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Discount fraud can ring up hundred of thousands—if not millions—of dollars in lost profits. Even the most vigilant of companies can fall prey to fraudsters, according to Nelson, a partner at Sideman, and Brand, an associate. Here, Brand and Nelson offer tips on what to do should your company get stung.—Jennifer Bosavage, editor
Responding to new sales opportunities for your company’s products is generally viewed as the lifeblood of a company’s sales organization and channel operation. But consider this situation: Your company steeply discounted its product for a particular new sale because unique circumstances and business justifications existed to warrant those special discounts—only those products ended up in the wrong place, not with the purported end user.
Worse yet, the discounted products were used by a broker to defeat a competing bid from an honest channel partner. That is discount fraud.
You know the bottom line: You’ve been lied to. But when the sales opportunity goes awry like this, it can mean more than lost revenues. What can you do about it?
The law considers it theft.
Discount fraud exploits the special discounts companies sometimes offer when market circumstances justify sacrificing revenue to win a particular new piece of business. Most commonly, the customer provides a description of those unique circumstances to the company and also pledges that any specially discounted products it acquires will be used only for the specified purpose, and will not be resold.
Consider the recent case of United States v. Ali, where the defendants devised a scheme through which they made false representations to Microsoft in order to obtain “authorized education resellers” status to ultimately purchase discounted academic edition software. The defendants procured roughly $30 million in Microsoft products on which they received about $20 million in special discounts. Defendants were supposed to sell the discounted products only to “educational users,” but instead sold 90 percent of the discounted software to commercial entities. They were ultimately sentenced to imprisonment and ordered to pay Microsoft $20 million in restitution, which reflected the difference for the academic edition software and the full list price Microsoft would have charged for the normally marketed version of the software.
The Court of Appeal upheld the fraud convictions, stating that “Microsoft had a right to full payment for its software and was deprived of that right when defendants fraudulently obtained the software for less than full payment.”
If your company’s products are in high demand, then you are an inviting target to the perpetrators of this fraud.
Next page: What’s at stake?