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Danone Is Right to Demand Transparency in Aegis Kickback Case

Three years ago, Aegis Media (AGS.L) insisted it was the "victim" when it emerged that its president, Aleksander Ruzicka, and five others had been siphoning credits for free media airtime to a private company and then selling them for his own profit.

But client Danone (BN.PA) doesn't believe Aegis is the victim. It believes the agency is the perpetrator. The company won a ruling in a German court that will require Aegis to reveal all the ad discounts it received between 2003 and 2005. It could be as much as $22 million (€15m or £13.2m).

So called "volume discounts" occur when agencies buy media airtime or other services (such as print and TV production) from vendors who then offer the agency a rebate or discount on their bulk buys. Client contracts generally require that such discounts be returned to the client -- but because the vendors offer them to the agency, the agency is tempted is to keep them as revenue, and hope the client never finds out.

That is the situation Aegis is in right now.

Let's be clear: Volume discounts are fraud. They are at best unlawful and at worst -- as in the Aegis case -- criminal. They should be called what they are: kickbacks.

And yet agencies get caught trying to steal them all the time. UK's Media Week did a great piece on them in September. Grey Group won a ruling in June keeping secret allegations about a volume discount scheme at one of its offices. A year ago Leo Burnett settled a $15.5 million case with the U.S. Army in which it was accused of doing something similar -- billing for inflated costs when it's actual costs were much lower. GroupM even once suggested that they become a contractual offering here in the U.S. The most famous case was Interpublic (IPG), which ended up paying at least $250 million back to its clients when it was caught taking volume discounts.

Some are suggesting that if Danone gets its way, all agencies could be forced to open their books when it comes to discounts. This will be a good thing. It should be standard practice, internationally. Clients have a right to know the true price of the goods they're buying.

But what will actually happen is this: Aegis will quietly settle this case. We know this because Aegis hates transparency. Their Q3 2009 earnings statement didn't even contain real numbers, just percentages. A company with that type of murky culture will not happily let the sun shine on its books.

In the meantime, whenever you hear an agency exec complaining about procurement pressure, just remember that lax procurement oversight leads to the Aegis situation.

As for Ruzicka? He's currently serving 11 years in prison.

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