Referrals and Kickbacks: are they both Legal and Ethical?

With the completion of the Fort Lauderdale International Boat Show (FLIBS), the boat show season for 2022 has almost come to an end. That means loads of yacht transactions have taken place and money has been sent all over the world. However, when it comes to money and payments surrounding yachts and yacht transactions, a grey area is always present about who can and who cannot receive certain funds, both legally and ethically. The funds referred to here are referral fees and kickbacks.

The term ethics derives from the Greek word ‘ethos’, which is a branch of philosophy that is concerned with human conduct - more specifically, the behavior of individuals in society, or in other words, rational justification for our moral judgments. The practices of Law and Ethics are closely intertwined, in which both areas concern maximising moral conduct by drawing a line between what is morally just or unjust, and what is legal.

So what is the difference between a referral fee and a kickback? A referral fee is money legally paid to an individual (or entity) who coordinates an introduction of a potential customer to a business and essentially functions as a commission. Referral fees are typically linked to the sale of a product and calculated based on the percentage of value of the transaction, but can also be paid for a client introduction and in that case is normally a flat fee. The individual or entity benefitting from the referral is typically the party who pays the fee.   

Conversely, a kickback is money paid illegally to an individual for the arrangement of a transaction and can be considered a bribe or inducement. In fact, in Florida, receiving a commercial bribe is described as soliciting or agreeing to accept a benefit, usually money, with intent to violate a law or duty. Among the various occupations that hold such duties include professional advisors, captains, yacht crews, and yacht brokers. So, for example, if a captain or a broker hires a mechanic or surveyor to conduct some work on the yacht and is offered a payment from that mechanic or surveyor for that work, the captain or broker should check their local laws to see those kickback funds can be legally accepted. After all, no one wants to be accused of committing a crime for doing something they did not know was a crime.

So how can you tell the difference? Referrals can be distinguished from kickbacks by examining the intent of the party who is either giving or receiving the payment and the manner in which the transaction is conducted. Unlike kickbacks, referral fees are generally legal in the yachting industry, although highly regulated, so long as the referral fees are appropriately disclosed. The payment of referral fees to captains, for example, are only permitted if disclosed to the owner, otherwise the payment of such fee can be considered a crime.

Regulations surrounding referrals and kickbacks ultimately work to protect customers. The unethical nature of kickbacks stems from such payments interfering with the neutrality and transparency of a party by creating the possibility of deceit. When offering or accepting a referral fee, clarify expectations in writing by creating a formal contract between the referrer and the individual or business. The referral fee agreement should include material terms such as the referral fee amount and the conditions of the role of both the referrer and the individual or business. Yacht brokers are paid a commission based on the broker being the procuring cause of the transaction so if a referral fee is being paid out of a commission, the payment must be included in the closing statement for the seller and purchaser to review.  

Offering a referral fee is an effective way to incentivise people in the industry to help generate new customers and grow your business. When conducted correctly, referral fees allow those who have benefitted your business to be compensated without compromising both the legality of the transaction and your moral/ ethical obligations.  Just be mindful of a situation where someone is offering money simply to hire them.

Nicholas J. Zeher is an attorney at Robert Allen Law whose practice includes maritime and commercial litigation, superyacht transactions, and immigration issues. For further information related to this article, please contact Nick at www.robertallenlaw.com, (305)372-3300 or Nzeher@robertallenlaw.com.