'Tis the Season for Compliance Concerns Over Gift Giving

In the weeks ahead, compliance officers should be making a list and checking it twice.

A hazard of the holiday season is that all those red bows can also be red flags for regulators, as employees can have different ideas about the appropriate value of gifts to clients and others they do business with, and the lines between tokens of appreciation and bribery can blur.

With anti-bribery enforcement at intense levels and more countries on the lookout for any indication of corruption, companies will have to be more attentive to improprieties that can arise from holiday gift giving, including any offerings that could be construed as violations of federal and state anti-kickback statutes, the Foreign Corrupt Practices Act, and the U.K. Anti-Bribery Act. Companies in the healthcare sector will need to watch for gifts that could give way to difficult Sunshine Act disclosures.

“More gift giving is expected at this time of the year and that's OK; it's the nature of the season,” says Michael Volkov, a former federal prosecutor who now heads a law firm that specializes in FCPA matters. “You have to be careful, however, to make sure you document everything,” he adds.

The need for caution, especially when gifting goes international, is amplified by vague language on the topic in both the FCPA's statutory text and a resource guide issued jointly last year by the Securities and Exchange Commission and Department of Justice.

“A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other,” the guidance states. “Some hallmarks of appropriate gift giving are when the gift is given openly and transparently, properly recorded in the giver's books and records, provided only to reflect esteem or gratitude, and permitted under local law.”

It adds that anti-bribery enforcement actions will likely only focus on small gifts if they “comprise part of a systemic or long-standing course of conduct” that indicates “a scheme to corruptly pay foreign officials to obtain or retain business.”

How Much Is Too Much?

The regulatory approval for gifting leaves out crucial details, however. How expensive can a gift be and still classify as “small?” What is expected in terms of transparency? Is there an expectation that gift giving is covered in a company's code of conduct? Without hard-and-fast standards, companies are left to establish their own policies and standards for giving and receiving gifts.

“You should avoid situations that on their face look embarrassing,” Volkov advises. “It is fine to send a modest gift to a number of people, so long as you take affirmative steps to negate criminal intent and are not directing them toward people who are deciding business for you. It has to be done in a non-discriminatory fashion.”

While the FCPA resource guide suggests flexibility, there are nevertheless standards that must be met when giving a gift on behalf of a company, says John Davis, coordinator of the law firm Miller & Chevalier's FCPA and international anti-corruption practice group. Among them: compliance with local laws, the reasonableness and transparency of the expenditure, and transparency on the part of whoever receives an item.

“There is a recognition by the agencies that certain levels of small and reasonable gift-giving during the holidays is appropriate,” he says. “Where people have crossed the line is with very large gifts or patterns of pervasive gift giving that were clearly intended to influence people.”

“More gift giving is expected at this time of the year and that's OK; it's the nature of the season. You have to be careful, however, to make sure you document everything.”

—Michael Volkov,

CEO,

The Volkov Law Group

Drawing the line between appropriately priced gifts isn't always as easy as comparing a coffee mug to a Mercedes. The popular fruit baskets and meat and cheese platters that many will send this season are an example of why even seemingly mundane presents need to be reviewed.

“Those baskets can be pretty darn expensive once you start getting into artisan quality items,” Davis says. “Pretty soon you are up to several hundred dollars worth of stuff in that basket. In and of itself, is that going to be a problem? Maybe not, but it can raise questions about whether that is too rich. “

Either compliance personnel must review gift requests or companies must set very specific gift policies, Davis advises. A company can set a hard price limit, for example, on how much can be spent on a gift, and conversely the value of what an employee is allowed to accept. The policy could also establish a roster of allowable gift vendors and a pre-approved list of items that can be sent to business associates and customers. The business can then track who is gifting what and get alerts if too many items are going to the same person, or if the value creeps into a range that will draw scrutiny.

