The issue of discounts to distributors has raised its head again, as Microsoft is reportedly under FCPA investigation for the actions of some of its distributors overseas. Distributors present different compliance risks than sales agents and representatives and should be managed differently as well.
When companies grant distributors uncommonly steep discounts, it fosters an atmosphere ripe for paying bribes because the distributor is either instructed by the company to use the excess amounts to fund corrupt payments, or pays bribes on its own, without the express direction or implicit suggestion from the company to do so.
The 2012 FCPA Guidance noted that common red flags associated with third parties include “unreasonably large discounts to third-party distributors.” The distributor enforcement cases offer lessons to combat this scenario, which is where legitimate companies require assistance.
How can distributor risk be managed? One mechanism is to install a distributor discount policy and monitoring system tailored to the company’s operational structure. In virtually every business, there exists a range of standard discounts granted to distributors. Under this approach, discounts within that range may be granted without the need for further investigation.
When the distributor requests a discount above the standard range, however, the policy should require a legitimate justification. Evaluating and endorsing that justification requires three steps:
1. Capturing and documenting discount authorization requests
William Athanas, a partner in the law firm of Waller Lansden Dortch & Davis, suggested an approach that would standardize the discounts given to a distributor as a way to manage this risk. He called it a “discount authorization request” (DAR). A DAR is designed to capture a given discount request and allow for an informed decision about whether it should be granted. An employee submitting a DAR must provide details about how the request originated as well as explain the legitimate justification for the elevated discount.
2. Evaluation and authorization of DARs
Formal company processes should be created to evaluate DARs. The goal of this structure is to allow for tiered levels of approval. Usually, three levels of approval are sufficient. Ultimately, the greater the discount contemplated, the higher-level scrutiny the DAR should receive. The goal is to ensure that all DARs are vetted in an appropriately thorough fashion without negatively impacting the company’s ability to function efficiently. It also mandates the operationalization of this compliance issue into multiple disciplines within your organization.
3. Tracking DARs
Once the information gathering, review, and approval processes are formulated, there must be a system in place to track, record, and evaluate information relating to DARs. By tracking the total number of DARs, companies will find themselves better able to determine where and why discounts are increasing, decide whether the standard discount range should be raised or lowered, and gauge the level of commitment to FCPA compliance within the company. Confirming the existence of a completed and approved DAR is an excellent objective measure for internal audit to perform as part of its evaluation of the company’s FCPA compliance measures. This information, in turn, leaves a company better equipped to respond to government inquiries down the road.
This process allows companies to get smarter about FCPA compliance. With a manageable amount of forethought, companies that rely on distributors can create, install, and maintain systems that let them spend fewer resources to more effectively prevent violations. Moreover, these systems generate tangible proof of a company’s genuine commitment to compliance, by more fully operationalizing this aspect of their compliance program.