Compliance Practices
No. 2-Dec-2023
Regular Release of Professional Content on Compliance and Ethics in Business Operations

ADVICE REGARDING THE BREACH OF INTEGRITY (AN UNAUTHORIZED GIFT)

In this discussion, I am addressing the receipt of gifts that is not permitted according to internal policies. What compliance advice should be offered when learning that someone has received an unauthorized gift, thereby violating internal rules?

Gifts, such as invitations to free conferences, concerts, sports events, or hospitality from business partners, as well as offerings from relatives or friends, pose a risk for conflict of interests. Such relationships can influence or create the appearance of influencing the impartiality of an employee or manager when representing the company while having personal or economic ties with external parties. This introduces a personal interest that could compromise the company’s primary interests. The situation at hand involves an individual who has violated internal rules regarding conduct integrity.

Corporations today mostly restrict the giving and receiving of gifts in the business environment to mitigate factors that could lead to biased behaviour by employees and executives towards individuals who have given or offered them gifts. Companies limit gift-giving particularly to avoid involvement in corrupt or other prohibited practices.

Gifts and hospitality are also restricted because they can create an appearance of bias or impropriety, especially for companies vulnerable to reputation damage. Such companies often have stricter rules and more restrictions regarding gifts, with some adopting a zero-tolerance policy, neither giving nor accepting any gifts. Meanwhile, companies less sensitive to reputation operate in a more private sphere and have lower corruption risks, enabling them to establish a more open gift and hospitality policy.

I provide an overview of the situation, including a professional compliance opinion and several typical criteria for assessing conflicts of interest, summarized in the public version. The entire opinion is accessible by request at: spekaing@andrijanabergant.com

The situation is anonymized, with some fictional elements, to protect the identity of individuals and companies, stemming from typical and realistic business circumstances across various industries.

DESCRIPTION OF THE CASE/SITUATION

In the presented case, we will find ourselves in a company sensitive to reputation damage. It is a large company of special social (public) significance, operating internationally, and extensively regulated. It has clear internal rules regarding gifts, limiting them to symbolic value and requiring employees to report every received gift.

During a business visit, the Director of Investments received a bottle of a limited-edition aged whiskey from a business partner as a New Year’s gift. The CEO inquired about this after finding out weeks later and seeks advice from the compliance department.

ADVICE AND COMPLIANCE RECOMMENDATIONS – FOUNDATIONS

In a situation where there are clear internal rules regarding the permissibility of receiving or giving gifts, and where it is also clear that one of the directors has acted contrary to these internal rules, we do not investigate whether the gift is appropriate or whether there are conflict of interest circumstances. For such cases, there is already a systemic determination with a general internal policy that such circumstances are unacceptable. From the description of the case, it is clear that the director has violated internal rules concerning business compliance and integrity.

*Based on the specifics of the case, it is necessary to apply an appropriate standard for verifying the described situation, for which compliance advice is provided. We must ensure that the situation is indeed well and truthfully presented to us, and that all relevant circumstances are accurately described. If we cannot guarantee this (in the given situation or at the given time), then when providing compliance advice and recommendations, we should summarize the description of the situation and state that compliance advice and recommendations are based on the assumption that it is an accurate and comprehensive description of relevant facts and circumstances of the case. Sometimes, to obtain an appropriate description of the relevant situation, there may be some exchange of questions and answers about relevant facts and circumstances, usually in correspondence with the requester for the advice, but also with other individuals.

Following this, we define the criteria based on which the compliance recommendation for response and decision regarding the breach of compliance and integrity is given. These will help provide an objective, professional, reasoned compliance advice with action proposals regardless of the level of involved individuals. Final response in terms of actions from supervisors regarding breaches are an indispensable element of an effective compliance management system and have two aspects:

• Actions that are calibrated in direct response to an individual case (disciplinary treatment of the offender, contractual, labour, civil, or criminal consequences, deterrence, elimination, or mitigation of potential harmful consequences).

• Systemic action aimed at analysing and addressing the root causes that led to the breach and investigating and preventing other existing or future similar cases.

