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When discount fraud happens, it hurts not only the vendor, but the solution provider and the end customer. It's a crime that subscribes to the trickle-down theory. Here, Nelson and Portnoy expand on their initial post about discount fraud. Nelson, is a partner at Sideman & Bancroft, specializing in litigation, with a focus on white collar criminal defense and complex commercial litigation. Portnoy is an associate at the firm, focusing on business crimes defense and complex commercial litigation.—Jennifer D. Bosavage, editor
Last month, we explained why your company should be concerned about discount fraud, the practice of sophisticated fraudsters taking advantage of companies that offer highly discounted products under certain circumstances. The typical scenario involves a customer who asks for deep discounts on your products based upon an articulated need; for example, asking for discounted products to build a new data center.
For many companies, it is a business necessity to provide such discounts to address particular end customers’ unique circumstances. In fact, the vast majority of those opportunities are genuine, and lead to additional sales and long-term customer relations.
But sometimes the representations made concerning the end use of the specially discounted products are false, and those products wind up not with the purported end user, but somewhere else. Such schemes cause lasting damage. Your company has received less than it otherwise should have for those products, and those same products are then sold by the fraudsters into the marketplace where they undercut established sales channels.
Your company may already have been a victim of this type of fraud, or perhaps your company has identified discount fraud as a potential problem. Regardless of your situation, there are concrete steps you can take to defend your company from this type of abuse. Putting your company in the best position to protect against such fraud begins with strengthening your internal processes.
While the steps outlined below, designed to combat discount fraud, do not represent a one size fits all solution, your company can mitigate against these fraud risks by designing controls and protocols into your company’s internal system. How your company does this will likely depend on your sales operation, structure and many other factors.
Following are the general principles of what some successful companies are doing to address this issue, and what we think works.