Discount fraud

Sales of “gray market” products generally are viewed as legal, but diversion of deeply discounted products from authorized distribution networks is often based upon fraud. Here we examine schemes to illicitly obtain millions of dollars of discounts through this pervasive but relatively unknown type of fraud. And we offer ways to ward off fraudsters’ efforts.

For years, Florida-based Tropical Investments obtained from U.S. manufacturers at deeply discounted prices large quantities of baby formula and other products regulated by the U.S. Food and Drug Administration. The company’s principals told the items’ manufacturers they needed the discounts to support their humanitarian efforts to sell the products to disadvantaged customers in Suriname via government procurement contracts.

Tropical Investments touted to the products’ manufacturers that it had contracts with the Suriname government to supply the goods, and that one of the company’s principals was originally from Suriname.

The company also provided export documents that showed shipments of these products into Suriname. Despite the company’s assertions, the entire operation was a fraud. Tropical Investments never exported the products but sold them in the U.S. at prevailing prices, which netted the fraudsters over $200 million in illicit profits.

The company generated export documents by shipping to Suriname empty crates and crates filled with products that were later returned to the U.S. Sometimes the company simply fabricated export documents.

In May 2022, three defendants were convicted in U.S. federal court of wire fraud, money laundering, smuggling and other charges, and received 18-year prison sentences. The court also entered forfeiture judgments totaling over $202 million. [See “Fraud Scheme Involving Baby Formula Leads to 18-Year Federal Prison Sentences for Swindlers,” U.S. Department of Justice (DOJ), May 20, 2022.]