Today, whistleblower systems are an elementary component of compliance management. Whistleblowing has also been of particular importance in China for some time. Three years of separation between foreign parent companies and their Chinese subsidiaries due to China’s restrictive Covid measures, which were only recently lifted, have certainly played a part in this.
Legal regulation of whistleblower systems
China does not generally require private companies to set up a general whistleblower system. However, there are now numerous legal and administrative regulations that specify the rights of whistleblowers or require the establishment of corresponding systems.
As early as September 2019, the State Council issued guidelines calling on both central and provincial governments to establish whistleblower protection systems. In parallel, a series of regulations were issued to provide financial incentives for whistleblowers. Of key importance here are the Interim Measures for Rewarding Whistleblowing of Major Violations in the Field of Market Regulation issued by the Chinese Ministry of Finance and the State Administration for Market Regulation, which came into force in December 2021. Based on these measures, a whistleblower may receive a reward of up to one million RMB under certain conditions.
The Chinese Civil Code stipulates that companies must issue and implement internal regulations against sexual harassment. These obligations are specified by the amended Law on the Protection of the Rights and Interests of Women, which took effect on January 1, 2023. Under this law, employers are required to set up an internal complaints system including the designation of a responsible contact person.
There is also a need for action in light of the draft German Whistleblower Protection Act (HinSchG) based on the EU Whistleblower Directive, which is expected to come into force in the 2nd quarter of 2023. Companies with generally at least 50 employees will be required, among other things, to set up internal whistleblowing departments. The German Whistleblower Act will affect the entire company group and thus also the Chinese subsidiaries of German companies. This also holds true for the German Supply Chain Act, which has already come into force on January 1, 2023, and also provides for the introduction of a complaint mechanism for human rights violations within the supply chain.
In China, too, mechanisms are now in place to protect whistleblowers. An employer who takes reprisals against a whistleblower can be prosecuted under administrative and criminal law. The whistleblower may also be entitled to reinstatement (with back pay) or compensation. All submitted information must also be treated as confidential. At the same time, whistleblowers are required not to fabricate or distort facts or to make false accusations.
What companies should do
Whistleblowing systems offer opportunities (especially early detection, avoidance and correction of violations; a positive factor in official investigations; strengthening of the internal compliance culture) as well as risks ( particularly costs; risk of abuse; creating a “culture of mistrust” within the company).
Against the background of increasing regulation and the importance of whistleblower systems, however, companies in China are required to set up internal whistleblower systems. Unless otherwise stipulated by law, complaints offices may also be set up by a third party, such as an industry association, lawyer, or at corporate headquarters. The following measures are recommended when setting up a whistleblower system:
- Setting up special reporting channels as well as the corresponding responsibilities (for example, by setting up special e-mail addresses or telephone numbers)
- Establishing and communicating internal whistleblower policies that help whistleblowers direct their tips to the company and ensure that their complaints are handled confidentially and anonymously
- Setting up a remediation system that also defines response deadlines to facilitate a timely follow-up or further communication with whistleblowers
- Conducting regular training on the internal whistleblower system to raise awareness among employees
- Periodical as well as incident-related examination of the reporting mechanism
- Regular (usually annual) report on measures taken; retention and accessibility of the report following legal requirements
- Lastly, it is particularly important to pay attention to the special aspects of data protection law. Here, the EU GDPR as well as the Chinese Data Security Law and the Personal Information Protection Law play a special role. From a Chinese perspective, there are considerable restrictions in particular on the cross-border transfer of personal information.
Sebastian Wiendieck is a partner and head of Rödl & Partner’s legal practice in China.