Growing Popularity of Whistleblowing in China

Businesses operating in China must develop robust internal reporting procedures to evaluate complaints of fraud or corruption. Leading up to the 2008 financial crisis, employees who had reported wrongdoing at banks were frequently ignored or fired. After the crisis, several countries enacted legislation to combat financial fraud and encourage people to report wrongdoing in our capital markets. For example, the United States Congress passed the Dodd-Frank Wall Street Reform and Protection Act that expanded whistleblower incentives and protection through two important measures: (1) bounty awards; and (2) anti-retaliation protection. Similarly, China has implemented legislation to protect and encourage whistleblowing regarding financial fraud and government corruption.

The “China Sarbanes-Oxley”

In May 2008, the Chinese government implemented regulation that provides protection for individuals who report wrongdoing regarding securities law violations and financial fraud. This law’s translated name is Basic Standard for Enterprise Internal Control and is commonly referred to as “China-Sox” (related to the U.S. Sarbanes-Oxley regulation). The primary purpose of this legislation is to improve internal control and prevent corporate fraud. Generally, companies operating in China must implement a fraud reporting mechanism to protect whistleblowers through (1) anonymous reporting; (2) multiple avenues of reporting; (3) retaliation protection; and (4) investigation and resolution of complaints.

Central Commission for Discipline Inspection Creates Whistleblower Website and App

Thereafter, in 2013, the Central Commission for Discipline Inspection of the Communist Party of China (“CCDI”) established an official website for whistleblowers to report corrupt practices by government and businesses. Interestingly, in June 2015, “the CCDI made it even simpler for whistleblowers by creating a mobile phone application for filing whistleblower complaints. On the day the mobile phone application launched, the CCDI received 1,033 tips, which was a sharp increase from the previous daily average of 250-300.” This website and technological development provides a constant “watchdog” against companies that seek to bribe government officials or engage in other fraudulent schemes.

Strategies To Strengthen Internal Reporting and Compliance

Although whistleblowing in China is growing more popular, most employees that discover wrongdoing still feel loyal to their companies and hope to resolve any issues internally. Harming the financial health of their company may harm their only source of income. As one attorney stated, “Whistleblowers aren’t looking to rush out and get an award. They are looking to do the right thing and they get frustrated when the company doesn’t respond properly. That’s when they go outside.”

Importantly, companies operating in China can mitigate the risks of the increasing trend of whistleblowing by implementing the following strategies:

  1.   procedures to review internal reports of compliance concerns;
  1.   written guidelines to safeguard the identity of employees who report;
  1.   mandatory training for supervisors on confidentiality and anti-retaliation;
  1.   well-publicized communications about internal reporting mechanisms;
  1.   consistent, formal opportunities for internal reporting, such as during annual certification and employee exit procedures; and
  1.   procedures to resolve retaliation complaints.

Chinese enforcement actions and investigations can be costly, time-consuming, and may damage a company’s reputation. Accordingly, organizations operating in China must avoid these risks by proactively deterring or mitigating fraud through internal reporting and self-policing.

Miles O. Indest
JD/MBA Candidate 2016