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December 11, 2019

DISCOUNTS

Understanding and Mitigating Third-Party

Discount Risk
By Cuneyt Akay, Sandra Gonzalez and Adelaida Vasquez, Greenberg Traurig

Juniper Networks (Juniper) recently settled discounts – signaling the expectation that a
allegations with the SEC that it violated the commercial policy should have existed. In more
FCPA’s internal accounting controls and recent enforcement actions, company policies
recordkeeping provisions, agreeing to pay $11.7 were deemed to be ineffective because despite
million. The Juniper enforcement action is a having company policies in place, improper
cautionary tale on the corruption risk of giving payments still managed to be made. The
non-standard discounts to third parties and following article analyzes several enforcement
failing to implement a policy for giving these actions, including the mechanisms for making
types of discounts. the improper payments and discusses possible
compliance measures to mitigate risk.
Under ideal circumstances, companies retain
third parties to leverage their on-the-ground Third-Party Discounts
relationships with end-user customers to
resell company items and/or services. In in Enforcement Actions
exchange, companies will offer discounts to
the third parties and the third parties will sell Juniper Networks (2019)
the items or services at list price and use a
portion of the discount for their own profit Juniper is a networking and cybersecurity
margin. The amount of the discount may solutions company that uses third-party
vary based on the third party’s sales volume. intermediaries, known as “channel partners,”
The problem arises when third parties use to sell to end-user customers. Between 2008
discounts to create slush funds to make and 2013, sales employees of Juniper’s Russia
improper payments to government officials. subsidiary convinced senior management
that the company needed to offer additional
The Juniper case is not the first time the discounts on its products to meet competitive
U.S. government has imposed penalties on a demands. However, these sales employees had
company for failing to analyze and monitor made secret agreements with various channel
discounts to third parties. However, the U.S. partners whereby the increased discounts
government’s expectations of companies that were not offered to the customers. Instead,
engage distributors has changed over the these additional discounts were retained by
years. In the Sanofi enforcement action, the the channel partners and eventually routed
SEC explicitly noted that no standardized into accounts that were off Juniper’s books.
commercial policy existed for distributor

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These off-book accounts were subsequently the parent company was satisfied it could
used by company employees and channel operate compliantly). The SEC’s reference to
partners to fund leisure trips for customers, an “independent and expert investigations
including government officials, without function” reflects the nature of the allegations
obtaining proper internal Juniper approvals. that gave rise to the violations. It also indicates
These trips included visits to Italy, Portugal that the SEC approves of an independent and
and the United States and involved sightseeing expert investigations function. Independence
tours, amusement parks and tours of national and expertise are important because they lend
parks. In some instances, the customers’ credibility to investigations that will withstand
family members were also invited on the trips. regulator scrutiny, should it come to that.
These trips were not to Juniper facilities or to
attend industry conferences. The trips had no See “Juniper Networks Resolves SEC Charges
legitimate business purpose but were designed for $11.7M After Allowing Subsidiary Misconduct
specifically to improperly influence customers to Continue for Years” (Oct. 2, 2019).
to obtain more business.
Sanofi (2018)
In 2009, senior management learned about
these off-book accounts and the improper Sanofi is a pharmaceutical company operating
discounts offered, both of which violated in over 100 countries with approximately
company policy. However, Juniper’s remedial 107,000 employees worldwide. The SEC’s
attempts were ineffective and failed. For investigation focused on three non-U.S.
example, employees simply resorted to using Sanofi subsidiaries that allegedly used fake
personal communication devices instead of expenses for purportedly legitimate travel and
work email to evade detection by the company. entertainment expenses, distributor discounts
Ultimately, the misconduct continued until 2013. and credit notes to distributors. Specifically,
Sanofi senior managers paid funds to foreign
The SEC alleged that Juniper “failed to officials derived from discounts (typically 20
accurately record the incremental discounts to 30%) and credit notes on Sanofi products.
and travel . . . in its books and records” and did In the scheme, the distributor kicked back
not “devise and maintain a system of internal funds to Sanofi employees who then delivered
accounting controls sufficient to prevent the illicit proceeds to government officials.
and detect off-book accounts, unauthorized The SEC noted that at the time, Sanofi had no
customer trips, falsified travel agendas and standardized commercial policy for distributor
after-the-fact travel approvals.” discounts and did not review the discounts
provided by local management. Moreover,
The SEC also detailed Juniper’s remedial tender sales increased 200 percent and
actions – such as establishing an independent included Sanofi’s top-selling products.
and expert investigations function. SEC
enforcement actions typically include remedial The SEC settled its case against the Paris-
efforts, some more detailed than others. For based company for violations of the FCPA’s
example, they vary from vague remedial efforts books and records and internal accounting
(implement new compliance and accounting control provisions for $25.2 million
procedures) to more specific (ceasing business (disgorgement, penalty and prejudgment
operations at the foreign subsidiary until interest).

