Lately I have had a spate of questions about secret commissions from clients in this sector. Commissions are often paid to PCOs and event organisers. You may be a PCO who charges the client a fee wholly or partly based on the cost of goods and services you have arranged for the client. The model here is that the client buys the goods and services direct from the various suppliers and the PCO is paid a percentage of the amounts payable to the suppliers.

This is a commission, but not a secret commission – and there is nothing wrong with that approach, so long as you are honest in your reporting of the amounts payable to the third party suppliers. Clearly the client knows it is paying a fee to you based on the amount the third party supplier charges the client, and nothing is hidden.

Another scenario I have been asked about is whether it is a secret commission to sell a good or service to a client at a greater amount than the supplier has charged to you. Again, on its face, there is nothing wrong with this. This assumes a “principal/principal” relationship between you as PCO and the suppliers and the client. You buy the goods and services as a principal from the suppliers and then on-sell them to the client whose event you are organising.

If you choose to “mark up” the price of the goods and services, that is your business. Effectively you are a reseller and resellers can (and routinely do) set their own prices. There is really no difference between this and the business model adopted by the department store where you bought your Christmas gifts – the store has marked up every item; you are just unaware of (and might be horrified at) the mark-up.

The confusion arises here when clients want to know (and PCOs want to tell their clients) what the mark-ups are. The issue of commissions raises its ugly head – spuriously, since it is a non-issue in this context. It is not a commission at all, just a resale at a higher price than you paid for it – something which most resellers do! In such cases you are not required to tell the client what you paid for the goods and services you are on-selling, but if you do disclose, you must not deceive…
If all of the foregoing are not secret commissions, what is?

The defining feature of an illegal secret commission is that the client does not know it is being paid – and in some cases, outright deception. The following scenarios are typical:

• The client seeks your advice about which venue and caterer, sound and stage suppliers to use, and you, for a fee payable by the client, provide that advice. Unbeknown to the client, however, you are also receiving a reward from the suppliers, for having sent them the business. This is known as a “kick-back” or “cash for comment” and it is the classic secret commission. It is illegal. The client is entitled to think that your advice was given independently, but the truth is that you were being paid by the suppliers who received the business as a result of your recommendation.

• You are charging a fee to the client based on the amounts payable to the suppliers. If you (whether alone or in cahoots with the supplier) fib about the actual amount being charged by the supplier so as to inflate the amount of commission payable, that would also constitute an illegal secret commission. It is a simpler case than the kick-back example since you are simply deceiving the client about the amount being charged by the supplier. There is a myriad of other possible scenarios – but again, the defining feature is deception. You cannot pretend to be independent when you are not. You should not receive rewards that your client is unaware of and you should never deceive the client/principal about the prices being charged by others.

In NSW such conduct is criminal and carries fines and imprisonment of up to seven years for individuals involved. Even if it was not criminal, such conduct will also, by definition, constitute a breach of your agreement with your client. If your business is carried on by a company, it will also be misleading and deceptive conduct under the Trade Practices Act. Suppliers to PCOs need to be careful to avoid aiding and abetting a corrupt commission. Say “no” to any proposal to combine forces in deceiving the client! In most cases the remedy is simple – transparency will solve most problems. If you tell the client that you are getting a reverse commission from the supplier the corrupt element evaporates and the commission is no longer secret or criminal. Think about your business model. Are you getting paid an honestly calculated percentage of the transaction costs or simply marking up goods and services you have purchased and resold as a principal? Or are you receiving kick-backs or deceiving your client about the amounts paid? Who, me?

For further details contact Matt Crouch on (02) 8281 7800 or email mcrouch@bartier.com.au

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