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Dun & Bradstreet Resolves $9.2 Million Enforcement Action Based On Conduct Of Two Indirect Chinese Subsidiaries From 6-12 Years Ago

As highlighted in this prior post [1], over six years ago Dun & Bradstreet (a leading source of commercial information and insight on businesses) announced that it was under Foreign Corrupt Practices Act scrutiny concerning conduct in China.

Yesterday, the SEC (Snails-Pace Enforcement Commission) announced [2] that D&B agreed to resolve an FCPA enforcement action by paying approximately $9.2 million to “arising from improper payments made by two Chinese subsidiaries.”

This administrative order states [3], in summary fashion:

“These proceedings arise from violations of the Foreign Corrupt Practices Act … by D&B arising out of conduct at two of its indirect subsidiaries in China, Shanghai Huaxia Dun & Bradstreet Business Information Consulting Co., Limited (“HDBC”) and Shanghai Roadway D&B Marketing Services Co., Ltd. (“Roadway”).

During the time period from approximately 2006 through 2012, D&B’s HDBC and Roadway subsidiaries made unlawful payments in order to obtain or retain business.

These unlawful payments were not accurately reflected in the books and records of HDBC and Roadway, which were consolidated into D&B’s books and records. During the relevant period, D&B also failed to devise and maintain sufficient internal accounting controls to detect or prevent the improper payments.”

HDBC is described as follows:

“[A] Chinese limited liability company that was formed in November 2006 as a joint venture between D&B’s Chinese subsidiary, Dun & Bradstreet International Consultant (Shanghai) Co. Ltd. (“D&B China”), and Huaxia International Credit Consulting Co. Limited (“Huaxia”). D&B China is the fifty-one percent majority shareholder of HDBC and its books, records, and financial accounts are consolidated into D&B’s books and records and reported by D&B on its financial statements.”

Roadway is described as follows:

“[D]uring the relevant time period, a Chinese limited liability company. In June 2009, D&B (through a wholly-owned subsidiary) acquired ninety percent of Roadway’s shares. Roadway’s books, records, and financial accounts were, during the relevant time period, consolidated into D&B’s books and records and reported by D&B on its financial statements. In March 2012, D&B voluntarily suspended, and then in May 2012, voluntarily shut down the operations of Roadway in part as a result of its discovery of the illegal conduct described herein.”

[4]

In terms of background relevant to the enforcement action, the order states:

“[D&B] currently maintains a global commercial database of over 280 million companies and its products provide commercial data to businesses and other entities through subscriptions and business reports on credit history, business-to-business sales and marketing, counterparty risk exposure, and other business data information products.

Access to, and purchase of, business data are core components of D&B’s business model, most importantly with respect to its well-known and established credit reporting business. Businesses utilize D&B’s credit profiles to verify other businesses, make independent decisions on the extension of credit, find new customers, and research new opportunities in specific countries. D&B needs to acquire business data continually to populate and maintain its worldwide databases, which are the heart of its commercial operations. D&B acquires commercial data through several methods including contacting the commercial entities directly, contacting an entity’s vendors or clients, and collecting information about entities from the government agencies where the business operates or is organized.

D&B first entered the China market in the early 1990’s through a joint venture and by the mid-2000’s, began to consider strategic alternatives to grow its China-based business. Ultimately, D&B chose a growth strategy that would be executed through acquisitions, mergers, or joint venture partnerships. In 2006, D&B promoted a successful European executive to be President of its Asia-Pacific region and tasked him with the mission of finding strategic partners to grow the China business.”

Regarding the HDBC joint venture, the order finds:

“In 2006, the new President of the Asia-Pacific region considered and courted several potential partners for merger or acquisition but ultimately focused on Huaxia as a joint venture partner. Among other things, Huaxia was considered attractive as a result of its “government connections.”

As part of its due diligence, a review of Huaxia’s data and operations was conducted by an executive from D&B’s Greater China management. The data and operations review focused on, among other things, data acquisition and sources of data at Huaxia. The report explicitly noted that, unlike D&B’s China operations, Huaxia used its government connections to source financial statement information directly from provincial offices of the Chinese State Administration of Industry and Commerce (“AIC”), Chinese National Bureau of Statistics, lawyers, and other individuals rather than publicly available sources. D&B’s due diligence procedures failed to address the information in the report, rather, D&B provided a short FCPA training session to Huaxia executives and then requested that they complete an anti-bribery questionnaire and certification.

