June 17, 2019

How should companies manage compliance risks related to discounts to third-party distributors?


Your company relies on Distco Inc. as its distributor in Brazil. Distco is a relatively new company, but has experienced recent success and is progressively increasing its geographic territory and sales.  The Distco representative responsible for Brazil approaches your company with concerns about stagnant sales in her territory.  To further growth, the representative seeks an additional 3% discount in the price at which your company sells products to Distco.  The Distco sales representative says that the additional discount is needed in order to offset the anticipated cost of marketing activities in Brazil.  When asked about specific marketing plans for Brazil, the Distco representative responds that she does not have anything formal in place, but believes there will be significant expenditures associated with business dinners and educational events for end-user customers. 

Key Considerations:

  • Discounts may give rise to anti-corruption and anti-bribery concerns as they can be used to fund improper payments to end-user customers, which may include governments or  state-owned entities.  
  • Companies should ensure that they have an informed understanding of normal discount levels in the particular market, and implement procedures to review and flag any unusual distributor discounts or any requests to depart from normal discount levels.
  • Companies should understand the purpose for which any incremental discounts will be used and should ensure that all discounts are recorded accurately in the company’s books and records. All requests for discounts should be accompanied by the appropriate justification. Decisions approving (or rejecting) the request should be memorialized in writing.   
  • Companies should routinely compare the distributor’s margin against the end user price to ensure that third parties are not building in excessive margins that can be used to make improper payments.