Tag: Distributors

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Phillips FCPA Enforcement Action: Lessons Learned – Part 3

We conclude our exploration of the Koninklijke Philips N.V. (Philips) Foreign Corrupt Practices Act (FCPA) enforcement action involving the Securities and Exchange Commission (SEC), for Phillips actions in China and its Chinese subsidiary, Phillips China. As set out in the SEC Order, Philips was order to “pay disgorgement of $41,126,170, prejudgment interest of $6,047,633, and a civil monetary penalty of $15,000,000” for a total fine and penalty of $62 million. Yesterday we considered the bribery schemes employed by Phillips China. After having reviewed the facts and Order we look at some lessons learned.

Distributors Under the FCPA

This is the third recent FCPA enforcement action involving distributors, following Oracle and Microsoft. Along with those cases, Phillips drives home the message that distributors are a risk under the FCPA. Oracle got into FCPA hot water regarding distributor discounts and marketing reimbursement. Microsoft came to OFAC grief as it did not know to whom its distributors were doing business as some distributors were selling to sanctioned entities. While distributors may not seem to be as high a risk commissioned sales agents, they do present a risk, which must be assessed and then managed with ongoing monitoring and improvements as appropriate. None of these steps were apparent from this FCPA enforcement action or found in the Order.

As noted yesterday, Philips in 2013 had agreed to “enhanced an anti-corruption training program that includes a certification process and a variety of training applications to ensure broad-based reach and effectiveness.” Whatever this training was, it does not seem to have reached China. Effective training is about communications, engagement and demonstrable implementation of the training messaging going forward. Once again Philips China did not seem as if that communications about not engaging in bribery and corruption was taken into its business operations.

Recidivist Behavior Under 2023 Corporate Enforcement Policy

As noted yesterday, in a May 10, 2023 Press Release,  Phillips announced that “The U.S. Department of Justice (DOJ) has closed its parallel inquiry into these matters” and the company intoned that it “fully cooperated with the SEC and DOJ.” Philips also reported that the FCPA matter had “previously been disclosed in Philips’ Annual Reports 2019 through 2022.”

There has been no statement by the Department of Justice (DOJ) regarding Philips. Further there has been no declination regarding Philips publicly announced by the DOJ. Given the strong statement about recidivists by Deputy Attorney General Lisa Monaco in announcing the Monaco Doctrine last September and the need for speed referenced by Kenneth Polite in announcing changes to the Corporate Enforcement Policy in January 2023; one might have expected some statement from the DOJ.

If the DOJ really wants companies to step forward and self-disclose, it would seem that Philips would be a good example to use. Apparently there was not self-disclosure, not extraordinary cooperation and no compliance with the 2013 SEC Order concluding the first Philips FCPA enforcement action. In other words, all the requirements for a company to obtain the significant credit under the 2023 Updated Corporate Enforcement Policy. If you add in Philip’s prior FCPA enforcement action into the mix, it would certainly appear that Phillips’ culture of compliance was lacking, at least along the lines of that aspect of the Monaco Doctrine.

Lessons Learned

With Phillips filing out the trio of recent distributor enforcement actions, it is clear that companies need to start paying more attention to the distributor sales model as a source of risk. Of course, robust due diligence screening is a must but it is only a starting point. Companies need to monitor the relationship after the contract is signed. The Philips FCPA enforcement action points toward the need for robust data analytics particularly around special price discounts with distributors creating excessive distributor margins which could be used to fund improper payments to employees of state-owned enterprises or governmental officials. A data analysis would quickly and efficiently show any special discount or discount beyond the standard range given to distributors. Moreover, regional discounts could be taken into account easily using the data analytics approach.

Additionally the maintenance of adequate books, records, and accounts concerning special price discounts to demonstrate that the discounts were supported by adequate documentation to ensure their business justification and management’s approval of them. This basic step also acts as a basic compliance internal control so that there can not only be oversight of the proposed distributors and any discounts but also creates a documented audit trail if a regulator ever comes knocking.

