An explosive report on kickbacks in the ad industry is coming out next month and some say it could lead to 'jail time'

A bombshell trade report lands next month which will reveal whether US advertising agencies accept rebates from media companies, and whether those agencies are transparent about disclosing them and passing them back to their clients, sources told Business Insider.

The report, commissioned by advertiser trade body the Association of National Advertisers (ANA), is set to be more "explosive" than many people in the industry were prepared for, these sources say, because it will lay bare the practices media agencies use to make hidden margins on their advertising buys. A previous report on the same issues from the ANA, published in 2012, was widely ignored.

The new findings are set to make many marketers sit up and take notice. Ad agency contracts generally say that client money should be spent transparently and honestly. Any indication that cash is instead being siphoned into schemes that only benefit agencies will cause trouble.

One source, who is aware of the report's findings, told Business Insider there have been suggestions of the possibility of "jail time" for executives found to have been deliberately in breach of their contracts.

Why this is an issue

Media agencies are paid by advertisers to secure them the best and most efficiently priced advertising slots.

However, one of the issues is whether buying agencies are actually securing the most strategic slots for advertisers, or whether they've made a previous agreement with a media owner to spend a set amount of their clients' ad dollars in order to receive a rebate. 

Rebates are standard media-buying practice in certain countries in Europe and Brazil. But they are not meant to exist in the US. Any sort of incentive is supposed to be disclosed and returned to the advertiser, unless otherwise previously agreed in the contract.

Media agencies are supposed to spend their clients' money where the client will get the best value, not just where the agency gets the biggest benefit. Credits, or freebie ad slots - which were granted precisely because an advertiser spent so much with a media owner - are supposed to be returned to the client not sold on for the agency's gain. And rebates aren't supposed to be hidden income for other parts of the agency business, such as an agency group's barter, or programmatic, or international operations, which are harder for clients to audit.

Some agencies argue that such volume-discount rebates belong to the agency to reward them for their bulk-buying power. That's the benefit of working with a big global agency, as opposed to a smaller independent - and if clients are unhappy, they shouldn't sign the contracts.

Business Insider does not yet know precisely which - if any - of these nontransparent practices the report will address, but sources told us the impact of the report's findings will be huge.

A quick recap on the story so far

The controversy surrounding media agency rebates was thrust into the spotlight in March last year at the annual ANA conference.

Jon Mandel, the former CEO of WPP media agency MediaCom, stood on stage and alleged agency kickbacks are still "widespread" and cited them as one of the reasons he left the industry.

"Have you ever wondered why fees to agencies have gone down and yet the declared profits to these agencies are up?" Mandel said at the time. Later, he told Australian trade publication Mumbrella: "It was like somebody had died in the room." The interview was headlined: "Is this the most hated man in advertising?"

The big six advertising agency holding companies responded to the speech by repeatedly outright denying they take kickbacks or rebates in the US.

In October last year, the ANA hired two firms to investigate the media rebates and transparency issues plaguing the sector.

One of those firms is K2, an investigative consultancy staffed by former FBI agents and founded by "father-son detective duo" Jules and Jeremy Kroll. Jules Kroll founded the Kroll Inc. private security and intelligence empire. The appointment signaled to many people in the industry that the investigation was going to be uncomfortably forensic.

The ANA also hired Ebiquity's Firm Decisions division, a marketing auditor, which works with clients including Unilever, Coca-Cola, Microsoft, and Jaguar Landrover.

The investigators are expected to release two separate reports in the next two or three weeks.

K2 will present its evidence, but will not name names, according to sources.

Firm Decisions will present guidelines for marketers based on its own and K2's findings. The guidelines are set to draw from the 52-page template contract UK marketer body ISBA released earlier this year, sources told Business Insider.

An ANA spokesman told Business Insider: "The ANA report will be released in the coming weeks and we will respond to all inquiries at that time. At this time we have no additional comment."

What's the report going to say?

While many people in the industry were expecting the investigation to be like the 2012 ANA report - vague findings and a list of guidelines that nobody is forced to adhere to - it turns out the new ANA report will be more incendiary than that, according to the sources we spoke to.

However, as there are still a few weeks before its publication, lots could still change. Here are some of the potential scenarios:

The worst-case scenario: Evidence is presented of criminal behavior

While the report itself is not going to name any individuals or agencies, if K2 or Ebiquity uncover any evidence of criminal activity, it is their responsibility to hand their findings over to law enforcement.