Some gifts could draw scrutiny, even in small values. Retail gift cards, for example, should be disallowed in nearly all situations because they are essentially cash equivalents, Davis says. Entertainment expenses get a bit trickier.

“It really is a gray area,” says Meghan Daniels, senior director of advisory services for SAI Global Compliance. “Given the lack of definitive criteria, it is much more difficult to set the policy, and communicate that policy, than it is with hard line areas of law like anti-trust or exports.”

FCPA Guidance on Gifts

The following is from, “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” issued by the Securities and Exchange Commission and Department of Justice last November.

A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver's books and records, provided only to reflect esteem or gratitude, and permitted under local law.

Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC. The larger or more extravagant the gift, however, the more likely it was given with an improper purpose. DOJ and SEC enforcement cases thus have involved single instances of large, extravagant gift-giving (such as sports cars, fur coats, and other luxury items) as well as widespread gifts of smaller items as part of a pattern of bribes.

Companies also may violate the FCPA if they give payments or gifts to third parties, like an official's family members, as an indirect way of corruptly influencing a foreign official. For example, one defendant paid personal bills and provided airline tickets to a cousin and close friend of the foreign official whose influence the defendant sought in obtaining contracts.

The defendant was convicted at trial and received a prison sentence.

As part of an effective compliance program, a company should have clear and easily accessible guidelines and processes in place for gift-giving by the company's directors, officers, employees, and agents. Though not necessarily appropriate for every business, many larger companies have automated gift-giving clearance processes and have set clear monetary thresholds for gifts along with annual limitations, with limited exceptions for gifts approved by appropriate management. Clear guidelines and processes can be an effective and efficient means for controlling gift-giving, deterring improper gifts, and protecting corporate assets.

The FCPA does not prohibit gift-giving. Rather, just like its domestic bribery counterparts, the FCPA prohibits the payments of bribes, including those disguised as gifts.

Source: SEC.

Many companies, even those with strong codes of conduct that they publish on their Websites, don't reveal their gift-giving policies with the same transparency. In response, Daniels says, SAI is surveying companies in an effort to provide those details and give companies some much-needed benchmarking. A common question clients ask: “What are other companies doing?”

SAI also developed a series of training videos to address common gift-giving issues. Training and consistent communication is crucial for fostering good judgment among employees, Daniels says.

“Even if laws and regulators have avoided hard rules and cost thresholds when it comes to gift-giving, companies need to have effective policies that are clear and easy for employees to understand,” Daniels says. “They need to have guidelines that make it clear when they can do something, when they cannot, and when to ask for a review.”

Gift-Giving Checklist

Among the advice SAI offers for this holiday season and other gift-giving opportunities throughout the year:

Spell It Out. Establish guidelines to help employees determine whether a gift is acceptable or not. These can break gifts into three categories: those employees may never give or accept (cash or gift certificates); those they may give or accept (small promotional items, calendars, pens); and those that should be reviewed before they are accepted (tickets to sporting events or concerts). Companies should make these guidelines easily accessible (in print and online) and periodically remind employees that they exist.

Who's on Point? Designate an internal resource for employees to contact with questions about gift-giving and receiving policies. This may be a corporate compliance officer or member of the legal team. Employees should be provided easy access via e-mail, phone, or in-person meetings. “These situations really do need to be handled on a case-by-case basis,” Daniels says.

Ask Questions. Make it clear that employees who are unsure of policies are responsible for asking their manager or a designated internal resource before accepting or giving gifts. This is especially important in healthcare, life sciences, and government contracting organizations, which often have more stringent policies compared to other industries.

Showing that, as an organization, you are taking steps to impart good judgment and leaving room for things to be handled on a case-by case basis, can defect deeper scrutiny if an inappropriate gift slips through the cracks. “As long as you show that the company is communicating these principles and putting thought and judgment behind situations, I think you are going to be covered,” Daniels says. “Even if it is Christmas, you still need to use your good judgment.”