Whatsapp

Image source: WhatsApp.

WhatsApp's controversial tweaking of its terms of service and privacy policy in August of this year has landed the company and its parent Facebook (NASDAQ:FB) in hot water -- in more ways than one. Users were a little concerned by the fact that WhatsApp would start sharing user data -- including phone numbers -- with Facebook, which seemed to fly in the face of Facebook's initial commitment to allow WhatsApp to operate independently. (Users can opt out of this data sharing.) Naturally, the data in question would inevitably be used to make online ad targeting even more pervasive, something requested by no netizen ever.

Well, the change has also drawn the ire of European regulators.

Did Facebook mislead regulators?

When the European Commission was scrutinizing the 2014 acquisition for approval, one of the many factors that it looked at was the possibility that Facebook would eventually try to match up WhatsApp accounts with Facebook accounts. At the time, Facebook told the Commission that it would be very challenging from a technical perspective to reliably match user accounts in an automated way. There were many factors that led the Commission to approving the deal, and this reassurance from Facebook contributed.

There's a clear disconnect between what Facebook initially maintained and the changes that WhatsApp implemented a few months ago, since evidently the companies have figured out a way to match user accounts in a scalable and reliable way. Moreover, this capability likely existed in 2014 when Facebook was responding to regulatory inquiries, the Commission alleges. As a result, the Commission now believes that Facebook either intentionally or negligently misled regulators. As you can expect, the Commission is none too happy about it.

But the approval of the deal two years ago was predicated on a wide range of factors, with the possibility of account matching being a relatively minor consideration. The Commission is not attempting to overturn its prior decision, or somehow undo the acquisition, which would probably be impossible at this point. It's not as if the data sharing represents a major antitrust concern; lots of companies share data. Besides, Facebook and WhatsApp already stopped sharing user data throughout the European Union in October following backlash from privacy regulators in different countries.

Rather, the Commission is more interested in preserving the integrity of its review process, which requires companies to submit accurate information. If Facebook knowingly provided inaccurate information, that's cause for concern. The Commission is now investigating, and sent Facebook a strongly worded letter asking it to explain itself. The Commission may impose a fine of 1% of annual revenue (approximately $200 million), if Facebook's response to the Commission's concerns prove unsatisfactory.

Here's Facebook's statement:

We respect the Commission's process and are confident that a full review of the facts will confirm Facebook has acted in good faith. We've consistently provided accurate information about our technical capabilities and plans, including in submissions about the WhatsApp acquisition and in voluntary briefings before WhatsApp's privacy policy update this year. We're pleased that the Commission stands by its clearance decision, and we will continue to cooperate and share information officials need to resolve their questions.

The good news for Facebook is that the Commission is extremely unlikely to impose a fine of this magnitude, at least if you look at the Commission's history in these types of cases. Worst-case scenario: Facebook gets a slap on the wrist. Best-case scenario: It satisfies the Commission and walks away in the clear. Neither outcome really affects the social network's long-term prospects.

Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.