How To Develop Intelligence To Protect Your Company From Discount Fraud

Discount fraud is on the rise, and, despite companies' best efforts, it's going to continue. But there are ways to defend your products and your company. Nelson, is a partner at Sideman & Bancroft, specializing in litigation, with a focus on white collar criminal defense and complex commercial litigation. Portnoy is an associate at the firm, focusing on business crimes defense and complex commercial litigation.

Last month, we described the internal procedures your company should implement to guard against becoming a victim of discount fraud, the practice of sophisticated fraudsters taking advantage of companies that offer steeply discounted products under certain circumstances. While your company can take steps to monitor and detect such unlawful behavior by designing controls and protocols into your company’s internal systems, discount fraud schemes still happen. No matter how good the procedures your company puts in place, the potential gain from a successful scheme is too enticing for the perpetrators of this crime to stop trying.

[Related: How To Use Internal Procedures to Protect Your Company From Discount Fraud]


Be assured that the fraudsters know your products and how to “package” their scheme to get what they want. They will try to find ways around your procedures. And you need to be equally smart about them.

It is critical to have a dedicated team of internal personnel who receive leads from customers, channel partners, and others, and then follow up on them to investigate. Learning what you can about who is targeting your company, and how they are doing it, gives your company a fighting chance to stem this problem.

Here are a number of tactics some successful companies are using to develop intelligence about the fraudsters that are targeting their companies. Solution providers should share these with their partners.

1. Tap Into What Your Partners Know

Honest partners are harmed as the result of having to compete against resellers who can underbid them by selling discounted products that were stolen through fraud.

Your customer's other partners have likely been vocal about these issues. If your customer has a group set up, get involved. Tap into the group. It's a valuable source of information regarding partner harm – as are the partners themselves. Talk to your partners about what deals they have lost. That information can provide leads for investigating these crimes – for example, doing follow-up with the end-user and asking for the serial numbers of the products they purchased can show where diversion takes place. Note you should consult with counsel before taking this additional step to identify the “do’s and don’ts” of such contact.

2. Be Proactive: Dig Into Your Data Often times, critical information about the fraudsters’ activities is right under your nose. You just need to sift it out. One such way is to pay attention to sales data, such as Point Of Sale data. You may already know who is supposed to have particular products, which are identified by serial number. Some companies which are successfully combatting discount fraud schemes examine a product’s “pedigree” when inquiries are made about a product. If there is a mismatch in the data (for example: the end user the product was sold to is different from the entity that ended up with the product), then it identifies a potential diversion deal that you can investigate further.

3. Sit Down With Your Adversary

New leads can come from unlikely places. If your company’s efforts to stop this type of crime results in a criminal prosecution, then your company may have the opportunity to sit down with the defendant prior to sentencing. View this as an opportunity to learn not only about his scheme, but about what else is out there. Ask questions. Who are the brokers who are selling the stolen products? What does the defendant know about other deals? Who else are they buying from?

There is a great incentive for this defendant to share the details with you. During sentencing, the defendant’s attorney will want to paint the most positive picture of the defendant in order to get the shortest sentence, and thus the fact that the defendant sat down with the victim and provided assistance in the form of truthfully answering all questions is a “plus factor” that the defendant typically wants in order to impact the judge. Take full advantage of this situation to gain new intelligence.

Similarly, when your company is involved in a civil suit (discussed next month), engaging in discovery or settlement exchanges is likely to net intelligence about other fraudsters.

4. Be Attuned to Receiving Information

It can, and does, happen...your general counsel receives an email from an employee who has been approached to take part in a fraudulent scheme. Rather than participating, the employee decides to come forward and provide the information instead. Your company must know how to respond quickly and effectively to this kind of critical information.

If your company participates in industry groups, be sure to follow up on “tips” if they are received. Depending upon the seriousness of the action alleged, and the amount of particularity in the tip, you can follow up to ascertain whether the information is valid. In our experience, sometimes the smallest kernel of information can uncover the largest fraud schemes.

Next month, our how-to post will discuss why a civil suit may be the appropriate tactic to confront a discount fraud perpetrator directly.