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See “Sanofi SEC Settlement Offers Lessons on Lilly. In 2007, Eli Lilly approved two unusual
Pharma Discounts, Samples and Receipts” discounts of 17% and 19% to a nationwide
(Sep. 19, 2018). distributor. The company did not question this
higher discount. Ultimately, the distributor
Smith & Nephew (2012) resold the product to a government entity and
used a portion of the purchase price to bribe
Looking further back, the SEC and DOJ government officials in order to obtain/retain
resolved its FCPA enforcement action against a business benefit such as the government
Smith & Nephew in 2012. In the scheme, a continuing to purchase the Eli Lilly product.
distributor made illicit payments to public
doctors employed by government hospitals The SEC concluded that Eli Lilly did not
or agencies in Greece. For years, Smith & conduct sufficient analysis to verify the facts
Nephew sold orthopedic products to its Greek surrounding the requests for additional
distributor at a discounted list price and the discounts nor did it have an adequate internal
distributor re-sold to Greek public hospitals accounting system to detect possible FCPA
for full list price. For reference, the discounts violations in its transactions. Accordingly, Eli
in a typical arrangement were 25-40 percent. Lilly was required to pay disgorgement of $13.9
million, prejudgment interest of $6.7 million
Smith & Nephew also paid marketing expenses and a penalty of $8.7 million.
for the distributor, up to 10 percent of sales.
In 1997, Smith & Nephew started to charge See “Pharma Giant Eli Lilly Agrees to $29.4
the full list price and then paid for marketing Million Consent Judgment to Settle SEC
services to shell companies that were never Charges of FCPA Violations Arising Out of Its
provided. Smith & Nephew inaccurately Operations in Russia, China, Brazil and Poland”
recorded the bribes as legitimate marketing (Jan. 9, 2013).
expenses in their books and records.
Compliance Measures to
Importantly, the DPA did not suggest (as the
SEC noted in Sanofi) that Smith & Nephew Mitigate Risk
implement a commercial policy for distributor
discounts. The compliance measures used to mitigate
risk when engaging distributors and giving
Eli Lilly (2012) discounts will depend on the company’s
business and the corruption risk in the region,
Eli Lilly is a pharmaceutical manufacturer that among other factors.
hired distributors in Brazil to sell its products
to both private and government customers. Company Policy on Discounts
Generally, the company sold its products to to Third Parties
its distributors at a discount, ranging between
6.5% and 15% with most receiving a 10% As the SEC intimated in the Sanofi enforcement
discount. These distributors’ compensation action, companies that engage high-risk
was the difference between the price at resale third parties should consider implementing a
and the discounted price negotiated with Eli standardized commercial policy for distributor

