Getting around compliance: The ethics of gifts and entertainment

Published on May 7, 2024 by Madhu Reddy

Numerous financial firms have established standard policies for employees in several aspects to protect their interests, as well as those of their employees. One of these policies includes a gift and entertainment (G&E) policy, which companies adopt to maintain work relationships. The prerequisite of maintaining work relationships is critical for companies, so having a standard G&E policy is beneficial. Any subtle gap in an employee G&E policy can result in ambiguity and divergence from the code of ethics, causing lack of clarity or transparency.

G&E policy

G&E is a designated policy a company develops to value employees and amplify work relationships. The policy often acts as an element that encourages individuals to contribute more, set reasonable and healthy work relationships, and safeguard the firm from any reputational damage.

Identifying the gap: An inconsistency between the code of ethics and G&E policy

A company’s G&E policy is an absolute way for a firm to mitigate conflicts of interest. However, an inconsistent code of ethics may lead to unforeseen risks and issues for firms and their employees. The following points suggest how to better align the G&E policy to the code of ethics policy.

• Employees need to pre-approve G&E, such as organising sporting events, team dinners and concerts. In such a scenario, overly formal structures and prolonged approval requirements make the process less engaging and more obligatory for many employees

• There are specific standards where firms restrict the amount of gift that exceeds a specific limit

• Exchanging gifts with employees under the pretext of personal intentions can at times be misunderstood if integrity is not maintained. Moreover, it can raise concerns about questionable conduct

Evaluating risk in the G&E policy

Risk assessment is another critical aspect of the G&E policy that companies need to consider for their code of ethics. G&E in a formal setting, when not handled with a code of ethics, can lead to risk for the company and employees. Therefore, companies can do a few things for risk assessment or evaluation, such as the following:

• Understand whether an employee is a gift giver or receiver

• Check whether gifts are approved or above a certain limit set by the company

• Establish standard rules in the G&E policy as part of the code of ethics in compliance

• Check whether employees are dealing with restricted recipients and PEPs, as they are subject to strict regulations

• Identify G&E that includes multiple geographies and different currencies and thus may pose a conflict of interest

• Identify and add the right disclosures for third-party and vendor relationships to navigate an extra layer of complexity

Understandably, companies and employees want to encourage healthy work relationships for higher productivity and teamwork. However, in some unforeseen circumstances, these gifts can turn into risk. Gifts provided with wrong intentions can create discrimination and unfairness. As such, make sure rules and regulations are established while evaluating risk in the policy.

Steps to avoid negligence in the G&E policy

To safeguard the interest of employers and employees, it is crucial to prevent any inadequacy in G&E policies. Moreover, to give more value and positive results, companies can hire a designated individual for G&E purposes with a standard role. The role would include the handling of

• the rules, regulations and limits under the policy,

• the collection and response related to the policy, and

• the approval and record-keeping of G&E.

Aligning the code of ethics and G&E policy can raise standards

To be a responsible, aware and ethical brand, the alignment of both the code of ethics and G&E policy can provide a growing environment, fostering healthy work relationships and growth. To protect employees’ interests and reduce their concerns, compliance officers can incorporate some ethics into rules, such as the below:

• Prohibit an employee from giving or receiving gifts directly or indirectly to and from others above a specified amount.

• Reduce rigidity in pre-approval of entertainment, such as sports events, by openly asking for suggestions for entertainment events. Thus, encourage work relationships and enhance communication.

What can firms do to protect conflicts of interest in G&E?

For better work relationships and to avoid a conflict of interest, companies should follow certain standard policies, rules and regulations, such as the following:

• Restrict a G&E amount and create awareness among individuals to inform compliance in case of any breach of policy

• Train employees on the potential risks of accepting G&E using real-life situations

• Conduct random/spot checks on items not covered in sampling, recurring audits and reconciliations

• Implement regular reminders regarding the policy

Conclusion

Complying with G&E rules is crucial in today’s intricate business climate to foster trust, reduce risk and protect companies’ brands. Business may successfully run with confidence and integrity by creating clear policies, training staff, and encouraging transparency and accountability. When the code of ethics and G&E policy work together, they can provide positive outcomes for companies.

How Acuity Knowledge Partners can help

We are experts in global compliance solutions for a wide range of market segments. We are adept in providing compliance services to several global market segments. We can assist businesses with their due diligence when it comes to G&E. To avoid fines and reputational damage in the event of a policy breach, we help develop appropriate procedures to G&E in accordance with their policy, provide clear policy communications, implement a streamlined approval process, and outline any pre-approval requirements and record/report any expectations, thus adhering to regulations of SEC, FINRA and other regulators.

References

• https://www.investopedia.com/terms/c/code-of-ethics.asp

• https://www.finra.org/rules-guidance/key-topics/gifts-gratuities-and-non-cash-compensation

• https://www.complysci.com/resources/gifts-and-entertainment-compliance/

• Gifts and Entertainment Compliance | COSMOS Compliance Universe (compliancecosmos.org)

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