In the presented case, based on the director’s defence regarding accepting of the gift, it can be inferred that likely:

• The offender was not aware (or claims so) of the internal gift policy, which has already been in place for a year in the company.

• He perceives the gift in his situation as uncontroversial and as part of standard business practices in similar relationships.

• He does not consider his conduct problematic for him as a corporate director.

Contrary to the director’s perception that such a gift is appropriate for his position, violations of internal compliance and integrity rules and procedures may be even more strictly addressed if committed by a leading or other individual with special authorities and responsibilities. Leaders are precisely those individuals expected in the company to be familiar with internal compliance and integrity rules, to act as central advocates of these policies, and to be the primary role models in their adherence.

The circumstance that a leading figure like the director was unaware of these rules (or claims to be) is even detrimental to his position, contrary to the director’s belief.

Furthermore, a violation by a leading employee represents a greater risk to the company’s reputation, as well as greater exposure of the corporate entity to penalties and legal liability, if the violation is committed by a leading figure.

On the other hand, the situation also suggests that there likely have been no harmful consequences, but which does not indicate for past or future practices, so…

From a systemic perspective, it is prudent for compliance team and supervisors to investigate:

• Whether this one or any other directors or leading individuals within the company have received similar gifts in the past…

…

The content of compliance advice for the requester (CEO)

*In cases of violations of applicable rules and procedures, compliance advice may rely on a previous report and findings of internal investigation. We always recommend this when further clarification and confirmation of the violation and an assessment of its harmful consequences are necessary.

In the case under consideration, we will take the described situation as verified regarding the fact of the violation, based on the statement of the CEO and the statement of the director in question, which coincide regarding relevant facts and circumstances.

THE CASE – SPECIFIC EXAMPLE

On January 17, 2024, the compliance officer received the following question from the CEO:

What is the appropriate response of the company’s management regarding the following situation?

The Director of Investments received a bottle of limited edition aged whiskey, from a business partner during a business visit in the New Years’ time. The CEO inquired about this, and the director openly described everything, explaining that it was a business partner with an existing contract who gifted him the whiskey on an appropriate occasion. The director further stated to the CEO and latter to the compliance officer in a clarifying conversation that such a gift is usual in these types of business relationships and at this level, and that he wasn’t even aware that he shouldn’t accept gifts, as it was a new policy.

To begin, it’s important to note that the internal Gifts and Hospitality Policy was adopted by the company’s management board on November 14, 2022, which stipulates that only symbolic gifts of small value are permitted in the company, and even these must be reported for internal record-keeping. On November 15, 2022, the Standardization Department sent out the adoption of this policy, with a link to its published content, to all directors and other employees following the established procedure. In line with the transitional period, the gift and hospitality registry was established on December 1, 2022, which is managed by the compliance department administration. All directors and other employees were informed about this.

From a systemic perspective, it’s recommended to:

PSP-1-2024:

The Human Resources Department should include regular training and education on conflict of interest and corruption prevention in the annual training program for 2024 and subsequent years, including the gift and hospitality policy, including internal rules on reporting violations and protecting whistleblowers.

Training in this area should be specifically addressed to directors and individuals with special authorities and responsibilities, based on relevant practical examples.

…

Regarding the handling of the individual case, it’s recommended to:

PSP-2-2024:

The board member responsible for investments should take …

*In a compliance and corporate integrity management system, violations must be appropriately addressed, hence the formal presentation of compliance recommendations with appropriate labels. Best practices guide these in a dedicated record, which can also be supported by information technology for more efficient monitoring and verification of actions actually taken and implemented. Such consistency is often lacking in less mature or newer compliance programs and in companies with a low culture of compliance and integrity, which can be strengthened with appropriate activities.

The presented opinion is one response to a situation that, besides the described ones, may have a variety of other assumptions and present circumstances that could lead to a different opinion. Therefore, we discourage its direct application to your situation, which is almost certainly not identical. The response also depends on internal rules, procedures, and organization.

However, hopefully this will encourage you to use the presented approaches and typical criteria, based on internationally recognized standards and best practices, in your own compliance and integrity advisory, especially in responding to violations thereof!

 

Originally published in EICE’s Compliance Practices, January 2024