SEC – D&B Settle FCPA Charges First Revealed on TV
Firms can and do discover violations of the Foreign Corrupt Practices Act in a variety of ways. In some instances the internal or external auditors uncover evidence which leads to the discovery. In others a whistleblower may inform the company and/or a regulator. In some instances an executive may uncover the illegal practices and trigger an internal investigation. Few firms, however, have had the experience of an executive on a TV news show revealing how the company collected personal information on numerous persons for its business trigger a police raid resulting in criminal privacy law violations against the firm and several executives — and ultimately FCPA charges. Yet that is what happened to The Dun & Bradstreet Corporation. In the Matter of The Dun & Bradstreet Corporation, Adm. Proc. File No. 3-18446 (April 23, 2018).
D&B manages a global business providing reliable credit information. Its shares are listed on the New York Stock Exchange. Access to, and the purchase of, business data are key components of the firm’s business. Critical to the firm’s business model is the continual acquisition of credit profiles and other related information. It is essential that its data bases remain current.
The firm first entered the market in China in the early 1990s through a joint venture. Over time that business approach was modified. The firm focused on acquisitions, mergers and joint venture partnerships.
In 2006 the President of the Asia-Pacific region established a relationship with Huaxia International Credit Consulting Co. Limited. Ultimately a joint venture was formed between D&B’s Chinese subsidiary and Huaxia. D&B owned 51%.
Huaxia was targeted because of its government connections. The firm was able to source financial statement information directly from provincial offices of the Chinese State Administration of Industry and Commerce or AIC, the Chinese National Bureau of Statistics, lawyers and other individuals rather than public sources. While a due diligence report prepared for D&B in connection with the transaction noted these facts, the firm’s response was limited to having Huaxia executives attend an FCPA training class and complete an anti-bribery questionnaire and certification.
Following the completion of the deal D&B continued to require detailed financial data on Chinese firms. Access to such information was restricted. D&B’s Greater China management and staff were aware that it was possible to obtain such information through illicit arrangements. D&B’s due diligence efforts indicated that Huaxia was directly acquiring certain non-public AIC business data through unofficial arrangements. The firm’s Greater China management understood, according to the Order, that Huaxia routinely obtained information through agents by making improper payments to government officials. This information was also known to the President of the Asia-Pacific region who was a member of the Global Leadership Team and a manager at D&B International.
For two years after the joint venture closed in November 2006 the firm did not fully integrate or consolidate the operations. Operations continued as before for each entity. Eventually Huaxia employees were prohibited from making direct improper payments. Rather, agents were used. That practice continued until mid-2012 when the firm’s Shanghai based subsidiary eliminated improperly obtained financial statement data from its information products as a remedial measure.
In June 2009 D&B entered into a business arrangement with Roadway, a Chinese firm that was acquired by a subsidiary. Roadway was a leading provider of direct marketing services in China. D&B identified as a key risk of this acquisition the February 2009 amendments to the Chinese criminal laws concerning citizens’ data privacy. Essentially those amendments criminalized the acquisition of a citizen’s personal information through theft or other means from Chinese government entities or organizations in a field such as finance, telecommunications, transportation, education or health care. Roadway had, according to what D&B learned, significant amounts of such data from independent vendors. Steps were taken try and mitigate the risk from the previously acquired data.
Following the acquisition, Roadway continued to acquire consumer data from agents. The data was provided to businesses for use in marketing. The agents furnished certificates that the data had been obtained legally. D&B did not audit or verify the certificates. From the date of the acquisition through 2012 the firm continued to acquire data by making improper payments. Those transactions were recorded inaccurately in the books and records of the firm.
March 15, 2012 was National Consumer Protection Day in China. A television news program featured a Roadway sales executive talking about the fact that the firm had created a database with information on over 150 million Chinese citizens. That data included specific financial, employment and contact information that was sold to firms for marketing. The data had been purchased from banks, insurance firms, and real estate agents according to the broadcast.
The Shanghai police raided the local Roadway offices the day of the broadcast. The firm’s computer servers were confiscated. Several employees were detained. Eventually the firm was charged along with five of its then current or former employees with illegally obtaining the private information of Chinese citizens. The company and its executives were convicted and required to pay a $160,000 criminal fine.
Subsequently, D&B self-reported to the DOJ and the SEC. The DOJ declined to prosecute. The Order alleges violations of Exchange Act sections 13(b)(2)(A) and 13(b)(2)(B). In resolving the matter the Commission considered the remedial actions of D&B which included ceasing the Roadway operations and illicit practices, terminating certain employees, disciplining others and re-evaluating and supplementing its anti-corruption compliance programs.
To resolve the matter D&B consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, the firm will pay disgorgement of $6,077,820, prejudgment interest of $1,143,664, and a penalty of $2 million.