At this point there is perhaps some head-scratching about the final resolution, if any, regarding Philips given the state of the record as laid out by the Order. However it is clear there are significant lessons for the compliance professional from the Phillips enforcement action around distributors. I hope that at some point there is greater clarity under the 2023 Corporate Enforcement Policy update.

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Phillips FCPA Enforcement Action: The Risks with Distributors – Part 1

Last week the Amsterdam based Koninklijke Philips N.V. (Philips) agreed pay more than $62 million to the Securities and Exchange Commission (SEC) to resolve charges that it violated the Foreign Corrupt Practices Act (FCPA) with respect to conduct related to the sales of medical diagnostic equipment in China. This case is yet another recent FCPA enforcement matter involving distributors. It demonstrates once again some of the inherent risks in a distributor sales model, as opposed to the model traditionally seen as the highest risk, the commissioned sales-agent. (Shout out to Harry Cassin at the FCPA Blog for breaking the story to the compliance community.)

According to the SEC Press Release announcing the matter, “Philips’ subsidiaries in China, cumulatively referred to in the order as Philips China, used special price discounts with distributors that created a risk that excessive distributor margins could be used to fund improper payments to government employees.” Equally significant was that the “SEC’s Order also found that employees, distributors, or sub-dealers of Philips’ subsidiaries in China engaged in improper conduct to influence hospital officials to draft technical specifications in public tenders to favor Philips’ products.” The SEC pointed to two examples, “in one instance, a district sales manager at Philips China provided funds to a hospital director in return for the director’s assistance in the procurement process, and, in another instance, Philips China employees discussed tailoring technical specifications for a public tender with hospital directors so that only Philips China and two other manufacturers would qualify for the bid.” As a result of its conduct, Philips was unjustly enriched by approximately $41 million.

I. Introduction

According to the Order, in “China the majority of hospitals and other healthcare providers are state-owned enterprises. These government-owned entities purchase the majority of their diagnostic imaging equipment through public tenders. By 2016, the majority of Philips China’s sales were made indirectly through authorized distributors or sub-dealers engaged by the authorized distributors. By 2018, 91% of Philips’ diagnostic imaging revenue in China was earned through this indirect sales channel.”

Philips China aggressively grew its diagnostic imaging business, winning public tenders in an increasingly competitive market. Phillips was aggressive in its pricing discounts to do so. According to the Order, “in some transactions, at the request of distributors, Philips China provided special pricing discounts on the health technology equipment that it sold to its distributors. However, Philips China’s approval processes and its recording of the special pricing discounts were not subject to sufficient internal accounting controls to ensure appropriate management authorization of the discounts.”

II. The Corruption Schemes

  1. The Hospitals

The Order related that in multiple transactions between 2014 through 2019, Philips China employees, distributors, or sub-dealers engaged in improper bidding practices to increase the likelihood that Philips China’s distributors or their sub-dealers were awarded public tenders to sell medical equipment to government-owned hospitals. There were three general prongs to these bribery schemes. The employee responsible for writing the technical specifications, in consultation with a bidder such as Phillips would provide that same bidder “with a competitive advantage in the public tender prior to the opening of the bidding period” by providing the information to the bidder prior to the formal beginning of the bidding process.

Another scheme was to draft specifications which would meet that bidder’s equipment “to increase the likelihood that the selected manufacturer would qualify for the winning bid.” In the final bribery scheme the “hospital employee directed the winning bidder or its distributor or sub-dealer to prepare the manufacturer’s bid and also two additional accompanying bids to meet the three-bid requirement of public tenders and give the appearance of legitimacy.” Further, “Phillips China employees who participated in the conduct described above included district sales managers, sales employees, and employees in the technical group that supported sales.”

