the showrooms
from people who wanted their cars or their money back,” he
said. “our sales staff always told these people that the cars
were still being released by customs and that the paperwork was
not ready, but there came a point when the people wouldn’t
believe them.”
as their patience began to wear thin, some of these angry buyers
went as far as going to al-forsan’s showrooms in mohandiseen
and nasr city, smashing the glass and driving off with the demo
cars inside. police eventually recovered all the stolen vehicles,
and it was agreed by the public prosecutor that no charges would
be brought against the frustrated buyers.
shifting to neutral
seeking to mollify angry customers, the public prosecutor announced
last month that individuals who had paid the full value of their
cars and have receipts to prove it, would receive their vehicles
from the dealer and a one-year license while the public prosecutor
reviews the case.
dealers, however, argue that this ruling further punished them for
a scam in which they were already victims. many reported that they
had already lost enormous sums of money when al-rabea and al-forsan
allowed some customers who had made payments on their cars to drive
them off lot, though without the customs release certificates. the
dealers claim they never received the payments for these vehicles
and are now being forced to swallow the losses. the public prosecutor’s
ruling will only deepen their losses.
“this [ruling] is not fair to the dealers, who didn’t
receive a penny for these cars,” charges abdel atti, who supplied
two cars to al-forsan to display in their showrooms but never received
payment. “i only lost about le 100,000, which is not a very
big deal compared to other dealers, some of whom lost over le 16
million.”
abdel atti thinks the most equitable solution is to split the losses
between both victims – the dealer and customer. he argues
that both the buyers and the dealers should have been paying closer
attention to the patterns of behavior of the distributors. while
this might be true to a certain degree, there was nothing uncommon
about the way the sales were planned out. paying a down payment
for a car and waiting for a few months until the vehicle is imported
and delivered to the buyer’s hands is not unusual.
the public prosecutor insists it is not showing favor to the consumer
at the expense of the dealer. it has agreed that if, upon completing
its review of the case, it determines that making the dealer carry
all losses is unfair, it will order that the new owners pay a sum
to the dealers as compensation. this extra amount could be as high
as 50 percent of the total value of the car.
on the other hand, customers who don’t have documents to prove
that they paid the full value of the vehicles are simply out of
luck. the public prosecutor has indicated that these individuals
will neither receive their cars nor their money back. similarly,
those who have only paid deposits on the cars will also be unable
to get their money back.
taming the road
in january, minister of trade and industry rachid mohamed rachid
issued a new set of guidelines for local dealers and distributors
aimed at closing the door to capital utilization schemes and other
fraudulent practices. all transactions to purchase or pay installments
on new vehicles must be deposited in a registered escrow account.
neither the car dealer nor the distributor can access the funds
in these accounts, nor use them as a guarantee for loans, until
the buyer receives their car.
once the account is activated, car dealers and distributors have
a six-month grace period to deliver the car to the buyer or else
the full amount must be returned to the buyer with an additional
10 percent surcharge as a penalty. likewise, if the buyer changes
their mind about the car during the grace period, they would receive
back their money less 10 percent of their down payment.
while these regulations should help protect consumers and dealers
from fraud, abdel atti fears they could also be an obstacle to legitimate
business. “the problem is when you have huge orders for cars
– let’s say 100 cars – the dealer needs an advance
payment to be paid directly to him to get these cars into the country,”
he explains. yet he is confident that rachid will amend the regulations
in the coming months. “i am sure that the minister will be
considerate of our business needs as he knows that not all dealers
are in the market for the hit-and-run scenario.”
convincing the public of this may take more time. the scandal has
sullied the reputation of all car distributors, who in the eyes
of consumers are deemed guilty by association. “there is no
doubt that these incidents have damaged the public’s trust
and our reputation,” says maher. “i can definitely tell
you that our sales have gone down.”
walid tawfik, owner of kia egypt and secretary-general of the car
traders section at the fecc, believes the public has blown a few
isolated cases out of proportion. “there are around 3,000
car traders in the market today and only two of them were untrustworthy.
this shouldn’t mean that all distributors and dealers should
be blacklisted,” he says.
however, unlike the majority of dealers and distributors in the
sector, tawfik feels that the new regulations will help boost the
confidence of buyers and elevate levels of sales. “people
have learned a valuable lesson from what happened and at the same
time, they feel more protected with the new regulations. this will
encourage them to buy.”
but for the time being, car buyers are likely to remain extra cautious
about whom they buy their cars from. it might be true that only
two of 3,000 car traders defrauded customers, but potential buyers
are going to think twice before agreeing to hand their money over
to distributors.
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