Financial information on private companies in China was crucial to the success of D&B’s products sold in its international market regarding China’s rapidly emerging economy. Financial statement information filed with the AIC office contains the detailed information on a business entity, is updated annually, and is of the type considered most useful for making credit determinations and other business decisions. D&B promoted that their information products were based upon AIC-sourced data. 13. Access to the business information, including financial statement information, archived in the AIC offices is highly regulated under Chinese law. Public access to the AIC archived file on a business entity is limited to enterprise registration information (name, domicile, business premises, legal representative, enterprise type, etc.), documents submitted for approval in an application for enterprise registration, items concerning the change of the enterprise (name, domicile, legal representative, subsidiaries), items concerning the deregistration of the enterprise (including insolvency), and items concerning supervision and inspection (including penalties against the entity). However, access to the complete AIC archived file for an entity, including its financial statement information, is restricted to law enforcement agencies, the judiciary, disciplinary/inspection organizations, and law firms in the limited circumstances related to representation of clients in lawsuits. Supporting documents for case initiation and the lawyer’s license are required to be produced to the AIC before such access is granted to a lawyer or law firm. Chinese law further provides that AIC archived files cannot be made public and those who obtain such AIC archived files shall not use such files to engage in commercial services.

D&B Greater China’s management and staff who were responsible for data acquisition knew of the commercial use restrictions and were also aware that it was possible to bribe complicit AIC employees to obtain otherwise restricted financial statement data. Because of the risk associated with such illicit arrangements, HDBC management used third-party agents to unlawfully obtain the financial statement data under the mistaken belief that using third parties would shield the company from any legal liability.

D&B’s due diligence efforts indicated that Huaxia was directly acquiring certain non-public AIC business data through unofficial arrangements. D&B’s Greater China management understood that Huaxia routinely obtained information through agents and the agents obtained information by making improper payments to government officials. The due diligence package disclosing these arrangements was circulated to the D&B transaction team, including the President of the Asia-Pacific region, who was also a member of D&B’s Global Leadership Team, and a manager at D&B International.”

Under the heading “HDBC Continued to Make Improper Payments to Acquire Data,” the order states:

“The D&B China and Huaxia joint venture was completed in November 2006 and resulted in the formation of HDBC. For at least two years after the closing of the deal, HDBC did not fully integrate or consolidate the operations and data acquisition practices of the two predecessor entities, allowing them to continue to operate much as they had prior to the joint venture. Legacy D&B China continued its normal business operations in Shanghai and the legacy Huaxia continued its normal business operations in Beijing. However, a D&B Greater China manager stopped the practice of Huaxia employees directly making improper payments to AIC officials and implemented the practice of using third-party agents to obtain the data.

In the fall of 2008, D&B Greater China management sought to reduce HDBC’s financial data acquisition costs. At the time, data acquisition costs in China were substantially higher than similar data costs in other countries. D&B Greater China management considered eliminating the use of agents and authorizing HDBC employees to purchase data directly from AIC officials, as this would significantly reduce costs. Separately, employees in the data and operations unit at HDBC noted in a report to the executive responsible for data acquisition in China that purchasing data directly from AIC individuals would be at a high cost and require “lots of palm grease (kind of bribe)” to the AIC officials. While the managers involved were not concerned with making improper payments directly to these government officials, they were concerned that HDBC would be unable to obtain proper fapiao (tax receipt) under this proposal. As a result, they explored ways to generate fake fapiao for the payments that would be made to local officials.

Ultimately, D&B’s President of Asia-Pacific, President of D&B Greater China, and the executive responsible for data acquisition in China decided to maintain the status quo of using third-party agents to acquire data for HDBC. This practice was in effect at HDBC from the creation of the entity in 2006 until mid-2012, when HDBC eliminated improperly obtained financial statement data from its information products as a remedial measure.”

Under the heading “Roadway Subsidiary,” the order finds:

“In April 2009, D&B considered a business collaboration with Roadway, which was a leading provider of direct marketing services in China. Businesses used Roadway’s services to market directly to businesses or consumers through various media, including direct mail, telemarketing, efax, and email. The transaction closed in June 2009, with D&B acquiring (through a wholly-owned subsidiary) ninety percent of the shares of Roadway.

A key risk identified by D&B in its pre-acquisition due diligence of Roadway related to certain February 2009 amendments to Chinese criminal laws concerning citizens’ data privacy. The amendments provided criminal sanctions for entities and individuals who illegally obtain citizens’ 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. D&B knew that Roadway had obtained a significant amount of its data from independent vendors, thus it needed to ensure that Roadway had legally obtained its pre-existing data and that Roadway would employ legal means of acquiring data post-acquisition. While steps were taken to try to limit the risk that its use of previously acquired data violated local law, ultimately Roadway violated Chinese law with respect to data that had been acquired post-acquisition.

As part of the pre-acquisition due diligence process, Roadway informed D&B that it could not warrant that no “rebates” were paid in connection with data sales because their sales representatives were paid on commission and this might incentivize them to “share” the commission with the “decision-maker” at the client in order to “drum up” business. D&B did not conduct further due diligence to verify whether sales representatives were in fact making improper kickbacks of a portion of commissions in order to secure business, or determine whether any clients were state-owned or state-controlled entities (“SOEs”). Subsequent internal audit reviews after the acquisition failed to detect the improper payments.”