  1. Phillips Responses

The SEC Order pointed to three examples of bribery schemes engaged in by Philips in response to the corruption perpetrated by the health care providers.

a. Bribes for Inside Information

In one example a Philips China district sales manager for Hainan Province delivered approximately $14,500 directly to the home of a director of the hospital’s radiology department in return for the director’s assistance in the procurement process. With the inside information obtained through this payment, “the sales team discussed the specifications to be included in the bid with the relevant hospital director, and its distributor prepared an accompanying bid with another manufacturer’s products.” It ended with a “procurement award for two Philips devices valued at $4.6 million.”

b. Bribes to Obtain Unlawful Influence

In another example, the decision-making directors at a hospital discussed tailoring the technical specifications with Philips China employees so that only Philips China and two other manufacturers would qualify to compete in the bidding process. In October 2017, a Philips China distributor won the bid to sell two Philips devices to the hospital. This tender was won as a result of inappropriately influencing the tender specifications, netting Philips a tender valued at $475,000.

c. Excessive Discounts Provided to Distributors

In perhaps the most classic distributor bribery model, Philips China’s use of special price discounts with distributors created the risk that excessive distributor margins could be used to fund improper payments to employees of government-owned hospitals. The SEC Order did not specify the amount of the discounts or how it differed from the standard (if any) discount provided to Philips distributor.

Join us tomorrow where we consider Philips lack of internal controls, the fine and penalty, the recidivism of Philips and any potential Department of Justice (DOJ) enforcement action.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program for 3rd Parties – Distributor Compensation

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 the risk of loss and title, at a discount from a manufacturer. The distributor resells at an uplift, and that spread between the purchase price and sales price is the distributor’s income. If a product is purchased at an inflated discounted rate and 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 company instructs the distributor 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:

  1. Creating a well-thought-out process that operationalizes your compliance program around distributor compensation in a manner that documents your decision-making calculus is key.
  2. Require multiple levels of approval for an out-of-range distributor discount.
  3. Tracking distributor discounts globally make your company more efficient.
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31 Days to More Effective Compliance Programs

Following the Money Through Distributors

Polycom came to FCPA grief in China, as have many other US companies. The bribery scheme was long running, occurring from 2006-2014. They included the creation of an off-the books accounting and recordation system for corrupt payments made by or on behalf of Polycom China. The money to fund these bribes came through variations of the basic bribery scheme. There would be a discount between the price reported to Polycom and that paid by the buyer. These discounts were not passed on to the end customer, but instead were intended to cover the cost of the payments the distributors made to the Chinese government officials.

In other words, this discount would form the basis of the pot of money to pay the bribe.
The Chinese business unit was equally creative with the reasons for the discounts, which were listed in the CRM. Polycom China usually cited competition with one or more vendors was required to give discounts on pricing. They also claimed that some end-using customers refused to pay full price. However these were all false excuses entered into the CRM to hide the truth from auditors and others charged with reviewing and approving the discounts.
Three Key Takeaways

  1. Channel your inner Woodward and Bernstein and follow the money.
  2. Simply because some type of compliance oversight is difficult or requires extra effort, it is no excuse not to monitor.
  3. Channel you inner Ronnie Reagan as well and ‘trust but verify.
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31 Days to More Effective Compliance Programs

One Month to More Effective Compliance for Business Ventures – Distributors as Business Venture Partners

Many compliance practitioners generally view distributors as a part of their third-party risk management program, with most of their attention on the pre-contract phase of the risk management process. Typically, most of the efforts are spent on due diligence with less on managing the relationship after the contract is signed. However, many facets of a corporate relationship with a distributor are closer to those of other business venture partners.

One of the issues in any compliance program is the compensation paid to a business venture partner as FCPA exposure arises when companies pay money – either directly or indirectly – to fund bribe payments. In the traditional intermediary scenario, the company funnels money to a business venture partner, who then passes on some or all of it to the bribe recipient. Often, the payment is disguised. Rethinking approaches to evaluating distributor activities is but one of the ways that the increased number of enforcement actions, 2020 FCPA Resource Guide, 2nd edition and DOJ’s 2020 Update to the Evaluation of Corporate Compliance Programs, have provided insight into how the government interprets and enforces the FCPA. This information, in turn, allows companies to get smarter about FCPA compliance. With a manageable amount of forethought, companies who rely on distributors can create, install and maintain systems which allow them to spend fewer resources to more effectively prevent violations. Moreover, these systems generate tangible proof of a company’s genuine commitment to FCPA compliance, by more fully operationalizing this aspect of their compliance program.
Many companies have been involved in FCPA enforcement actions because of distributors. This sales side channel does not receive the focus equal to that of commissioned sales agents. Yet it can present an equally large compliance risk. By using this DAR approach, you will have created a well-thought out process which will operationalize your compliance program around distributor compensation, in a manner which documents your decision-making calculus.
Three key takeaways: 

