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involve smoking and drinking and sexually harrassing co-workersI read it as trusting your employees to behave like adults ... like not to get drunk, and to let them engage in harmless flirting or even dating. A wink is not sexual harassment, a joke about sex (even if a little brutal) is not sexual harassment.
Also, people have their own habits / vices ... if you've got smokers in your company, provide a place were they can smoke. I mean, you've got money for masseuses, can't you find 10 spare square meters with air conditioning?
What's wrong with that?
Instead of having a "fun department", just let people be who they are.