China announces arrest of British, American investigators on charges of privacy violation

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BEIJING, China – Beijing is tightening control over trade in information that can help companies find their way through China’s secretive business world.

On Tuesday, police announced the arrest of two corporate investigators, a Briton and an American who work in Shanghai, on charges of improperly selling personal information about Chinese citizens.

Peter Humphrey and Yingzeng Yu, a married couple, are part of an industry of investigators who help corporate clients screen potential partners and employees or watch for embezzlement and other employee misconduct.

“The opaque nature of the investigation and detention of the Humphreys is troubling at best and puts a serious chilling effect on legitimate efforts to investigate even benign, public information,” said James Zimmerman, managing partner of the Beijing office of the law firm Sheppard Mullin Richter & Hampton.

Chinese leaders want the prosperity that comes from free-market competition but see control over information as a tool to protect the Communist Party’s monopoly on power.

The government operates an extensive surveillance network to track China’s public and limits access to data on companies and individuals. Since last year it has further narrowed what can be obtained.

Other companies that supply information already are under pressure. In January, four Chinese employees of a unit of Dun & Bradstreet Corp. were sentenced to prison on charges of improperly buying personal data of Chinese citizens.

A string of Chinese companies have been hit by disclosures by investigators about possible financial misconduct that caused their share prices to plunge.

Possibly in response to that, regulations issued in February 2012 prohibit government agencies from disclosing financial or commercial information about a company without its permission.

That made it harder for companies to investigate potential partners or acquisition targets to find liabilities or conflicts of interest. Known as “due diligence,” it is a common practice in other countries.

Several dozen reports prepared by Humphrey and Yu for corporate clients contained information that “seriously violated the legitimate rights of citizens,” the Shanghai police department said in a statement. It said they were formally arrested on Aug. 16.

That included home addresses and information on family members, real estate and vehicles, the statement said. It said they were sold to clients including manufacturers, law firms and financial institutions.

Such information can reveal links between people and establish who controls a business. That can be essential in a Chinese business world dominated by behind-the-scenes personal connections.

Also last year, communist leaders were embarrassed by news reports that disclosed details of the family wealth of Xi Jinping, the new ruling party leader, and retiring Premier Wen Jiabao.

Humphrey’s and Yu’s firm, ChinaWhys Ltd., says on its website it “specializes in discreet risk mitigation solutions, consulting and investigation services” aimed at “walking multinationals through the labyrinth of opportunity, risk and unfamiliar cultural environment.”

Humphrey, a former reporter for the Reuters news agency, has worked as an investigator for the past 14 years in Asia, focusing on white-collar crime prevention, fraud investigation and crisis mitigation, according to the website. It says Yu has worked for or advised companies in the United States, Hong Kong and China in technology, medical products and other industries over a 25-year business career.

Humphrey and Yu are accused of paying 800 to 2,000 yuan ($130 to $320) per item of personal information, the official Xinhua News Agency said.

A report about the case on the state television midday news showed two people in handcuffs with their faces blurred.

“To obtain this information, I sometimes used illegal means,” said the man, a Westerner, speaking in Mandarin. “I want to apologize to the Chinese government.”

The latest case could mark an escalation in enforcement against foreign as well as Chinese investigators.

People of Chinese ancestry have been prosecuted in the past on charges of industrial spying or other corporate misconduct but Humphrey appears to be the first non-ethnic-Chinese to face such treatment.

In January, the four former executives of Dun & Bradstreet’s Shanghai Roadway D&B Marketing Services Co. were sentenced by a Shanghai court to up to two years in prison. The company was fined 1 million yuan ($160,000).

The British Embassy in Beijing confirmed last week that Humphrey was arrested but gave no details of charges. The embassy said it was providing unspecified consular assistance to his family.

The American Embassy in Beijing said earlier that diplomats visited Yu on July 16. A spokesman said Tuesday he had no additional information.

The detentions coincided with the announcement in July of an investigation into possible bribery of doctors by employees of pharmaceutical company GlaxoSmithKline. That prompted suggestions their case might be linked to Glaxo, but Tuesday’s announcement made no mention of that.

Glaxo declined Tuesday to comment.

The announcement said Shanghai police are investigating 126 people on suspicion of improperly gathering personal information and have detained 35.

Chinese companies have reacted angrily to disclosures of information by investigators.

In the highest-profile case, a U.S. firm, Muddy Waters Research, accused Chinese forestry company Sino-Forest Corp. of exaggerating the value of its assets.

Sino-Forest’s shares on the Toronto Stock Exchange plunged in value. Canadian police launched an investigation of the company, which filed a lawsuit accusing Muddy Waters of defamation.

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