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Monitoring Gifting Policies During the Holiday Season

Jose Tabuena | December 15, 2015

Jose Tabuena Icon - 0815The turn of the calendar year is a time to reflect on business relationships that have been built and nurtured. Companies take the period to express appreciation and goodwill with gifts and events with new and ongoing customers, vendors, and other partners.

Gift and entertainment expenses are a natural part of doing business. But like all good things, there is a fine line that shouldn’t be crossed. There are obvious no-no’s, and there are types of hospitality, gifts, and entertainment payments that can also run afoul of laws without employees realizing.

The challenge for compliance and internal audit is knowing how to evaluate where the lines are drawn in the organization. For many situations no hard and fast rules exist about what constitutes a gift or what should be avoided, but some common activities can be considered illegal under anti-bribery-related regulations.

Under certain circumstances, the solicitation or acceptance of gifts, gratuities, or business courtesies could violate the law. Both the Foreign Corrupt Practices Act and the U.K. Bribery Act (plus many other laws) prohibit giving something of value to a government official that may influence him improperly to award or increase business or provide an unfair advantage. Also remember: The rules apply when you are on the receiving end as well as when you are the giver of gifts and hospitality.

Because anti-corruption principles essentially require that we never offer or provide anything that directly or indirectly benefits any person to secure a business advantage, limits are often set surrounding gifts, meals, and entertainment. Organizations establish policies and procedures related to limits on and reporting of brand reminders, gifts, cultural courtesies, meals, and hospitality to help ensure that individuals do not provide any benefit that could interfere with professional judgment. Employees should be expected to manage relationships with service providers (such as distributors, consultants, speakers, or promoters) to ensure that services performed on the company’s behalf comply with applicable laws and regulations.

Consumers should be able to rely on the independent judgments of their professional advisers, without concern that those judgments have been improperly influenced by incentives from companies seeking to promote their products and services.

Unless your organization completely bans the giving and receiving of gifts, judgment is often needed to assess the propriety of giving or receiving one. Training and awareness is valuable and provides guidance to the workforce. Common questions involving the code of conduct and gift policies include:

  • I received a gift from a supplier during the holidays, and I am not sure if I can accept it. What should I do? Typically, that depends on the nature of the gift, its value, and the culture of the country. If the value of the gift is not modest, generally you should return it to the supplier explaining that policy does not permit employees to receive expensive gifts. On the other hand, if the amount of the gift is small and considered reasonable based on the culture of the country, you can accept it, and a recommended approach is to share it with the employees of the department if possible.
  • How do I tell the difference between a prohibited facilitation payment and a legitimate payment to get a service performed more quickly, like clearing customs on a fast-track basis? Some differences include the amount of documentation and whether the same option is always available to every applicant. Fees for legitimate fast-track options are normally published, with a set fee, and are accompanied by clear, standard documentation such as an application form and receipt from the fee issuing entity. If you are unsure whether a payment to get services performed more quickly is permitted, you should contact your legal or compliance officer.

Codes of Conduct and Other Resources

A clearly written code of conduct that includes answers to frequently asked questions can be a valuable vehicle for educating employees on gifting policies. Because the limits a company decides to set can vary even within the same industry sectors, it can be useful to benchmark practices of similar companies.

The University of Houston Law Center has a searchable database that contains the compliance codes of Fortune 500 companies. It covers 42 different topics, and users can sort the information by subject matter, company, and industry. Categories you can isolate in the database include: General Gift Entertainment Policy; FCPA Gift Policy (also FCPA Travel and FCPA Entertainment are separate categories); and Facilitating Payments Policy.

The Wall Street Journal has dubbed the online tool as “catnip for compliance officers;” it provides an efficient way to study and compare what other companies in your industry do for gift limits and related practices. Common themes and emerging issues found in codes of conduct include:

  • Outlandish entertainment, hospitality, and travel. This may be the most abused area yet can be a tricky category because these expenses are a common part of doing legitimate business. They cross the threshold of corruption and bribery if they exceed normal and socially acceptable levels. Flying a prospect to visit and view your facilities is reasonable; private jets and first-class tickets likely aren’t. What do Las Vegas trips, cosmetics, and spa visits have in common? They were gifts made by companies to foreign government officials in 2014 that landed them in hot water with U.S. regulators.  
  • Donations to charity. While not wholly forbidden, larger than normal donations, those made to a charity that a prospect is intimately involved with, and donations that are specifically requested (particularly at times of negotiation or bidding) or donations that can be reasonably construed to instill favor with a prospect are all noted as potentially signaling corrupt intent.
  • Undocumented loans or favorable financing. Deals are negotiated, but undercutting market rates and offering exorbitant discounts out of line with your regular business practices raises red flags. Make sure all loans, financing, and discounts are properly approved and documented.

Auditing Gifts and Expense Reporting

For many organizations, gifts, travel, and entertainment expenses are a major source of discretionary spending. The sheer number of transactions and diverse sources of data and applications make such expenses vulnerable to error, abuse, and fraud. Adherence to expense reporting policies, including the proper reporting of gifts, may be reflective of the ethical climate at the organization. If the workforce considers excessive gifts and gratuities or maverick spending practices to be the norm, such conduct can readily spread to other behaviors where work pressures can increase the temptation for misconduct.

Auditors should review the code and policy guidelines and approval processes for gift giving by the company’s directors, officers, employees, and agents. More companies have automated gift-giving clearance processes and have set clear thresholds for gifts along with annual limitations. Having systems that aggregate and analyze expense data, while confirming adherence to policies, can assist in monitoring employee activity. 

Internal audit shops should keep the periodic review of expense reporting and policy compliance as an ongoing part of the regular audit plan. Even if the sample selected for audit is small, the perception of detection can go a long way in setting expectations in the company and promote an environment of fiscal prudence.

An effective internal audit may reveal that a company has spent excessive sums on gifts, travel, and entertainment expenses in a manner that fails to document adequately the reasonableness, necessity, and business purpose of such expenditures. Addressing such a finding should help to deter improper gift-giving as well as wasteful spending and abusive practices. Leadership’s own compliance with gift and expense policies can set the tone for the organization.

Ultimately we want our government officials to make decisions that serve the best interests of the public. Government decisions should not be improperly influenced by companies seeking favor for their corporate interests through incentives to government officials. Likewise, consumers should be able to rely on the independent judgments of their professional advisers, without concern that those judgments have been improperly influenced by incentives from companies seeking to promote their products and services.

Corporate hospitality is a common means of creating goodwill and social interactions between customers, partners, and those who have services or goods to sell. The challenge for compliance professionals and internal auditors is to be able to recognize when gifts of appreciation cross the line.