Welcome everyone to another edition of my Global Tech Law Newsletter. A quick post today on something that came up recently. It might seem innocent, but can create certain legal issues. I'm talking about when a third party makes payment on someone else’s behalf.

As a general matter, avoid it. My friend luckily had his antenna on, as this was one of a few things that caused him to hesitate working with a new counterpart. Mostly, it was the other side's inability or unwillingness to explain the rationale for why they were proposing what they were proposing. Just saying “this is the way we’ve always done it.”

Having a third party make payment for services (instead of the party actually receiving the services making payment) can be a sign of:

(1) Money laundering – be particularly wary if the company has no clear, reasonable relationship to the client.

(2) Kickbacks – The third party pays one price to you, the vendor, then invoices the end client a higher price and splits the difference between themselves and someone personally working at the end client.

(1) and (2) above are especially likely if the end client introduces the third party after the fact, i.e. it was not the third party itself that found you, the vendor, and initiated the conversation. The latter may in fact be providing a legitimate procurement service. The former seems odd and out of place with no business rationale.

The key is looking for clear and aligned interest, does it pass the smell test why someone else would pay? Do they have a legitimate interest in helping the client? A family member or parent/affiliate company would not typically be concerning.

For some vendors such as law firms and accounting firms, it can also create ethical issues as to who is the actual client and what access the third party has to the advice given.

It can also complicate invoicing, bookkeeping, and tax reporting. Your engagement agreement or retainer arrangement may need to reflect that another entity (not the direct beneficiary of the services) will be making payments.

Have a clear agreement documenting roles (and potential limitations) for each party, do your own basic due diligence on the third party (instead of sticking your head in the sand), and absent a clear and reasonable explanation on why the third party must pay and not the client, simply walk away. It’s a sign of an engagement that likely is going to bring on other problems down the road, not just this one out of the gate.

*This blog may be considered attorney advertising. It is for informational purposes only and does not constitute legal advice.