Humphrey arrest in China spotlights due diligence dilemma

[Editor’s Note: This post comes from a reader who asked not to be named. We’re very grateful for his generosity — rlc]

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The recent arrest of Peter Humphrey in China should be thought provoking to corporate compliance departments everywhere. Who is Peter Humphrey and why should compliance officers care?

Peter Humphrey and his wife operated ChinaWhys Co. Ltd. (Hong Kong), a private investigation firm that offered investigatory services to corporations and law firms doing business in China. Demand for such services is booming. Before ChinaWhys, Peter was China country manager for U.S. risk consultancy Kroll and served before that as head of China investigations at PwC. However, this month the media has reported that the information ChinaWhys collected and sold in some cases was obtained illegally. Peter and his wife were arrested in China on August 16. This week, Chinese state television broadcast his public confession.

With the aggressive increase in enforcement of the FCPA and foreign equivalent laws, there has been a welcome and necessary shift towards better knowing your vendors, suppliers, and third party intermediaries. This has not always been the case — even recently.

Consider Bizjet.  According to a DOJ Deferred Prosecution Agreement, Bizjet paid bribes (described as “commission”) to government officials in Mexico through a shell company called Avionica International & Associates Inc. (“Avionica”). Bizjet received a deferred prosecution agreement and paid fines of $11.8 million.

Among those mentioned (and subsequently indicted) by DOJ was Jald Jensen, Bizjet’s Sales Manager Latin America. It is unknown what level of due diligence Bizjet performed on Avionica prior to making at least $434,000 in “commission” payments. However a California Secretary of State online business search indicates that Jald R. Jensen is the “Agent for Service of Process”. Further, Avionica’s corporate address is provided and matches Jensen’s personal address which is found through numerous public websites and would have been in Bizjet’s HR directory. These facts obtained from simple research should have raised serious questions about the nature of the commission payments and Jensen’s relationship with Avionica.

This is an example of the type of information compliance departments hope to obtain through performing vendor due diligence. Most companies have few resources and little expertise to conduct due diligence in-house and thus outsource this work to third parties. In many cases, the work is outsourced to very small companies that are barely known or understood themselves. They advertise and promise corporate and human intelligence gathering in many jurisdictions and utilize a network of local contacts to deliver. Unfortunately, companies do not often know or understand how this information is obtained.

In Peter Humphrey’s case his company may not have been well known, but his background seemed comforting. Despite this, he apparently admitted in China that at least some of the information ChinaWhys sold appeared to have been obtained illegally.

What will the affect be on mindful corporate compliance? Who can really tell, but it may cause any of the following:

• Companies may question and better understand who exactly is doing the work and consider limits on the subcontracting that occurs

• Companies may consider using more widely known firms (even despite Peter’s background)

• Companies may turn to local legal counsel to navigate through what information is legal to obtain