Legal Definitions - dry exchange

A dry exchange refers to a transaction that *appears* to involve a mutual exchange of value between two parties, but in reality, something of genuine value passes only from one party to the other. The "exchange" from the second party is either nonexistent, of negligible value, or merely a pretense designed to disguise the true nature of the transaction. Historically, this concept was often used to hide practices like usury (lending money at excessively high interest rates) by making a loan look like a fair exchange of goods or services.

Here are some examples to illustrate this concept:

• Disguised Loan with Hidden Interest: Imagine a small business owner who urgently needs $20,000 but wants to avoid traditional bank loans due to credit issues. A private lender offers to "buy" the business owner's valuable delivery van for $20,000, with an immediate, separate agreement that the business owner will "buy back" the same van in six months for $24,000. During this period, the van never actually leaves the business owner's possession or use.

  Explanation: The "sale" and "buy-back" of the van constitute the dry exchange. While it looks like two separate transactions involving the van, in truth, the van is merely a prop. The lender provides $20,000 (the actual value passing from one side), and the $4,000 difference in the buy-back price is effectively disguised interest on a loan. The "exchange" of the van is a pretense to hide the true lending arrangement and its cost, making it appear as a legitimate sale rather than a high-interest loan.

• Disguised Gift or Transfer of Wealth: Consider a wealthy individual who wants to give a significant sum, say $100,000, to a struggling relative without it being immediately categorized as a direct gift, perhaps for tax planning reasons or to avoid scrutiny. The individual "purchases" a collection of old, common household items (like used kitchenware or outdated electronics) from the relative for $100,000, even though these items are objectively worth only a few hundred dollars at most.

  Explanation: In this scenario, the "purchase" of the low-value household items for an exorbitant price is the dry exchange. Money passes from the wealthy individual to the relative, but the "exchange" of the nearly worthless items from the relative to the wealthy individual is not a genuine exchange of equivalent value. The items serve as a mere pretense to facilitate the transfer of $100,000, which is, in essence, a disguised gift. The true intent is to transfer wealth, not to acquire valuable goods.

• Disguised Payment for Undocumented Services: A company needs to pay a consultant for highly sensitive strategic advice that they prefer not to document explicitly as a consulting fee in their public financial records. Instead, the company "buys" a generic, publicly available "industry trend report" from the consultant for a substantial sum, for example, $50,000, even though the report itself can be downloaded online for free or purchased for a nominal fee of a few hundred dollars.

  Explanation: The "purchase" of the readily available industry trend report for an inflated price is the dry exchange. The company receives something (the report), but its actual market value is negligible compared to the payment made. The report serves as a cover for the actual payment for the consultant's valuable, but undocumented, strategic advice. The true value passing is the payment for the advice, while the "exchange" of the report is a pretense to justify the outflow of funds in a way that avoids specific documentation or disclosure requirements for consulting fees.