Recently, the co-founders of a firm primarily engaged in investigation-related services were arrested in Shanghai. The arrest indicates protected information laws are being rigorously enforced in China, and could signal a tipping point for information-gathering firms operating there.
On August 19, 2013, UK citizen Peter Humphrey and his wife, a U.S. citizen, were arrested in Shanghai on allegations of crimes related to the buying and selling of protected information during their work as investigators. The arrests, coming after several weeks of detention, are a strong signal that police believe they have enough evidence to secure convictions. The two are co-founders of ChinaWhys, an “International Business Risk Advisory Firm” that was primarily engaged in investigation-related services. Although not mentioned in government announcements of the arrests, media reports indicate that the arrests were linked to the ongoing investigation into the pharmaceutical industry that has been unfolding through a steady stream of escalating allegations by PRC enforcement officials.
Effects and Implications
- The arrests could signal a tipping point for investigation firms. There have been numerous signs that investigation firms would be increasingly targeted in government crackdowns. This previously thriving sector may have to undergo significant and fundamental reform to survive in the current enforcement environment.
- Investigations and information collection are targets of increased scrutiny. Entities and individuals that have previously relied on or participated in the collection of potentially sensitive information should carefully review and evaluate their practices and begin exploring lower risk alternatives. These recent developments signal that certain traditional information-gathering methods that are commonplace in China—and standard practice in most countries—may now involve substantial risk.
- Protected information laws are a powerful tool for enforcement agencies. In addition to ChinaWhys, earlier this year a local office of a multinational business information company was fined RMB 1 million, and four of its executives were imprisoned, on charges related to the illegal procurement of consumer information. China’s protected information laws, including sector-specific laws and regulations, have been steadily increasing in number and expanding in scope, creating a complex patchwork of duties to protect information and liability for misuse.
Mitigating Risks and Ensuring Compliance
With increasing signs that protected information laws will be rigorously enforced, companies operating in China must be diligent to ensure compliance. A careful review of information policies, especially those related to anticorruption due diligence, internal audits and investigations, third-party agent reviews and even standard pre-transaction due diligence, will help companies prepare for and mitigate their risk. Vigilant review and vetting of any third-party investigation or information-collecting initiatives is essential to reducing exposure.
Robust investigation will remain critical to companies’ efforts to succeed in China while complying with China’s regulatory requirements and those in their home jurisdictions. Companies using licensed firms legitimately operating in the investigations sector, with appropriate methods of gathering and communicating information, are best positioned to capitalize on the opportunities that China offers.