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By Suzanne Vranica
Advertising agencies that engaged in suspect ad-buying practices could be exposed to liability for wrongdoing such as wire fraud and racketeering, according to the industry trade group that uncovered the practices.
Federal prosecutors for the Southern District of New York are investigating media-buying practices in the advertising industry and are looking into whether agencies received rebates from media outlets, The Wall Street Journal reported in September.
The probe stems from a 2016 investigation of the industry commissioned by the Association of National Advertisers, which represents big advertisers such as Procter & Gamble Co., General Motors Co. and Verizon Communications Inc.
The ANA study, which was conducted by corporate investigative firm K2 Intelligence, found rebates and other nontransparent practices were "pervasive" in the U.S.
Now, in an industry white paper released Thursday, the ANA said if these practices are found to be fraudulent, "criminal charges can be brought against the media buying agencies and those executives and employees who were involved."
The report laid out federal crimes that it said are likely at the center of the investigation, such as mail and wire fraud, conspiracy and racketeering. The "primary" offenses likely to be at issue are mail and wire fraud, the report said.
The 2016 ANA study found that ad agencies used the buying power of their clients for their own benefit. It found agencies' suspect practices included receiving cash rebates from media sellers for reaching spending thresholds and not returning those funds to clients.
The white paper said, "If two or more employees agreed to hide, divert or conceal earned rebates and cause a false report to be sent to an advertiser, a conspiracy may have taken place."
A call to the American Association of Advertising Agencies wasn't immediately returned. The ANA study didn't name specific companies, and ad agencies broadly denied wrongdoing when it was released.
The ANA has said the Federal Bureau of Investigation has asked it and its members for help with the investigation.
Doug Wood, the ANA's general counsel and partner at law firm Reed Smith LLP, which helped write the white paper, said it was intended to give marketers a "fuller picture on what is going on and what is involved" if an advertiser chooses to cooperate with the FBI.
The FBI has told Reed Smith that the probe is a long-term, industrywide investigation. Still, the white paper said, "No one has been accused or charged with any crimes and no one is accusing anyone of criminal behavior."
The FBI is seeking to talk to marketers that have already investigated their media-buying firms and have found indications of fraud, the white paper said.
Mr. Wood is urging advertisers to review their agency contracts and to conduct an investigation to determine if they have been victimized. Only after that process is complete should a marketer consider cooperating with the FBI, he said."If the government doesn't know they were a victim of the fraud, they are not in a position to help them collect restitution," he said
While the news of the investigation is worrisome for the ad business, the ANA white paper said that there could be some benefits for marketers if they cooperate, such as more transparency in the industry and possibly financial restitution for advertisers that have been harmed.
"If advertisers sit on the sidelines and don't engage in self-help to determine if they were defrauded, they may lose out on restitution down the road, if charges are brought," said Steven A. Miller, a partner at Reed Smith and a former federal prosecutor in Chicago.
Write to Suzanne Vranica at firstname.lastname@example.org
(END) Dow Jones Newswires
November 08, 2018 17:54 ET (22:54 GMT)
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