May 2007

Pssst .... Secret Commissions - misleading & deceptive and possibly a crime

We have had much recent interest from our clients on the subject of secret commissions. Confusion reigns with this topic, so we thought we'd clear the air.

Secret commissions will be of particular interest to those of you who engage agents to assist in the running of your businesses or have been engaged to act as agents for another business.

Taking a secret commission remains a criminal offence in Australia and has application to both private and public sectors of business. In addition, there are civil consequences and the possible application of the Trade Practices Act as outlined below.

What is a secret commission?

The very expression conjures images of clandestine meetings and subterfuge, and rightly so, for a secret commission is just that: it is "secret" in the sense that a key player in the arrangement is never told about it.

The criminal offence has been interpreted by the courts to occur where an agent dishonestly accepts money or other benefits (payment of money is not a requirement of the offence) from a third party in return for agreeing to depart from a duty he owes to his principal.

An example is the easiest way to illuminate: an agent is engaged by its principal to source products from the available suppliers on its behalf. The principal is entitled to expect that the agent will provide independent and unfettered advice, based purely on the merits of the products and their pricing and value for money. The agent then recommends a particular manufacturer, but unknown to the principal, the agent is receiving a cash payment from that manufacturer. The independence of the agent as an advisor has been compromised. This is also known as a "kick-back" or "cash-for-comment.

Bribing a government official to award your business a government contract is also, obviously, corrupt and can land both you and the official in hot water.

The law in NSW

Part 4A of the NSW Crimes Act 1900 prohibits the following conduct:

  1. Receiving or soliciting, as an agent, an inducement or reward for doing or not doing something in relation to the affairs of their principal.

  2. Corruptly giving or offering an agent an inducement or reward for doing or not doing something in relation to the affairs of the agent's principal.

  3. Use of misleading documents or statements by agents with the intent of defrauding their principals.

  4. Corrupt inducements to a person for giving advice to a third party which induces them to enter into a contract or appoint the person who gives the inducement to any office.

Penalties for infringement include fines as well as imprisonment for up to 7 years for individuals that are involved.

In NSW, the public sector is also governed by the Independent Commission Against Corruption Act which prohibits conduct which has the effect of undermining the exercise of official public functions, constitutes a breach of public trust or a misuse of official information.

The law in the Federal arena

The Federal crime will be committed by a corrupt Federal public official or by a member of the private sector who offers the commission or bribe to a Federal public official.

For persons in the Federal public sector, it is important to note that the term of imprisonment for taking or giving a secret commission has been increased from 2 years to 10 years.

Other consequences

A secret commission is also potentially misleading and deceptive conduct under section 52 of the Trade Practices Act. Breach of this provision will expose the agent (and potentially the payer of the commission) to an action for damages by an aggrieved party (such as the principal) or the ACCC itself. There may also be a misrepresentation under that legislation giving rise to a liability for a fine.

Finally, any agent that accepts a secret commission will be likely to have committed a default under the agency agreement, thus exposing the agent to termination of the agreement and liability for damages.

What can you do to protect your business?

  1. If you are a principal - review your agency and consulting agreements to include prohibitions against an agent accepting gifts or other benefits from a third party supplier of goods or services to ensure that the agent is acting with your best interests at heart ? quality of goods and services and value for money being key! Make it clear to the agent that you are expecting independent advice and that such independence must not be compromised by kick-backs or secret deals with suppliers.

  2. If you are an agent ? ensure transparency ? disclose any benefits (cash or otherwise) you are offered or accept from a third party supplier of goods or services to your principal.

  3. If you are a third party supplier ? don't offer inducements to agents in return for which they are required to recommend your goods or services to their principals.