By Dentons | August 29th, 2014
By Todd Liao and Michelle J. Shapiro
Peter Humphrey and his wife were indicted by a Shanghai court on August 8, 2022 for illegally obtaining and selling private information of Chinese citizens. The private information included residential addresses, family member information, car ownership records and real estate records. The couple operated ChinaWhys Co. Ltd., a private investigation firm that offered investigatory services to corporations and law firms doing business in the People’s Republic of China (the “PRC” or “China”).
At the time of their arrest, the couple were investigating Chinese citizens on behalf of GlaxoSmithKline (“GSK”), the UK pharmaceutical company. The arrest came days after Chinese authorities publicly leveled bribery allegations against GSK, which hired investigators to determine the identity of the person(s) that disclosed the bribery scandal to Chinese authorities and GSK executives. This arrest is indicative of a shift in China’s regulatory landscape toward tightened privacy compliance regulations and proactive enforcement of data privacy violations with respect to Chinese citizens.
The following article highlights certain lessons that can be learned from the Humphrey case and provides practical advice for navigating the risks associated with internal investigations in China.
Lessons from Humphrey’s indictment
Humphrey and his wife were arrested and prosecuted pursuant to Article 253 of China’s Amendments to Criminal Law (VII) (“Article 253″) which bans “stealing or illegally obtaining, by any means, personal information”. Although Humphrey and his wife are the first foreign nationals to be arrested by Chinese authorities for trading in “illegal personal information,” at least 126 people have been arrested in Shanghai for similar violations over the past five years.
In China, personal information is protected under various laws, including the constitution, and civil and criminal laws. While an overarching personal data protection law has been in the drafting phase since 2003, it is unclear when the law will be enacted. Prior to the changes to Article 253, the scattered data privacy provisions protected a citizen’s right to a general freedom of communication, security and privacy, but did not cover basic personal information. Article 253 helps fill the regulatory void in respect of the protection of basic personal information. In addition, Article 253 provides Chinese courts with an effective tool to scrutinize due diligence and investigation practices conducted in China insofar as such processes involve the collection of “personal information”.
Prior to Humphrey’s indictment, the “standard practice” for conducting an investigation in China involved outsourcing the due diligence investigation to professional due diligence firms, such as Humphrey’s. As a result of the changing laws regarding personal data protection, there will now be more scrutiny on how information regarding Chinese individuals and companies is obtained. Humphrey’s case highlights the risks of holding or relaying personal information of Chinese citizens and demonstrates that companies obtaining such information without proper authorization may face legal penalties, including criminal prosecution. In light of Humphrey’s indictment and China’s changing regulatory landscape, multinational corporations (“MNCs”) that depend on due diligence checks to avoid running afoul of corruption legislation (such as the US Foreign Corrupt Practices Act (the “Act”)) may need to alter investigative techniques to comply with PRC law.
Conducting investigations in China
Pitfalls and roadblocks in data collection
As noted above, PRC regulations on personal data protection are scattered and complicated, which may pose pitfalls for investigators and anti-corruption professionals that are unfamiliar with PRC law. For example, the existing laws do not have a unified definition of “personal information” in the non-internet context. The absence of clear guidance on what constitutes personal information or other key subject matter creates a layer of uncertainty for an MNCs’ investigation efforts in China. Humphrey and his wife’s case exemplifies this risk, as both admitted they were unaware of the newly enacted laws regulating their industry.
In addition to knowledge of data privacy law, familiarity with local practices and national policies issued by the government is an important component of MNCs’ investigations in China. Before January 2013, due diligence firms were able to freely retrieve corporate records from the Administration of Industry and Commerce (the “AIC”), which is the governmental authority that keeps financial and ownership information on all companies in China. The Chinese government recently restricted access to this information after several media and investment informational companies published sensitive information regarding the fraudulent schemes of Chinese companies and political figures. This restriction has severely impaired the ability for MNCs to conduct comprehensive due diligence on the ownership interests of potential joint-venture partners, merger and acquisition targets, vendors, state-owned entities, foreign officials and politically exposed persons.