Consultants' Trial in China Highlights Perils of Business Investigations
Case highlights the increasing enforcement of China’s privacy protections, making it difficult for companies to research potential business partners, investments.
HONG KONG — Next week a court in China will hear a high-profile case against two foreign business consultants, each charged with illegally obtaining personal information on Chinese citizens. Shanghai No.1 Intermediate People's Court said on Tuesday Briton Peter Humphrey and his American wife and business partner, Yu Yingzeng, would go to trial on Aug. 8. The couple is charged with having illegally obtained private information on Chinese citizens through their risk consultancy firm, ChinaWhys. The case highlights how Chinese authorities are increasing enforcement of the country’s privacy protections, making it difficult for companies to research potential business partners and investments. According to its website, ChinaWhys helped foreign companies “avoid landmines” in the Chinese market. That included background checks on business partners and employees, as well as anti-fraud investigations. Prosecutors allege that a lot of the information the firm gathered over the years was illegally obtained: bought from Chinese investigators or through "secret photography, infiltration or tailing after someone.” But there is also speculation that their prosecution has political undertones. One of ChinaWhys' most recent clients, pharmaceutical firm GlaxoSmithKline (GSK), had hired them to investigate a former employee, someone rumored to have powerful political connections. The British pharmaceutical giant wanted to know whether the employee had reported to senior management - and to Chinese authorities - evidence of widespread corruption at the firm. In an interview broadcast on state TV, Humphrey confessed to the charges and referenced the GSK job. "They requested me to investigate the background of their suspected informer and make an assessment of the informer. I offered to investigate GSK China's internal businesses to determine if the alleged corruption did exist, but they turned me down,” Humphrey said. Chinese authorities started investigating the pharmaceutical company’s practices in China last year, around the time Humphrey agreed to investigate the company’s concerns over the alleged leak. In May, GlaxoSmithKline China executive Mark Reilly was formally accused of overseeing a network that bribed doctors to boost sales of the company’s products. Instead of focusing only on the GSK job, Chinese prosecutors have charged Humphrey and Yu for information breaches that span many years. The charges include illegally obtaining and re-selling phone, bank and real estate records, business and vehicle registrations, and other private documents. Attorney Steve Dickinson, an attorney at law firm Harris Moure in Tianjin and co-author of the China Law Blog, advises foreign companies about the Chinese market. “Various people in China they want to know things about their potential business partners, they want to know things about their commercial opponents. They want to know things about government officials," Dickinson said. "Well, great, but it is illegal to obtain that information. Should it be illegal? That is a different question," he added. In recent years, authorities have updated provisions on privacy protections in an effort to avoid serious information breaches, said Liu Deliang, professor of law at Beijing Normal University. “In December 2012 there has been a decision by the National People's Congress [which showed] the importance that the new government in China put on information safety online,” Liu said. “Obviously there has also been more awareness on the part of the public about the protection of their rights. I believe that in the future there will be more cases like this being discovered and prosecuted.” But the breadth of some provisions have raised concerns the laws might be used arbitrarily and could curb due diligence investigations - such as the ones ChinaWhys worked on. In an article Humphrey wrote months before he was detained last year, Humphrey described a U-turn in his field. Companies' filings at local business bureaus were no longer accessible, and authorities had started arresting hundreds of investigators and their sources. “I find this a very dark day for due diligence and forensics work,” he wrote. Some analysts, including Humphrey, connected the clamp down on public records with foreign media investigations detailing the wealth of some of China's top leaders. Dickinson said five foreign consulting firms he was familiar with got out of the business because of the apparent danger. “They saw all their contacts going to prison. They said 'We are next if we don't stop,' so they stopped,” he said. Daniel Roules, a mergers and acquisition lawyer at the law firm Squire Sanders in Shanghai, said that for years he advised potential foreign buyers to buy detailed reports on Chinese companies from a local firm. "It was a tremendous wealth of information available at a quite reasonable price, that company today is still in service but it provides only the minimum information that is provided by the company registered, the kind of information that any of us could get,” Roules said. That, Roules said, is an example of how the playing field has been changing in China. If found guilty, Humphrey and Yu face up to three years in prison.