The Referral Fee Arrangement
You run a small customs consulting practice. A freight forwarder, Northwind, refers importer clients to you and proposes a written arrangement: Northwind will pay you a 10% commission on the duties it collects from referred clients, and you will pay Northwind a 5% referral fee on your consulting fees from those clients. Northwind says this is "standard industry practice" and that clients need not be told because "it doesn't affect their costs." One referred client, a family-owned furniture importer, has asked you twice whether you have any financial relationship with Northwind. You have not answered. The arrangement would add roughly $60,000 annually to your revenue.
1. Evaluate the proposed commission and referral fee against your professional obligations, including disclosure.
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Undisclosed commissions and referral fees create conflicts of interest and can mislead clients about your independence. The client's repeated question signals it matters to them. "Standard practice" is not a defense. You should disclose any financial relationship in writing, explain how it works, and obtain informed consent where required. Some fee arrangements may be prohibited or restricted depending on your licensing rules and jurisdiction; verify before agreeing. The commission on duties collected is especially sensitive because it could incentivize higher duty outcomes, undermining client trust.
2. The client directly asks whether you have a financial relationship with Northwind. How should you respond?
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Answer honestly and completely. Explain the proposed arrangement, the amounts, and how it could affect your incentives. Do not deflect or give a partial answer. If the arrangement is not yet finalized, say so and describe what you propose. Offer to proceed without the arrangement if the client prefers. Document the conversation and the client's decision. Evasiveness here would be a serious breach of trust and could constitute misrepresentation.
3. What should you do before signing the arrangement, and what safeguards would you build in?
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Before signing: check applicable licensing and ethics rules on commissions and referral fees; obtain legal review; confirm disclosure is permitted and sufficient. Safeguards: written disclosure to every affected client; informed consent; a conflict-of-interest policy; separate accounting for commissions; a cap or prohibition on duty-based commissions that create perverse incentives; annual review; and a client opt-out. If disclosure would not cure the conflict, decline the arrangement.