Magazine article Business Credit

NACM Loss Prevention Department's Latest Symposium: Know Your Customer = Stopping Diversion = Increased Profits

Magazine article Business Credit

NACM Loss Prevention Department's Latest Symposium: Know Your Customer = Stopping Diversion = Increased Profits

Article excerpt

BOTH THE SPEAKERS AND ATTENDEES OF THE Loss PREVENTION Department's 1998 Diversion Symposium held in Miami Lakes, FL, came away with the same conclusions: you must know your customer in order to stop diversion-and stopping diversion increases your company's profits.

Most of the attendees were in agreement that if a manufacturer has price differential between markets, then its products are being diverted. Traditional (or international) diversion is defined as "a gray market good is a foreign manufactured good, bearing a valid U.S. trademark that is imported without the consent of the U.S. trademark holder" (US v. Coalition to preserve the Integrity of American Trademarks et al 486 US 281 (1988). Domestic product diversion is defined as "products sold by the manufacturer which are distributed into markets other than originally intended in violation of a contract, law or regulation" (Reginald Montgomery, The Legal Advisor, November 1995 (no, 12).

Philip R. Manuel, CFE, president of the Philip R. Manuel Resource Group, Ltd., Washington, DC, kicked off the educational sessions by defining gray market diversion: "A gray market is an enterprise which uses deliberate trickery and deception to acquire goods from authorized sources of product supply and which is driven by authorized price differentials. The gray market enterprise by necessity is subterranean, conspiratorial and silent, as its goal is the corruption of the authorized channels of supply and pricing."

Manuel told attendees that diverters use fraud to perpetuate their schemes. However, he also stated that "historically law enforcement and prosecutors have not looked at diversion as criminality." He said that although a fraud investigation can be frustrating, it is the fraud aspect of diversion that will convince prosecutors (and company management) to proceed against a diverter.

Manuel suggested that diverters not only commit fraud by violating contracts and creating phony shipping documentation, they also commit what he calls "soft dollar fraud". Soft dollar programs are designed to provide incentives and inducements, such as advertising reimbursements, marketing or demo units, rebates and trade allowances, warranty reimbursements and price protection. He said that when these programs are corrupted by false or grossly inflated claims, "soft dollar program accruals to replace profit in low margin sales."

Manuel told manufacturing attendees that "controlling soft dollar fraud is the key to controlling gray market diversion." He concluded by saying that "Diversion is fraud, so use fraud in your criminal and/or civil prosecutions of diverters."

The next session introduced the attendees to the U.S. Food and Drug Administration's Office of Criminal Investigations (FDAOCI). Terrell L. Vermillion, director of FDAOCI, proclaimed that diversion is a multibillion dollar problem. He said that anything from illegal narcotics to counterfeit nuclear arms have been moved through diversion networks. Vermillion also explained how international money launderers have turned to diversion to cleanse illicit funds. Vermillion said that the FDA is taking an aggressive approach to the problem of diversion fraud. He said that since 1995, FDAOCI has had 655 criminal investigations which resulted in 389 felony convictions, $30 million in criminal fines and $11 million in asset forfeitures.

Special Agent Brian Krompasick of the U.S. Food and Drug Administration's Office of Criminal Investigations and Special Agent Kathleen M. Redmond of the U.S. Department of Agriculture's Office of Inspector General told attendees about a false export diversion case that cost at least four American manufacturers millions of dollars in lost profits. In 1995, Kotby Mohamed Kotby of Geneva, Switzerland; Mary Ellen Kitler of Norristown, PA; and Urs Brunschweiler, a Swiss citizen residing in France, were charged with a 122 count indictment in Newark, NJ. The three were charged with conspiracy, wire fraud, mail fraud, making false statements, issuing false bills of lading and money laundering. …

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