Definition and Legal Framework of the Term Kickback
Explanation of the Term Kickback
In a legal context, a “kickback” refers to a covert rebate, commission payment, or gratuity provided by a third party—outside the actual contractual relationship—to a party involved in a transaction. The aim of such a benefit is typically to influence a decision within a business transaction, usually to the detriment of a client or business partner. Kickbacks are particularly prevalent in connection with intermediary transactions, procurement, and especially in the financial services, real estate, and insurance industries as well as in the healthcare sector.
Distinction from Similar Terms
Kickbacks are distinct from open commissions, bonuses, or success premiums, which are based on a contractual foundation and transparency toward the business partner. While commissions are paid as permissible, disclosed remuneration, kickbacks are often deliberately concealed and serve to circumvent legal or contractual regulations.
Legal Classification and Normative Background
Civil Law Aspects
In civil law, the handling of kickbacks is particularly relevant with regard to duties of transparency, fiduciary duties, and the prohibition of self-dealing.
Duty of Disclosure and Obligation to Provide Information
According to established case law of the Federal Court of Justice (BGH), there is a duty to disclose kickbacks in advisory and brokerage relationships, especially in financial services. The advisor or intermediary must proactively inform of the amount and source of any such benefits, provided these could conflict with the interests of the client.
- Violation of Disclosure Obligations: If a broker or advisor conceals a received kickback, this may lead to the contestability or nullity of the underlying contract and liability for damages.
- Breach of Fiduciary Duty: The acceptance of undeclared benefits may constitute a breach of the duty of loyalty arising from an agency relationship (§ 242 BGB).
Claims for Restitution and Compensation for Damages
If a kickback is concealed from a client or customer, claims for restitution based on unjust enrichment (§ 812 BGB) for return of the received remuneration, as well as tort-based claims for damages (§§ 823 ff. BGB), may arise.
Criminal Law Relevance of Kickbacks
Kickbacks may result not only in civil law consequences but also in criminal law ramifications.
Embezzlement and Bribery
- Embezzlement (§ 266 StGB): The acceptance of kickbacks by an agent may result in financial loss to the person represented and may, under certain circumstances, constitute criminal embezzlement.
- Bribery and Corruption in Business Transactions (§§ 299 ff. StGB): In business transactions, kickbacks may fulfill the statutory definition of bribery or corruptibility in commercial dealings, particularly if the purpose of the payment is unfair preferential treatment in contract awards.
- Additional Offenses: Depending on the circumstances, tax evasion (failure to declare income) or money laundering may also be present.
Specifics in the Healthcare Sector
In the healthcare sector, specific regulations exist, such as §§ 299a and 299b StGB (“Bribery and Corruptibility in Healthcare”), which criminalize the acceptance and granting of kickbacks between healthcare professionals and third parties.
Regulation in the Capital Markets and Insurance Sector
In the securities and insurance sectors, kickbacks are comprehensively regulated due to the special need to protect investors and policyholders. Securities services providers, for example, are required under the Securities Trading Act (WpHG) to fully inform their clients of both received and paid benefits.
Case Law of the Federal Court of Justice
The Federal Court of Justice has repeatedly ruled that banks, investment advisors, and insurance brokers must always fully and transparently inform their clients about received rebates (including BGH, judgment of 19.12.2006 – XI ZR 56/05).
Consequences of Violations
In the case of undisclosed kickbacks, the affected client can demand reversal of the transaction, repayment of the kickback payments, or compensation for damages.
Compliance, Tax Law, and International Regulations
Compliance Requirements
To avoid conflicts of interest and criminal as well as liability risks, companies are required to establish appropriate compliance guidelines, particularly providing for a prohibition or strict disclosure obligation regarding kickbacks.
Tax Aspects
Kickbacks are taxable income and subject to proper reporting requirements. Failure to report concealed kickbacks regularly fulfills the offense of tax evasion pursuant to § 370 AO.
International Dimension
Internationally, kickbacks are especially regulated by the OECD Anti-Bribery Convention and the UN Convention against Corruption (UNCAC). Numerous national anti-corruption laws criminalize kickbacks.
Industry Examples and Practical Cases
Real Estate and Construction Industry
Here, kickbacks often appear as concealed rebates to purchasing decision-makers, brokers, or site managers. The acceptance of such payments regularly violates the principle of transparency and results in claims for damages and criminal liability.
Healthcare
Kickbacks between pharmaceutical companies and physicians or hospitals are routinely prohibited and subject to the medical professional code as well as specific criminal law provisions (§§ 299a, 299b StGB).
Public Sector
In public procurement, kickbacks given to favor a supplier are considered corruption and are prosecuted under §§ 331 ff. StGB.
