Germany’s Cash-for-Clunkers Black-Market Scandal

Germanys Cash-for-Clunkers Black-Market Scandal

As the U.S. jumps on board the cash-for-clunkers bandwagon, the Obama Administration would do well to pay attention to what is happening in Hamburg’s sprawling harbor. The seaport city is one of the busiest ports in the world: nearly every car — new or used — passes through its docks on the way out of Germany. And this week, the police charged with patrolling the harbor released evidence showing that Germany’s hugely popular cash-for-clunkers program may have some unintended beneficiaries: organized-crime groups and individuals who export the old cars to the Third World instead of crushing them into scrap.

Under the German program, which started in February, anyone who scraps a car that is at least nine years old can apply for a government subsidy of $3,600 toward the purchase of a new car. The German federal government has earmarked about $7 billion for the plan, which has been so popular that car sales in Germany could hit a 10-year high of 3.5 million vehicles this year.

The plan is meant to help scrap dealers too. They get the old cars for free, the idea being that they can then earn money by selling the scrap metal to steel companies. But with scrap prices taking a dive, some dealers are eying the bigger profits that come from selling the cars abroad. “The problem is that there is no supervision of the companies to ensure that they actually scrap the cars,” says Frank Wolff, director of the environmental-crime division of the Hamburg police. “These firms are supposed to turn the cars into scrap, but instead, some are selling them to buyers in Africa.”

Over the past few weeks, Hamburg police at the shipyards have turned up 43 cars that had been declared scrapped but were illegally earmarked for export to buyers in Africa and Eastern Europe. The numbers so far seem small, but some law-enforcement experts warn that as many as 50,000 cars destined for the scrap heap have already been sold illegally — at the expense of German taxpayers.

The problem for the police is that German lawmakers were in such a hurry to approve the money to boost the car industry that they did not create sufficient controls to prevent abuse of the system. Dealers are supposed to scrap the cars, but if they don’t, it’s only considered a minor violation, not a criminal offense. “It just opens the door for abuse,” says Ronald Schulze, an official at the Federation of German Detectives. “We can’t charge them with fraud because lawmakers failed to define the crime.”

Export-control officials dispute the experts’ estimate that up to 50,000 cars that should have been scrapped may have actually been sold. But there is no statistic to prove or disprove the claim. The cases that are known, such as the cars recently discovered at the Hamburg port, have sparked political furor — not surprising in an election year. Finance Minister Peer Steinbrueck demanded an investigation into suspected abuse, while the opposition Free Democrats called for establishing a special police unit to crack down on any clunker-related fraud.

But it is probably too late for Germany to do anything about its black market in clunkers. The abuse could have been prevented if lawmakers had also created a control system to track each car from the point of hand over to the scrap heap. And the police could have prosecuted dealers who sell the cars instead of scrapping them if lawmakers had made it a crime. Instead, the hands of the police are tied, and as Germany’s cash-for-clunkers program runs its course — it’s limited to 2 million cars — public interest in cases of abuse will likely fade.

Soon, though, the debate will get back to the plans’ central flaw. From Berlin to Baltimore, government subsidies to boost car manufacturers hit by the recession have been a huge short-term success. But where will the consumers come from when the government aid runs out “These scrapping schemes bring forward sales that would have occurred later,” says Tim Urquhart, automotive analyst at IHS Global Insight in London. “They are just deferring the pain to 2011 and 2012.”

See the best cars from the 2009 Detroit Auto Show.

See the most important cars of all time.