Whistleblowing Guideline – How will it affect my Company in China?

To improve compliance in companies, many rely on a whistleblower system. This is (often) a digital system designed to detect violations and/or misconduct of any kind against internal regulations (e. g.  bullying, disloyalty, fraud, corruption, or money laundering). One of the most important rules here is to create a communication based on trust so that the incriminated persons feel safe.

How does the reporting process work? Often, a digital whistleblowing system is used. A software (or website) where everyone will have access to (around the clock and from any location). The whistleblower can decide for himself whether to release his personal data or to remain anonymous. In this case, a separate mailbox in the reporting system helps the whistleblower to keep in contact with the case manager. The compliance manager is responsible for the case review as well as the next steps.

Already in 2019, the European Whistleblower Directive came into force for this purpose and on 27 July 2022, the draft law was passed. The law will come into force three months after promulgation and then companies with 250 employees or more are obliged to set up an internal reporting channel. The EU Whistleblower Directive also calls for need of action for companies and their branches abroad.

If a whistleblower system is implemented swiftly and correctly, it holds a great opportunity for one’s own competitive advantage. Dealing with this issue openly and professionally strengthens one’s own corporate culture. Therefore, the implementation of this system has a great added value for the organization, employees, customers, suppliers and others.

Currently, there is no general regulation about whistleblower protection in China. Nonetheless there are several regulations specific on sectors (tax and foreign exchange control or medicine and food control).

Indeed, whistleblower protection is one of the most important compliance instruments in Chinese companies. On the other hand, there is no comprehensive and general protection of whistleblowers so far.

Foreign companies are not obliged to implement such a system under Chinese law. BUT: There is a government reward system for reporting directly to the authorities (instead to the own company). We will look at this more in the next chapter.

To encourage people reporting serious violations of market regulation directly to the authorities, a reward system has been introduced by the state: “Interim Measures for Reporting and Rewarding Major Violations in the Market Regulation Field”. Reports are treated confidentially, and the whistleblower must be informed within 15 working days whether he/she is entitled for a reward. False reports will be severely punished by criminal prosecution.

The system is based on three levels:

However, this reward system may cause concerns for foreign companies. Legal terms (e. g. “serious violation of the law”) are not precisely defined and are therefore indeterminate.

The partially very high rewards per case also entail a highly monetary incentive. Lack of trust in the company, could lead to prioritized reports to the authorities directly.

For companies, this means that they have no possibility of investing themselves and reacting on time in case something happens (e. g. self-disclosure to reduce penalties or strengthening the own position while negotiating with the authorities).

In conclusion: In China, a whistleblower protection system is beneficial for companies to mitigate risks of whistleblowing to authorities and penalties, but this alone is not enough.

Ultimately, an effective whistleblower system is needed, thus employees (and third parties) report to the company instead of going directly to the authorities.

But how can I implement it? What is the best way? Here are a few suggestions:

• Raising awareness through compliance training for management and employees. Active and targeted communication also helps to improve acceptance and use.
• Whistleblowing systems must be technically secure and easily accessible for everyone.
• Identity protection of the whistleblower.
• Compliance with local and European law.

Lawyers and business consultants with a lot of experience in dealing with Chinese law and companies can be of great support in this case. Supervisors can make a big difference here. Among other things, they ensure corporate compliance and liability. Since they are also responsible for the management and directors, the implementation and monitoring of a whistleblower system will also be one of their areas of responsibility. Would you like to read more about this topic? Click here.

As simple as it sounds, good compliance can help implementing the whistleblowing system in Chinese companies, improve the corporate culture, thus minimizing reporting cases or encourage employees to report cases internally.

If you have any questions regarding tax, accounting, auditing, or legal advice, please feel free to contact Ecovis Richard Hoffmann in Heidelberg or the ECOVIS Ruide China team. Ecovis Richard Hoffmann has also experience in being a supervisor in China. Through years of experience and specific knowledge of the German, international, and Chinese business environment, Richard Hoffmann has successfully supported several hundred companies to navigate through the complexity of legal, tax and compliance issues in China.