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27th November 2014
Operator Sales Bribes
The BACA Council has been made aware of a marketing campaign, targeting individual brokers, that causes concern about bribery in our sector.
Please note, the campaign is allegedly from a European operator who is not a member of BACA.
The campaign is offering individual brokers (who are employed by brokerages) a commission on flight sales to be paid directly into their personal bank accounts.
This attempt to circumnavigate the brokerage, has a number of serious legal issues that your staff should be aware of.
Please find below an article on the subject by Richard Mumford Head of Aviation at Stevens & Bolton LLP and BACA Council Member. I would encourage you to share this article with all your staff.
Charter broking is a business. Brokers and the brokerage that employs them are in the market to make money, and the more of it the better. However, pursuing personal profit above all else is a very risky business that could land brokers in prison. Recent industry examples of bad practice include operators writing to individual brokers employed by a brokerage to offer them personal payments to place business with that operator. That seriously risks individual brokers breaching the law and their obligations to their employers.
Most broking is rewarded by commissions paid to the brokerage by the operator or the client. Individual brokers employed by larger businesses are generally rewarded by a mixture of a basic salary and a bonus, the latter being determined by a combination of the individual broker’s generated commissions and the performance of the wider business.
Despite the inroads made into the market by technology, broking largely remains a people business. Operators are aware that it is generally an individual broker who makes the decision to pick up the phone and charter a particular aircraft rather than that of a competitive operator. So how does an operator persuade a broker to call them?
One option that crops up from time to time is to seek to bypass the employer of the individual broker and incentivise that broker directly. In addition to (or more rarely instead of) paying a smaller commission to the brokerage, the operator might contact the individual broker and offer to pay them a personal commission for their loyalty in placing a piece or pieces of business with that operator.
So where is the harm in that? The flight takes place on time, the client is happy and pays the operator. The brokerage gets paid a commission and the individual broker gets some money towards their next holiday. Everybody wins.
In fact, there are a number of fatal problems with this approach:
- The broker acts as agent to the client (the principal). In law, an agent is required to act in the best interests of its principal. A client who accepts a personal payment to place business with one operator rather than another operator that might suit its client’s needs better is breaching that obligation. If something goes wrong, then the individual broker could well be sued by the client. Additionally, agents owe a duty not to make a secret profit. A brokerage will sign up a client on terms that the brokerage is entitled to receive a commission. The individual broker will have signed up to no such terms and so will likely breach the obligations owed to the principal.
- The Bribery Act 2010 prohibits the receipt of an incentive to carry out a function improperly. Here, the function is the provision of broking services. The payment by the operator is clearly an incentive. If the broker then improperly places the piece of business with that operator when objectively it should have been place elsewhere, or in breach of other obligations that broker owes (eg to its client or to its employer), then that is bribery. Bribery is punishable by up to 10 years in prison.
- Any individual broker who is employed by a brokerage will owe duties of fidelity to the brokerage and will likely also have an employment contract that controls the relationship between broker and brokerage. These obligations will include requirements to act in the best interests of the brokerage, and will often include specific obligations in relation to anti-bribery and corruption or the receipt of gifts. An individual broker who accepts a personal payment without the prior express consent of their employer will almost certainly breach these obligations and be liable to summary dismissal.
- If the individual broker and/or the brokerage are BACA members, this conduct is likely to constitute a breach of the BACA Code of Conduct. Indeed, it would likely constitute a breach of a large number of the Code’s rules. BACA would welcome information from any broker who receives this type of approach from an operator.
- There are clearly tax implications for the individual broker for receiving such payments. Tax and potentially NIC would be payable. It is doubtful that many individual brokers would wish to declare this income or know what to do with it in terms of meeting obligations to pay tax.
- It is not just the individual broker who is breaking the law. It is also likely the operator making the payment. The operator is likely committing offences under the Bribery Act and is likely to be inducing breach of contract both between the brokerage and client and between the individual broker and the brokerage. Further, the individual broker could trigger an investigation into the conduct of the brokerage and cause significant harm and disruption to business.
- Other offences could also be committed, including offences under the Fraud Act.
In short, it is a very bad idea and creates major risk to the broker.
Clearly, in circumstances in which a specific agreement is reached between the brokerage, broker, client and operator, then this structure could be made to work. However, without any element of that being entirely transparent and agreed, offences and/or breaches of obligations will likely occur. It is really not worth taking that risk.
For clarity, it has long been practice in charter broking, just as in other markets, to offer marketing incentives. These can range from lunches or trips to rugby matches, through calendars and desk toys to more expensive gifts such as hampers, watches and trips abroad. Most organised brokerages will have gifts and corporate hospitality policies. These can range from a requirement to refuse everything, to a requirement to hand in any gifts (often raffled off at Christmas for charity), to a financial limit on any incentive.
This could be an article of its own, but in brief, if a gift or hospitality received is of sufficient rarity or value so as to create a risk that an objective person looking at it might be concerned that it could improperly influence the broker’s future decisions about placing business, then it creates a risk that it will be considered as bribery. To protect themselves, individual brokers should always maintain transparency with the brokerage and seek prior consent.