Gift giving is a customary practice during festive seasons and special occasions (such as birthdays) in many parts of the world. But where should one draw the line in matters of business? What can be done when company executives are expected to give away ‘perks’ in the form of special movie screenings, free tickets to upcoming concerts and gifts on Diwali and Christmas? Keeping cultural sensitivities aside, are they allowed to offer such gifts, hospitality or entertainment as a part of business activities in the first place? It can be a dilemma for most companies to handle such situations, especially in India and countries with similar culture where gifts, hospitality and entertainment are historically acceptable.
Predicaments in the Media & Entertainment space
The Media & Entertainment (M&E) sector typically has a high number of dealings with third parties such as suppliers, contractors, freelancers and others external parties due to the nature of the business. With the sector poised for rapid growth, there is fierce competition and all stakeholders tend to be quite target-oriented to maximize growth. Today, bribery and corruption can affect any sector, and the M&E sector has its own set of roadblocks in the form of such risks. As per an EY survey, Reality check: fraud, bribery and corruption in India’s M&E industry, 98% of respondents stated that unethical practices had led to significant loss of profits and inflated costs. 83% stated that kickbacks for approval of talent-related and acquisition cost is a serious cause of concern.
In order to achieve business targets, the third parties associated with an M&E company may indulge in giving gifts, hospitality and entertainment to get their work done. While these may be quid pro quo arrangements, but are they ethical?
Let’s take an example of ABC Ltd. an advertising agency that had certain employees indulging in unethical behaviour. Upon investigation, it was uncovered that ‘high value’ gifts were received by certain ‘senior’ employees (by external parties) to seek favors, which included contracts being awarded without proper due diligence.
Under the FCPA scanner
Global enforcement is on the rise and there could be cases where M&E companies would be exonerated as they would fall under the purview of the US Foreign Corrupt Practices Act (FCPA). The Act does not necessarily prohibit extending gifts, hospitality or entertainment but forbids these if they are offered as a disguise for bribes and have a “corrupt intent”.
The Resource Guide to the FCPA issued by the Department of Justice and the Securities and Exchange Commission defines “corrupt intent” as “the intent to improperly influence the government official”. One of the tests to determine if the intent is corrupt or not is to see whether the expenses incurred are “reasonable, legitimate and bona fide, and related to a company’s promotion, demonstration or explanation of their products and services”.
A look at the enforcement cases in the past few years show a recurring trend and highlights violations around business advantages sought in exchange of gifts, hospitality and entertainment. In addition, these expenses are typically recorded inaccurately in the books of account. Another observation is that the regulators held companies accountable for the actions by their third parties; which includes gifts, hospitality and entertainment extended by the latter. Therefore, companies cannot safely assume that activities by these third parties will not hold the company liable in any way.
The FCPA Resource Guide offers a list of non-exhaustive safeguards to help evaluate whether a particular expenditure is appropriate:
- Pay all costs directly to travel and lodging vendors and/or reimburse costs only upon presentation of a receipt
- Do not advance funds or pay for reimbursements in cash
- Ensure that any stipends are reasonable approximations of costs likely to be incurred and/or that expenses are limited to those that are necessary and reasonable
- Obtain written confirmation that payment of the expenses is not contrary to local law
- Provide no additional compensation, stipends, or spending money beyond what is necessary to pay for actual expenses incurred
Source: SEC’s FCPA Resource Guide (https://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf)
Reinforcing the message of compliance
FCPA enforcement in the M&E industry is still not that widespread. As per EY’s survey, Reality check: fraud, bribery and corruption in India’s M&E industry, internal controls and audit continue to be seen as a company’s main line of security against frauds.
With rising business risks, M&E companies should take necessary precautions by creating clear policies and guidelines on gifts, hospitality and entertainment. More importantly, these policies and guidelines should be clearly communicated to both internal and external stakeholders through trainings (face-to face or web based), annual declarations and sign offs to underline the message, leading by example through the right tone at the top. Internal web- based systems or dashboards can also be a good way of conserving corporate resources if properly implemented, and help companies detect potential violation of FCPA in their operations. It is also important to communicate a firm and direct message which is sacrosanct for all employees and highlights the implications of individual misconduct for the entire company and associated third parties.