  1. 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.
  2. Require multiple levels of approval for an out of range distributor discount.
  3. Tracking distributor discounts globally makes your company more efficient.
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FCPA Compliance Report

Oracle FCPA Enforcement Action

In this episode, I take on a solo pod to discuss and consider the Oracle FCPA enforcement action brought by the Securities and Exchange Commission.

Key areas we discuss on this podcast are:

  • Background facts.
  • Same facts in same country?
  • Failure of a paper program.
  • The need for data analytics.
  • Where is the DOJ?
  • What are the lesson learned going forward?

 Resources

For a White Paper on the Oracle FCPE enforcement action, email tfox@tfoxlaw.com

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Compliance Into the Weeds

The Oracle FCPA Enforcement Action

Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to more fully explore a subject. In this episode, we look at the recently announced SEC Foreign Corrupt Practices Act enforcement action involving Oracle. Highlights include:

  1. Recidivist behavior in some countries with similar schemes.
  2. Policy, procedure, and internal controls failures.
  3. Why no monitor.
  4. Compliance programs lessons learned.
  5. What about the DOJ?

 Resources

Matt in Radical Compliance

Tom in the FCPA Compliance and Ethics Blog

  1. Background
  2. The Schemes in Action
  3. Parking in India
  4. The Comeback and DOJ
  5. What it all means
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Oracle: FCPA Recidivist Part 3 – Parking in India

This week we are exploring the 2022 Foreign Corrupt Practices Act (FCPA) enforcement action brought by the Securities and Exchange Commission (SEC) involving Oracle Corporation. As we have noted, Oracle is now a recidivist FCPA violator, having been involved with a similar enforcement action back in 2012. I thought it would instructive to review that prior enforcement action to see what the bribery schemes were, if Oracle lived up to the remediation steps it took in 2012 and what it might all mean for the 2022 enforcement action.

According to the 2012 Complaint, the scheme worked as follows: Oracle India would identify and work with the end user customers in selling products and services to them and negotiating the final price. However, the purchase order would be placed by the customer with Oracle India’s distributor. This distributor would then purchase the licenses and services directly from Oracle, and resell them to the customer at the higher price than had been negotiated by Oracle India. The difference between what the government end user paid the distributor and what the distributor paid Oracle typically is referred to as “margin” which the distributor generally retains as payment for its services. That description sounds like most distributor relationships but this was not what got Oracle into trouble.

The Bribery Scheme

As further specified in the 2012 Compliant, “certain Oracle India employees created extra margins between the end user and distributor price and directed the distributors to hold the extra margin inside funds. Oracle India’s employees made these margins large enough to ensure a side fund existed to pay third parties. At the direction of the Oracle India employees, the distributor then made payments out of the side funds to third parties, purportedly for marketing and development expenses.” The 2012 Compliant noted, “about $2.2 million in funds were improperly “parked” with the Company’s distributors.” To compound this problem, employees of Oracle India concealed the existence of this side fund from Oracle in the US and hence there was an incorrect accounting in Oracle’s books and records.

The 2012 Complaint further noted, “Oracle India’s parked funds created a risk that they potentially could be used for illicit means, such as bribery or embezzlement” and then went on to highlight such an instance which occurred in May 2006, where Oracle India secured a $3.9 million deal with India’s Ministry of Information Technology and Communications. Oracle’s distributor accepted payment from the end user for the full $3.9 million. Under the direction of Oracle India’s then Sales Director, the distributor sent approximately $2.1 million to Oracle, which Oracle booked as revenue on the transaction. Oracle India employees then directed the distributor to keep approximately $151,000 as payment for the distributor’s services. The Oracle India employees further instructed the distributor to “park” the remaining approximately $1.7 million to be used for disbursement towards “marketing development purposes.” Some two months later, an Oracle India employee provided the distributor with eight invoices for payments to third party vendors, in amounts ranging from approximately $110,000 to $396,000. These invoices were later determined to be false. Further, none of these third parties, which were just storefronts and provided no services on the deal, were on Oracle’s approved vendor list.