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discounts. One that includes a process that Further, it may make sense to require
analyzes the factors surrounding the discount the customer’s formal confirmation of
and that ensures the approved discount the discount. Companies should ensure
is properly used with respect to the end transparency around discounts for government
customer is advisable. customers. That is, if a non-standard discount
is requested where the end customer is a
Consistent with the above enforcement government entity, companies should not
actions and U.S. government expectations, the only verify the legitimacy of the request but
existence of a standardized commercial policy also consider obtaining a formal confirmation
for distributor discounts is not enough – a from the end customer that they are aware
company’s commercial policy should create of the discount. This process would ensure
a process for evaluating the reasonableness that the approved discounts are passed on to
of a discount. The commercial policy should the end customers and mitigates the risk that
identify the parameters of permissible distributors use the inflated price difference
commercial discounts, which should specify for improper business advantages.
the types of eligible end customers, volume
discounts, and permitted standard discounts, if As with any company policy, it is important
any. The policy should also define distributors to train relevant company employees on the
that the company uses, if there’s more than one. requirements of the commercial policy. In
Juniper, the employees used personal devices
If the company permits non-standard to evade detection of their discount practices.
discounts, the commercial policy should also Companies may wish to implement a policy
specify a process for reviewing and approving to prohibit using personal email accounts for
non-standard discounts (and marketing company business.
expenses if applicable) before executing a
third-party agreement that includes discounts Considerations During Third
on selling company items or services. For high- Party Engagement Process and
risk transactions, this analysis should include
more than just a local business confirmation After Engagement
of the need for the additional discount.
For example, general explanations such as In addition to standard due diligence and
competition in the market, end customer budget engagement procedures for high-risk third
or potential gain from future contracts should be parties, companies should include the
substantiated with actual market research. following in contracts:

Additionally, companies should consider • anti-corruption clauses, including audit

implementing a process that requires various rights;
levels of local business unit approvals for • the amount of discount offered and
non-standard discounts before final review what process is followed to increase that
and decision from companies’ management/ discount, such as the addendum to a
headquarters. Ultimately, the commercial contract; and
policy on discounts should have sufficient • representations and warranties from
controls to verify the legitimacy of requests for distributors that no side funds or
any type of additional discount. off-book accounts exist.

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It is also important to review all forms of will make sense for a specific company.
compensation, not just distributor discounts, The reasonableness of a discount will vary
to the third party. For example, Sanofi issued based on many factors: what is reasonable
credit notes to vendors and in some cases, for Smith & Nephew was not reasonable for
vendors exchanged the credit notes for cash Eli Lilly. In fact, companies are increasingly
from Sanofi. modifying their business strategy to go direct
to consumer and eliminate use of distributors.
After engagement, the company should Texas Instruments recently announced in
follow a risk-based approach to auditing October 2019 that it would do exactly that. The
third parties that are given discounts. If the company indicated that direct relationships
engagement permits marketing expenses, with customers allows Texas Instruments “to
the company should request evidence like provide better service and greater assurance of
the online advertisement or signage. If the supply, among other benefits.”
company negotiates a particular third-party
discount based on sales volume, it should go
back and review prior sales to determine if the Cuneyt Akay is a shareholder in Greenberg
third party achieved that sales volume. If the Traurig LLP’s Denver office. He assists clients
additional discount was approved based on the throughout the world (with a focus on Africa
potential for future contracts, the company and Asia) to design and implement effective
should follow up to determine status of said compliance programs.
future contracts.
Sandra D. Gonzalez is a shareholder based in
Finally, if a high-risk distributor requests Austin, Texas and assists clients at every phase
changes to the compensation arrangement, of an anti-corruption compliance program in
either discounts or otherwise, the company locations across the globe, with a particular
should analyze the changes and the associated focus on Latin America, Africa and Asia.
corruption risk. Any changes should be
reflected in an addendum to the engagement Adelaida Vasquez is a Houston shareholder
agreement. providing counsel on international compliance
matters and transactional due diligence
See “From Discounts to Slush Funds: Red Flags issues arising out of various government
to Heed and Eight Steps to Take to Avoid SAP’s regulations, including the FCPA. She assists
$3.9 Million Mistakes” (Feb. 10, 2016). clients throughout Latin America with FCPA
compliance.
Customizing Policies and
Potentially Eliminating
Distributors

It is important to design compliance

mitigation measures that are embedded in the
company’s process that adequately address the
company’s risk. Not all of the above measures

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