Discount fraud occurs when discounted products, with prices specially negotiated for the specific buyer or region, end up with other buyers or in other regions, threatening the strategies businesses rely on to maintain value and market position. Discount fraud poses a serious financial threat, potentially costing businesses an exorbitant amount of dollars in lost revenue. No company is completely immune, as fraudsters continuously find new ways to exploit discount programs. In this article, Sideman & Bancroft Partners Richard J. Nelson and Erica Brand Portnoy share key strategies to help businesses identify and combat this deceptive practice, ensuring robust brand protection.
Recognizing Discount Fraud
Responding to new sales opportunities for your company's products is critical to business growth. However, companies must be cautious when offering steep discounts for unique sales circumstances.
For example, in United States v. Ali, defendants misrepresented themselves to Microsoft to obtain academic edition software at a steep discount, then resold it commercially. This scheme resulted in $20 million in wrongful discounts and led to criminal convictions, imprisonment, and restitution orders. Cases like this highlight the seriousness of discount fraud and the legal consequences for perpetrators.
The Risks to Your Business
If your company's products are in high demand, you are a target for discount fraud. Beyond the financial losses, fraudsters undermine your legitimate channel partners by unfairly competing by getting their hands on lower-priced, fraudulently obtained goods. Protecting your business from this fraud ensures market integrity and safeguards your relationships with honest partners.
Steps to Protect Your Company
1)Invest in Strengthening Fraud Detection
Implement procedures to detect and prevent fraud. Educate employees
on how discount fraud operates and incorporate fraud-prevention
controls into your company's internal systems to support a
comprehensive brand protection framework.
2)Establish an Internal Team
Fraudsters know how to manipulate your pricing
structures—your company must be equally informed. Establish
an internal team to monitor, investigate, and act on leads
regarding potential fraud.
3)Take Legal Action
Companies should not hesitate to take legal action against
fraudsters. Civil lawsuits, such as claims for intentional
misrepresentation or unfair business practices, can provide faster
resolution than waiting for criminal proceedings. Litigation can
recover losses, deter future fraud, and uncover broader fraudulent
networks.
4)Refer Cases for Criminal Prosecution
Discount fraud may constitute mail or wire fraud, warranting
federal or state prosecution. Successful criminal referrals can
result in imprisonment and restitution orders for victimized
companies. Law enforcement actions send a strong deterrent message
to would-be fraudsters, further strengthening your brand
protection.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
