Can Rakuten dispel concerns over outflow of information to China?

The Yomiuri Shimbun

11:51 JST, April 29, 2021

Isn’t there reason to fear that data, including customers’ personal information, will flow to China? Rakuten Inc. should thoroughly explain the situation.

At the end of March, Rakuten received an investment of about ¥66 billion from a subsidiary of Chinese IT giant Tencent Holdings Ltd., equivalent to 3.65% of Rakuten’s total outstanding shares.

The move is part of Rakuten’s efforts to raise funds to strengthen its mobile phone business after the company entered the market in a full-fledged manner in April last year. Rakuten also has obtained a ¥150 billion investment in capital and business tie-ups with the Japan Post Group. Rakuten intends to use the funds for the construction of base stations and other purposes.

Rakuten is an e-commerce giant and has a huge number of customers and amount of personal information, including those from its financial services business. The alliance with Japan Post is expected to increase the amount of Rakuten’s data. Rakuten must pay closer attention to the handling of this data.

The revised Foreign Exchange and Foreign Trade Law, which came into force last year, has strengthened regulations on foreign investment in Japanese companies, and required foreign investors to submit to the government prior notification when they acquire 1% or more of outstanding shares or 1% or more of voting rights of companies. The ratio was previously 10% or higher.

Areas of particular importance from a security perspective are designated as “core industries,” and Rakuten falls into that category.

Tencent did not file a notification for its recent investment. The revised law includes a provision that foreign investors are exempted from the prior notification requirement if they meet certain conditions, such as that they do not send executives to the company they are investing in or have access to its technical information not open to the public. Investors themselves decide whether to apply this exemption to the notification requirement. Tencent took advantage of the system.

Rakuten claims that Tencent’s share purchase is intended as a purely financial investment. However, details have not become clear, including whether Rakuten and Tencent exchanged documents after they made an affirmation about adherence to rules based on conditions for the exemption of the notification requirement.

When Rakuten announced its acceptance of the investment from Tencent, Rakuten said that it aimed to improve services through the collaboration with the Chinese company. Therefore, to clear up doubts about whether it really is a purely financial investment, it is essential to openly provide the evidence that the investment is solely for that purpose.

Tencent is a Chinese tech giant, along with Alibaba Group Holding Ltd.

In China, the government requires companies in the country to cooperate in information-gathering activities under the National Intelligence Law. Concerns remain that Rakuten’s information could flow out to China through Tencent.

Monitoring by the Japanese government is important. The revised Foreign Exchange and Foreign Trade Law states that investors who take a stake of 1% or more, while using the rule that exempts them from the prior notification requirement on the grounds of a purely financial investment intent, are still required to make a follow-up report to the government within 45 days of the investment.

The government should closely examine the follow-up report from Tencent, which is due in mid-May. If there are any problems, it should take resolute action, such as ordering the sale of shares.

Since Rakuten also operates in the United States, it will be necessary to explain the situation to U.S. regulatory authorities. Japan and the United States need to closely share information and keep a close watch on the situation.

— The original Japanese article appeared in The Yomiuri Shimbun on April 29, 2021.