One of the issues in any compliance program is the compensation paid to a third-party as FCPA exposure arises when companies pay money, either directly or indirectly, to fund bribe payments. Another area that leads to exposure from third-parties is with distributors. In a distributor relationship, the distributor purchases a product; taking risk of loss and title, at a discount from a manufacturer. The distributor resells at an uplift and that spread between purchase price and sales price is the distributor’s income. If a product is purchased at an inflated discounted rate and then sold, the difference between the purchase price and resale value could be used for corrupt purposes. Commission payments and excessive distributor discounts can be channeled to pay bribes.
The FCPA Resource Guide, 2nd edition noted that common red flags associated with third-parties include “unreasonably large discounts to third-party distributors.” When companies grant distributors uncommonly steep discounts, bribes can result either: 1) because the distributor is instructed by the company to use the excess amounts to fund corrupt payments; or 2) because the distributor pays bribes on its own, without the express direction or implicit suggestion from the company, to gain some business advantage.
Three key takeaways:
- The creation of well-thought out process which operationalizes your compliance program around distributor compensation, in a manner which documents your decision-making calculus is key.
- Require multiple levels of approval for an out of range distributor discount.
- Tracking distributor discounts globally make your company more efficient.
