I had taken a circular route to get to the palace, I had already found the black market and watched the smugglers. After the cut scene in the Palace I spoke with Prince Aruihi. He said I could help him for favor or coin but when I answered affirmatively it gave a message that he was disappointed and I can only end the conversation. When I talk to him again I can ask about the jobs, at which point it gives me an option to tell him about the smuggling. If I do so I get the quest and then it completes with xp and money. However if I choose any other option (e.g. let me come back later, or ask questions about the quest) then I get the quest and it completes itself up to the point of saying I should take the information back to the prince. However if I talk to the prince again I only have the option to lie and say I didn't see anything or coming back later, I no longer can tell him about the smugglers.
I am having trouble uploading the quicksave I have right before this behavior as it is 2MB large and ziping it doesn't seem to help.