Failure of Internal Audit

All of the above were in violation of Oracle’s internal policies, however the 2012 Compliant specified that “Oracle lacked the proper controls to prevent its employees at Oracle India from creating and misusing the parked funds” and prior to 2009 “the Company failed to audit and compare the distributor’s margin against the end user price to ensure excess margins were not being built into the pricing structure.” Oracle failed to either (1) seek transparency in its dealing with the distributor and (2) audit third party payments made by the distributors on Oracle’s behalf” both of which would have enabled the Company to check that payments were made to appropriate recipients. Indeed, the scheme only came to Oracle’s attention during an unrelated “local tax inquiry to Oracle’s India distributor”. This sounds reminiscent of HP Germany where a routine Bavarian Provincial tax audit picked up the suspicious payments which lead to a FCPA investigation.

2012 Remedial Steps

However, even with the above listed failures of Oracle’s compliance program, the Company did take Maxim Three of McNulty’s Maxim’s to heart: What did you do to remedy it? The 2012 Complaint indicated that the person in charge of supply chain at the Indian subsidiary resigned and left the company. An internal investigation was undertaken and four employees of the Indian subsidiary who had actual knowledge of the scheme were terminated. Additionally, “Oracle took other remedial measures to address the risk and controls related to parked funds, including: conducting additional due diligence in its partner transactions in India so that Oracle had greater transparency into end user pricing in government contracts; terminating its relationship with the distributor involved in the transactions at issue; directing its distributors not to allow the creation of side funds; requiring additional representations and warranties from distributors to include the fact that no side funds exist; and enhancing training for its partners and employees to address anti-corruption policies.”

So, what exactly did “directing its distributors not to allow the creation of side funds; requiring additional representations and warranties from distributors to include the fact that no side funds exist; and enhancing training for its partners and employees to address anti-corruption policies” entail for Oracle employees and business operations going forward, leading to the 2022 enforcement action? Since the events leading to the 2012 enforcement action were centered in India, one might reasonably assume that Oracle would prioritize all of these remedial steps in India and add more focused monitoring in India to make sure the remediate steps were implemented and followed. In the case of Oracle India, apparently not.

Join me tomorrow where we explore the comeback by Oracle leading to the 2022 enforcement action and explore questions related to the Department of Justice (DOJ) and where they may stand on the Oracle matter.

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Oracle: FCPA Recidivist Part 1 – Background

Oracle Corporation now joins the ignominious group of Foreign Corrupt Practices Act (FCPA) recidivists. Last week, in a Press Release, the Securities and Exchange Commission (SEC) announced an enforcement action which required Oracle to pay more than $23 million to resolve charges that it violated the FCPA when “subsidiaries in Turkey, the United Arab Emirates (UAE), and India created and used slush funds to bribe foreign officials in return for business between 2016 and 2019.” The recidivist label comes from the sad fact that the SEC “sanctioned Oracle in connection with the creation of slush funds. In 2012, Oracle resolved charges relating to the creation of millions of dollars of side funds by Oracle India, which created the risk that those funds could be used for illicit purposes.”

 As reported in the FCPA Blog, Oracle is now one of 15 FCPA recidivists out of a total of 246 FCPA enforcement cases. This gives a recidivism rate of 6.1%. Clearly recidivism is also on the mind of the Department of Justice (DOJ) in the announcement of the Monaco Doctrine and release of the Monaco Memo. Given the overall tenor of the Oracle SEC Order, it is not clear if the SEC has the same level of concern as the DOJ on repeat offenders.

