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Technology Facebook warns investors it could face $5-billion FTC fine for expected privacy violations

Facebook reported quarterly earnings on Wednesday afternoon.

Marcio Jose Sanchez/The Associated Press

Facebook said on Wednesday that it expected to be fined up to $5-billion by the Federal Trade Commission for privacy violations. The penalty would be a record by the agency against a technology company and a sign that the United States was willing to punish big tech companies.

The social network disclosed the amount in its quarterly financial results, saying it estimated a one-time charge of $3-billion to $5-billion in connection with an “ongoing inquiry” by the commission. Facebook added that “the matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.”

Facebook has been in negotiations with the regulator for months over a financial penalty for claims that the company violated a 2011 privacy consent decree. That year, the social network promised a series of measures to protect its users’ privacy after an investigation found that its handling of data had harmed consumers.

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Read more: Elections Canada puts Facebook, Google, other tech giants on notice over political ads

The FTC opened a new investigation last year after Facebook came under fire again. This time, the company was accused of not protecting its users’ data from being harvested without their consent by Cambridge Analytica, a British political consulting firm that was building voter profiles for the Trump campaign. Facebook also suffered a data breach that exposed the personal information of nearly 50 million users.

Levying a sizable fine on Facebook would go against the reputation of the United States of not restraining the power of big tech companies. For years, American regulators have faced criticism that they allowed Silicon Valley firms to grow unchecked, even as their European counterparts aggressively brought actions against tech companies – including fining Google a record $5.1-billion last year for abusing its power in the mobile phone market.

For the Trump administration, penalizing Facebook would be a defining action. Although President Donald Trump has rolled back scores of business regulations, he and others in Washington – including Democrats – have coalesced around calling for greater scrutiny and enforcement of tech companies. Sen. Elizabeth Warren (D-Mass.), a presidential candidate, has called for the breakup of Amazon, Google and Facebook. And Trump has sounded alarms over the dominance of the firms and their control over speech and the distribution of information.

It would also be a milestone for the FTC, whose biggest fine for a tech company was $22-million against Google in 2012 for misrepresenting how it used some online tracking tools. The agency, which is charged with overseeing deceptive and unfair business practices, is riding a wave of anti-tech sentiment as questions about how tech companies have contributed to misinformation, election meddling and data privacy problems have stacked up.

“The FTC is really limited in what they can actually do in enforcing a consent decree, but in the case of Facebook, they had public pressure on their side,” said Justin Brookman, a former official for the regulator who is now a director of privacy at Consumers Union, nonprofit consumer advocacy group.

But some lawmakers said a fine would not suffice in punishing Facebook. Rep. David Cicilline (D-R.I.) said that “a fine in the low billions of dollars would amount to a slap on the wrist for Facebook” and that Congress needed to act.

“Facebook must be held accountable – not just by fines – but also far reaching reforms in management, privacy practices and culture,” Sen. Richard Blumenthal (D-Conn.) added in a tweet.

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The FTC declined to comment.

Officials at the agency have not reached a final decision on Facebook, said two people with knowledge of the situation, who were not authorized to speak publicly. In recent weeks, the agency’s chairman, Joseph Simons, sent strict orders to all commission offices and staff in the consumer protection, enforcement and privacy bureaus to not discuss the Facebook case, two people said.

But Facebook’s estimate of a fine signaled that a settlement with the FTC was near. The Securities and Exchange Commission typically requires that a company notify investors of any significant financial hits.

For Facebook, a $5-billion fine would amount to a fraction of its $56-billion in annual revenue. Any resolution would also alleviate some of the regulatory pressure that has been intensifying against the company over the past 2 1/2 years.

“This would be a joke of a fine – a two-weeks-of-revenue, parking-ticket-level penalty for destroying democracy,” said Matt Stoller, a fellow at the Open Markets Institute, a think tank that is a vocal critic of the power of tech companies.

More meaningful to Facebook would be any regulatory mandates that curbed its ability to share data with business partners or required it to take more measures to inform consumers when and how it collected data.

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“Those will have the most lasting impact on consumers’ privacy,” said Ashkan Soltani, a former chief technology officer for the FTC.

Even as the negotiations continue, Facebook’s business remains robust. The company said Wednesday that its revenue increased 26 per cent in the first quarter to $15-billion from a year earlier. Net income dropped 51 per cent from a year ago to $2.4 billion because of the expected one-time charge related to the FTC investigation. The company has more than $40 billion in cash reserves.

New users continue flocking to Facebook. More than 2.7 billion people use one of the company’s so-called family of apps – Facebook, Messenger, Instagram and WhatsApp – each month. The company said about 1.56 billion people use Facebook every day, up 8 per cent from a year ago.

Last month, Mark Zuckerberg, Facebook’s founder and chief executive, said he planned to start shifting people toward private conversations and away from public broadcasting on social media, which is likely to help the company manage issues of toxic content and misinformation. On Wednesday in a conference call, Zuckerberg repeated that vision.

“People want a platform that is as strong on privacy as possible,” Zuckerberg said. He added that “we just don’t know” how the change would affect the company’s business.

Zuckerberg also said he welcomed regulations, an idea that he has increasingly been vocal about this year.

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“I think it’s necessary,” he said. “Getting these issues right is more important than our interests. And I believe that regulation will help establish trust when people know that the right systems of governance and accountability are in place.”

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