Most people we spoke to about the report do not think agencies will end up in court. Advertisers will be reluctant to sue their agencies as it's a time-consuming and costly exercise, in which a marketer has to admit publicly that they had made a foolish appointment or didn't review their contracts properly.

However, one marketing consultant, who asked not to be named, told Business Insider there could possibly be a federal investigation if there is political pressure on the issue of mis-selling.

"You look at what happened post-Enron. It died down until senators put political capital on it. And it only takes one senator to start drum-beating about the issue. Then it becomes a big, bright light," our source said. "It's horrible, I don't wish it on anybody."

People in the ad business have been jailed for their part in kickback schemes before.

In the US, Ogilvy & Mather account chief Shona Seifert and CFO Tom Early got 18 months and 14 months respectively in federal prison in 2005 for over-billing the White House anti-drug account. Grey Global Group print chief Mitch Mosallem was given a 70-month jail sentence in 2003 for operating a kickback scheme on the Procter & Gamble and Brown & Williamson accounts. Interpublic Group in 2008 settled accusations from the SEC that it booked $250 million in clients' volume discounts as its own revenue, and two executives were forced to settle a complaints against them.

More recently, with the rise of programmatic advertising, the way in which media agencies make their money has become even more complicated. It's a newer area and digital vendors are hungry for billings from big agency groups. Meanwhile, agency groups have set up central trading desks to buy and re-sell digital media. But those trading desks have long been the target of criticism. As Digiday wrote in 2012: "There's something inherently fishy about an agency that's supposed to be unbiased funneling money through a vendor that's a sister company."

Mark Ritson, Melbourne Business School associate professor of marketing, branding consultant, and Marketing Week columnist, thinks that the digital ad industry on many occasions exaggerates its audience figures (because, unlike traditional media, there is not a unified digital measurement metric that everyone agrees on,) which has "created a culture" of opaque behavior. He explained to Business Insider:

I can exaggerate the audience size by a factor of five and I'm not creating any direct crime. But the minute I turn that into dollars and sell someone something I knowingly know is not true, or incentivize them in a manner that's not correct - when we turn an audience number into dollar figures it becomes a far more dangerous activity. That's the issue.

Nobody is going to go to jail for over-estimating an audience size. But you could go to jail, theoretically, for incentivizing the sale of that audience in an illegal manner or pricing it in a manner you know to be incorrect.

When you put a dollar sign in front of the number, things get a lot more serious a lot more quickly.

Another big concern among agencies is that the behavior of a few bad actors, poster boys for how not to conduct business in this space, will tar the entire industry with the same brush.

The middle scenario: Clients and investors punish the agencies

Last April, Pivotal Research analyst Brian Wieser downgraded the stock ratings for all the advertising agency holding companies he covers due to the client-media agency transparency issue. In a research note, he wrote:

Rightly or wrongly, there is a growing perception among marketers that agencies have been mis-leading, transferring value associated with media volumes without clients' full understanding or support.

Wieser said he thinks it's unlikely the report will throw up criminal violations. But he still thinks it will make life harder for agencies.

When the ANA announced former FBI agents at K2 were digging into the transparency issue, shares in advertising holding companies Publicis and WPP fell that day, he said.

Investors began paying attention and now the majority of marketers, when exposed to details of practice, will do so too. Civil cases "are probably not likely, but would not be surprising either," Wieser said.

"How much revenue is at threat is hard to imagine, but what seems clear is that clients are being more aggressive in their negotiations and, [with this report,] clients will have more leverage," he added.

The best-case scenario: The report will reiterate that there is a deep level of mistrust between clients and their agencies - but it will aid more positive conversations

We already know trust is at a low. More than 70% of global advertisers and agencies surveyed by ID Comms agreed the way in which rebates are handles remains the biggest barrier to building long-term trust, as Marketing Week reported.

Graham Brown, a director at global media advisory firm MediaSense, said he hopes the report isn't made into a "tabloid press issue" - not least by consultancy firms that could gain business if the report manages to find malpractice - and instead helps marketers decide how important the relationship is with their agencies and whether they want to make it better, or review it.

"It doesn't matter how severe [the report] is; it's all about the level-headedness of how people read it and respond to it because, at the end of the day, these are high-quality service providers that clients need," Brown said.

He added: "For me, this is a boil that needs to lanced. Hopefully, with the toxicity that is within the relationship [at the moment,] this is like the antiseptic that cleans it up."

Business Insider is investigating the client-media agency transparency issue. If you would like to provide information, both on-the-record, or anonymously, please contact loreilly@businessinsider.com.