According to the Order, from at least 2014 through 2019, “employees of Oracle subsidiaries based in India, Turkey, and the United Arab Emirates (collectively, the “Subsidiaries”) used discount schemes and sham marketing reimbursement payments to finance slush funds held at Oracle’s channel partners in those markets. The slush funds were used both to (i) bribe foreign officials, and/or (ii) provide other benefits such as paying for foreign officials to attend technology conferences around the world in violation of Oracle’s internal policies.” I guess those employees at the subsidiaries, and specifically those in India, did not receive the Memo about Oracle’s 2012 FCPA settlement, where they promised to institute a series of internal controls to clean up the problem.

During the period in question, Oracle used two sales models, direct and indirect. Under the direct model, Oracle transacted directly with customers who paid Oracle directly. Under the indirect method, Oracle transacted through various types of third parties including straight distributor models, value added distributors (VADs) and value added resellers (VARs). While Oracle used the indirect sales model for a variety of legitimate business reasons, such as local law requirements or to satisfy payment terms, it recognized since at least 2012 that the indirect model also presented certain risks of abuse – including the creation of improper slush funds.

Learning one lesson from the 2012 enforcement action, “Oracle utilized a global on-boarding and due diligence process for these channel partners that Oracle implemented at the regional and country levels. Oracle only permitted its subsidiaries to work with VADs or VARs who were accepted to its Oracle Partner Network (“OPN”). Similarly, Oracle prohibited its subsidiaries from conducting business with companies removed from the OPN.”

Distributor Discounts

According to its policies regarding distributors, a valid and  legitimate business reason was required to provide a discount to a distributor. Oracle used a three-tier system for approving discount requests above designated amounts, depending on the product. In the first level, Oracle at times allowed subsidiary employees to obtain approval from an approver in a subsidiary other than that of the employee seeking the discount. At the next level and for higher level of discounts, Oracle required the subsidiary employee to obtain approval from Oracle corporate headquarters. The final level was a committee which had to approve the highest levels of discount.

The weakness in the Oracle distributor discount policy was that “while Oracle policy mandated that all discount requests be supported by accurate information and Oracle reviewers could request documentary support, Oracle policy did not require documentary support for the requested discounts – even at the highest level.” The standard requests for discounts were those previously seen in the Microsoft FCPA enforcement action, including “budgetary caps at end customers or competition from other original equipment manufacturers.” As the Order noted, “Oracle Subsidiary employees were able to implement a scheme whereby larger discounts than required for legitimate business reasons were used in order to create slush funds with complicit VADs or VARs.” Naturally it allowed distributors which “profited from the scheme by keeping a portion of the excess deal margin” to create a pot of money to pay a bribe.

Marketing Reimbursements

Distributor policies also allowed Oracle sales employees at the Subsidiaries to “request purchase orders meant to reimburse VADs and VARs for certain expenses associated with marketing Oracle’s products.” Once again there was a multi-pronged approval process in place. For marketing reimbursements “under $5,000, first-level supervisors at the Subsidiaries could approve the purchase order requests without any corroborating documentation indicating that the marketing activity actually took place.” Above this $5,000 threshold, additional approvals were required with additional requirements for business justification and documentation.

With these clear and glaring internal control gaps, you can see where it all went wrong for Oracle, the Order noted that “Oracle Turkey sales employees opened purchase orders totaling approximately $115,200 to VADs and VARs in 2018 that were ostensibly for marketing purposes and were individually under this $5,000 threshold.” Yet even when the $5,000 threshold was breached and supervisory approval was required in Turkey and the UAE, “The direct supervisors of these sales employees, who were complicit in the scheme, approved the fraudulent requests.” It is not clear if Oracle compliance had visibility into marketing reimbursement protocols. Of course, the “Oracle subsidiary employees in Turkey and the United Arab Emirates requested sham marketing reimbursements to VADs and VARs as a way to increase the amount of money available in the slush funds held at certain channel partners.” These slush funds were then used to pay bribes.

Please join me tomorrow where I look at the bribery schemes in action and how Oracle was able to obtain such an outstanding resolution and their extensive and aggressive remedial actions.

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31 Days to More Effective Compliance Programs

What is your distributor compensation protocol?


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:

  1. 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.
  2. Require multiple levels of approval for an out of range distributor discount.
  3. Tracking distributor discounts globally make your company more efficient.