Under the heading “Roadway Made Payments to Obtain Business,” the order finds:

“After the transaction closed in mid-2009, Roadway continued to acquire consumer data from agents and provide the data to businesses for use in marketing. While the agents did provide certifications that the consumer data was legally obtained, D&B did not audit or otherwise review the sources from where agents acquired data to verify their certifications.

On March 15, 2012, National Consumer Protection Day in China, a television news program featured a Roadway sales executive making statements that Roadway had created a database with information on over 150 million Chinese citizens that included specific financial, employment, and contact information that Roadway sold to companies for marketing purposes. The broadcast stated that Roadway had purchased the personal information from banks, insurance companies, and real estate agents or by cold calling companies. That same day, the Shanghai police raided the Roadway offices in Shanghai and confiscated computer servers and detained several employees, including senior management and employees responsible for data acquisition at the company.

In September 2012, Roadway was charged, along with five then-current or former employees, by the Shanghai District Prosecutor with illegally obtaining private information of Chinese citizens. Subsequently, in January 2013, Roadway and the five individuals were convicted and Roadway was required to pay an approximately $160,000 criminal fine.

In addition to failing to ensure the legality of the Roadway-acquired data, post-acquisition, D&B also failed to take steps to determine whether Roadway employees were paying customer “decision-makers” to get business. From July 2009 through March 2012, Roadway employees continued to make improper payments to customer “decision-makers” to obtain or retain business, including customers that were Chinese government agencies or entities that were SOEs. These payments were called “Pin Tui,” or promotional expenses, and were inaccurately recorded in Roadway’s books and records as legitimate promotion and advertisement expenses. The Pin Tui payments were made directly by Roadway employees and through third-party agents in connection with over thirty-four percent of the customer transactions at Roadway between July 2009 and March 2012. Of the 1,036 customers whose “decision makers” received payments in this period, 156 were Chinese government agencies or SOEs.”

Based on the above findings, the SEC found that D&B violated the FCPA’s books and records and internal controls provisions.

As to the books and records provisions, the order states:

“The company’s subsidiary, HDBC, falsely recorded illicit payments to government officials to acquire data incorporated into its business products as legitimate data acquisition expenses. D&B subsidiary Roadway also acquired data through the use of improper payments and made improper payments to government officials and private businesses to obtain or retain business. Roadway falsely recorded the payments as legitimate business expenses. The false entries in HDBC’s and Roadway’s books and records were then consolidated by D&B in its own books and records.”

As to the internal controls provisions, the order states:

“D&B violated [the provisions] for several years by failing to devise and maintain a sufficient system of internal accounting controls in its China subsidiaries to prevent and detect improper payments in connection with data acquisitions and sales.”

Without admitting or denying the SEC’s findings, D&B agreed to cease and desist from future violations and agreed to pay approximately $9.2 million (disgorgement of $6,077,820, which represents profits gained as a result of the conduct described herein, prejudgment interest of $1,143,664, and a civil money penalty in the amount of $2 million).

Under the heading “D&B’s Self-Disclosure, Cooperation, and Remedial Efforts,” the order states:

“In determining to accept the Offer, the Commission considered Respondent’s self-disclosure, cooperation, and remedial efforts. D&B made an initial self-disclosure to the Commission staff and the DOJ in March 2012, shortly after local police raided its Roadway subsidiary. D&B’s cooperation included voluntarily producing documents from overseas, summarizing the findings of its internal investigation, translating numerous key documents, providing timely factual summaries of witness interviews done in the course of its internal investigation, making employees available to the Commission staff, and providing for employees or former employees to travel to the United States for interviews. D&B’s cooperation assisted the Commission in collecting information that may not have been otherwise available to the staff.

D&B’s remedial action included ceasing business operations of its Roadway subsidiary; discontinuing illicit practices at HDBC; terminating certain D&B employees who were involved in the misconduct; doubling the size of its audit services and corporate compliance teams; hiring legal and compliance employees in China; re-evaluating and supplementing its anti-corruption policies and procedures on a global basis, including its relationship with third-party vendors and suppliers; enhancing its internal accounting controls and compliance functions; developing and implementing FCPA compliance procedures, including the expansion and implementation of new due diligence and contracting requirements for vendors and suppliers; engaging a law firm to review every data vendor and source of data used in China; and conducting regular anti-corruption training throughout the D&B organization. D&B also implemented a process to re-evaluate and supplement its anti-corruption compliance on a global basis.

D&B also undertook disciplinary actions against certain employees, including senior executives at D&B Greater China and D&B International. These individuals included executives who had oversight responsibility for ensuring that adequate FCPA compliance training and controls were in place at the company’s HDBC joint venture and Roadway subsidiary.”

On the day of the enforcement action, D&B’s stock price rose .3%.

Peter Spivack [5] of Hogan Lovells represented D&B.

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