Dun & Bradstreet: Two Chinese Subsidiaries and a Parent’s Settlement

In the Dun & Bradstreet FCPA case, the company agreed to pay more than $9 million to resolve allegations involving improper payments by two Chinese subsidiaries. The Securities and Exchange Commission described the alleged Foreign Corrupt Practices Act violations in its April 23, 2018 order. If you know who requested a payment, what it bought or how it entered the accounts, that is the view inside the transaction we want to hear.

The SEC Settlement and the Justice Department’s Decision

The Dun & Bradstreet settlement combined disgorgement, interest and a civil penalty. The SEC alleged that the Foreign Corrupt Practices Act violations stemmed from improper payments by the Chinese subsidiaries.

The Justice Department separately declined to prosecute Dun & Bradstreet on April 23, 2018. Its letter credited the company’s voluntary disclosure, investigation, cooperation and changes to its compliance program and internal accounting controls. That decision about prosecution sat alongside the SEC settlement. For an insider, the payment and its explanation still matter: the same business transaction can raise questions about both the purpose of the money and the way the company recorded it.

What the Payment File Has to Explain

A payment inside a multinational business can involve a local manager who authorizes it, an intermediary who receives it and someone else who ultimately benefits. Finance, compliance and audit may encounter different parts of that transaction. We start with the business purpose, the recipient and the explanation that accompanied the money.

The books and records question concerns whether the accounts accurately describe the transaction. The controls question concerns the approvals and checks around it. An invoice, an approval and an entry can agree with each other while leaving the actual use of the money unexplained.

That distinction matters when subsidiary accounts feed the parent’s books. A person preparing a local reimbursement may know the underlying expense, while someone reviewing the consolidated accounts sees its category and amount. We connect the description that traveled upward with the transaction the employee saw. A neat entry is a poor substitute for an honest explanation.

HDBC: Paying for Restricted Business Data

The SEC’s order described HDBC’s payments for non-public financial statements. HDBC was the Chinese joint venture formed by Dun & Bradstreet’s Chinese subsidiary and Huaxia International Credit Consulting. According to the SEC, Huaxia’s government connections helped it obtain financial information from provincial offices of China’s State Administration of Industry and Commerce. That data mattered to Dun & Bradstreet’s products because customers used company financial statements to make credit and other business decisions.

The SEC alleged that management and data-acquisition staff knew the restrictions on commercial use of those files and knew officials could be bribed to release them. HDBC used agents to obtain the data, with management believing that intermediaries would shield the company from liability. The agency described a local manager replacing direct payments by Huaxia employees with payments through agents after the joint venture began. We see the absurdity: changing who handed over the money left the reason for the payment intact.

A cost review brought the payment method back into view. The SEC alleged that, in 2008, managers considered buying data directly from officials to reduce the expense of using agents. Data staff warned in a report that direct purchases would require bribes, while managers worried about obtaining proper tax receipts and explored fake receipts. The company ultimately kept the agents, and the SEC said that practice continued until HDBC removed improperly obtained financial statement data from its products in mid-2012.

For someone working with business data, the source of the information can explain more than the purchase category. A data employee may know which files were restricted, while finance sees an agent’s bill for obtaining them. We connect that knowledge to the payment, the recipient and the product the information supported.

Roadway: Payments to the Customer’s Decision-Maker

Roadway sold direct marketing services that businesses used to reach other businesses and consumers. In its order, the SEC alleged that Roadway employees paid customer decision-makers to obtain or retain business, including customers that were government agencies or state-owned entities. Employees made payments directly and through agents, recording them as promotion and advertising expenses.

The alleged payments reached beyond a single customer relationship. The SEC said they accompanied more than 34% of Roadway’s customer transactions between July 2009 and March 2012. Of the 1,036 customers whose decision-makers received payments, 156 were government agencies or state-owned entities. An employee who knew which customer received the money could explain whether a promotion expense actually paid the person choosing the supplier.

The SEC also described Roadway’s acquisition of consumer data through agents who certified that they obtained it legally. Dun & Bradstreet did not audit or otherwise review those agents’ data sources to verify the certifications, according to the order. That allegation concerns how Roadway obtained its product, alongside the separate allegation that it paid customers to buy it.

The two subsidiaries’ accounting met at the parent. The SEC alleged that HDBC recorded illicit payments as legitimate data-acquisition expenses and Roadway recorded improper payments as legitimate business expenses, then Dun & Bradstreet consolidated those entries into its own books. The useful comparison is specific: money to obtain restricted data at HDBC, and money to obtain data and win customers at Roadway.

What an Audit Can Miss

The SEC alleged that Dun & Bradstreet had warnings before both transactions. Its review of Huaxia identified unofficial access to government-held data, yet the company responded with a short training session and an anti-bribery questionnaire and certification. Roadway disclosed that sales representatives might share their commissions with customer decision-makers, but Dun & Bradstreet did not investigate whether those payments occurred or whether customers were government-controlled. The order said subsequent internal audits failed to detect Roadway’s improper payments.

An insider may know whether the review addressed the transaction that prompted the concern. We look at whether the audit tested the use of the money, the source of the data and the approvals that followed the warning.

The March 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, estimated that exposure to state False Claims Acts through state pension-fund ownership reduced firms’ likelihood of accounting fraud by 5% to 9%. In a smaller sample with internal-audit data, it found little evidence that increased audit investment explained the reduction. For us, that is a reason to take the people who understand transactions seriously alongside the systems designed to review them.

How We Help a Subsidiary Insider Build an FCPA Case

We help you assess the invoices, approvals, agreements, accounting entries, messages and internal warnings you know, and what each can explain. For a concern involving a Chinese subsidiary, your knowledge of the local business may connect a recipient or service to an entry reviewed elsewhere. That connection is the heart of the whistleblower evidence we build a case around.

The person who approved a payment, the employee who worked with the recipient and the accountant who recorded it can each know something different. We bring those parts together around the transaction and the company’s response when questions arose. You can start the conversation with the part you understand.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For foreign-bribery and issuer-accounting information, we assess whether your information fits the separate SEC whistleblower award program. We work through that choice with you as part of building the case.

You Know the Transaction Behind the Entry

If you know what a subsidiary payment bought or why its recorded description was wrong, speak with our whistleblower experts about the transaction you saw. We bring in FCPA whistleblower lawyers who understand foreign subsidiaries and accounting evidence, and stay beside you to build your strongest case around what you know.