Legal Assessment and Risks
Kickbacks are deemed inadmissible in most cases unless they are fully disclosed to a contracting partner, client, or public authority. They regularly result in the application of strict civil and criminal liability rules, claims for restitution, and reputational damage. Participants in such practices should strictly observe the applicable disclosure, fiduciary, and tax obligations to avoid legal consequences.
Source Reference: The information in this article is based on current legislation in Germany (BGB, StGB, AO, WpHG), pertinent case law from the Federal Court of Justice, and internationally recognized recommendations for combating corruption.
Frequently Asked Questions
Is the acceptance of kickbacks subject to criminal sanctions?
The acceptance of kickbacks (covert rebates) can be criminally relevant in Germany and other jurisdictions, especially when it occurs in commercial transactions or the public sector. In Germany, the key criminal offenses are, in particular, corruptibility (§ 332 StGB), bribery (§ 334 StGB), acceptance of benefits (§ 331 StGB), and granting of benefits (§ 333 StGB) as well as the provision of § 299 StGB (corruption in commercial transactions), which is particularly relevant in the private sector. Whether criminal liability arises depends on whether the acceptance or granting of a kickback breaches the duty to safeguard another’s interests and thereby fosters market distortion or illicit granting of advantages. In addition to criminal sanctions, professional law consequences, claims for damages, and contract rescission may also ensue. Whether criminal liability arises depends on the specific design, concealment, and connection of the kickback to the underlying service.
Are there civil law consequences for the arrangement or acceptance of kickbacks?
Yes, under civil law, kickbacks can render the relevant contracts void (e.g., pursuant to § 134 BGB, for violation of a statutory prohibition) or trigger claims for damages, for instance if an agent accepts a kickback without the principal’s knowledge and thereby breaches § 667 BGB or fiduciary duties. This particularly concerns situations in which a trustee, intermediary, or other representative acts for a business principal and is covertly granted advantages by third parties. In such cases, the principal can normally seek restitution of the kickback and possibly further damages. Termination of the employment or service relationship without notice may also be justified.
Do kickbacks have to be declared for tax purposes?
Kickbacks are taxable transactions for both the payer and the recipient. For the recipient, kickbacks typically increase taxable income and must be properly declared, regardless of whether the kickback was paid legally or illegally. The payer should note that payment of a kickback is often not tax-deductible as a business expense (particularly if it contravenes applicable law or is paid in cash under the table). Failure to declare may result in tax criminal consequences, such as tax evasion under § 370 AO. Failure to comply with bookkeeping obligations is also possible if such payments are concealed or not properly recorded.
Is the acceptance of kickbacks regulated differently in the context of international business relationships?
Yes, the legal treatment of kickbacks varies significantly internationally. While most European and North American countries have strict anti-corruption laws (e.g., the U.S. Foreign Corrupt Practices Act (FCPA), UK Bribery Act, German StGB), other legal systems sometimes have less restrictive provisions or enforcement is more difficult. Companies operating internationally must therefore observe not only national law, but also extraterritorial regulations and local compliance standards. Particularly relevant are international agreements such as the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which enables cross-border prosecution.
What obligations do companies have with regard to disclosure or prevention of kickbacks?
Companies and their executive bodies are obliged to establish internal control systems to prevent kickbacks and similar acts of corruption. This includes the implementation of compliance programs, regular training, clear anti-corruption guidelines, and whistleblower systems. For certain industries or listed companies, there are legal reporting obligations, such as under the Money Laundering Act (GwG) or the German Corporate Governance Code (DCGK). If a company fails to fulfill its preventive obligations, it risks fines, liability claims against executives, and reputational damage.
Can a recipient of kickbacks be dismissed under employment law?
The acceptance of kickbacks by employees or executive members generally constitutes a serious breach of employment obligations and regularly justifies extraordinary, i.e., immediate dismissal under § 626 BGB. Even minor amounts can irreparably destroy the necessary relationship of trust, so a warning is usually dispensable. Furthermore, the employer may claim damages and issue a negative employment reference. In corporate group structures or public enterprises, even stricter internal regulations may apply, which sanction even the mere attempt or initiation of such acceptance of advantages.
Is there an obligation to return or surrender received kickbacks?
Yes, particularly in the case of a trustee or representative position, there is an obligation under § 667 BGB to surrender all benefits obtained in connection with the management of a business, which explicitly includes kickbacks. If a representative breaches this duty, the principal is entitled not only to restitution, but also to damages (e.g., for inflated prices resulting from the kickback arrangement). This obligation to surrender exists regardless of whether criminal proceedings are pursued and is enforced under civil law. In many cases, the reversal of the corresponding contract can also be demanded.
