China's whistleblowing regulations in the spotlight

China’s latest whistleblowing regulations, the Interim Measures for Reporting and Rewarding Major Violations in the Market Regulation Field, jointly issued by the State Administration for Market Regulation and the Ministry of Finance, are now in effect. The Measures aim to encourage public reporting of major violations of laws and regulations, promote social governance, and broadly protect the public interest.

Notably, the Measures place a heavy emphasis on protecting the rights and interests of whistleblowers, particularly those in hard-to-monitor industries with a direct impact on the public (eg, pharmaceutical and food). Key provisions within the Measures provide specific guidance on the threshold, requirements, and scope for whistleblowers to obtain monetary awards, as well as the supervision and management of the reward system.

Importantly, the Measures also contain provisions seeking to deter fraudulent reporting by whistleblowers.

What can be reported

“Major violations” which may be reported are defined as acts that can trigger criminal liability or administrative penalties including forced suspensions of production and business operations, forced closures, revocation of licenses, confiscations, and relatively heavy fines.

The Measures list four categories of “major violations” that should be reported:

1. major violations of laws and regulations concerning the quality and safety of food, drugs, special equipment, and industrial products
2. major violations of laws with regional and systemic risks
3. major violations of law concerning market supervision that have a large social impact and seriously endanger the personal safety and property of others and
4. violations of law which are suspected crimes and transferred to judicial authorities for adjudication on criminal liabilities.
   

Entitlement to whistleblower reward

The Measures require a “whistleblower” to be a natural person – ie, not a legal person or entity. That being said, a whistleblower is ineligible for a reward if he or she:

1. is a staff member of the state or local administrations for market regulation (the AMRs) or a person with statutory supervision and reporting obligations
2. is the infringed party, its agent, or any interested party in the alleged infringement
3. is a person who committed the violations, with the exception of an “internal whistleblower” who may be part of the wrongdoing (ie, an employee who reports a major violation by their employer) or
4. has received any form of remuneration or rewards from other entities for that report.
   

In connection with the exception created for “internal whistleblowers,” it is noteworthy that the Measures treat “internal whistleblowers” more favorably than others – the government may exercise discretion to raise the monetary value of reward (beyond the reward amounts specified below) for “internal whistleblowers.”

Thresholds and calculations for rewards

The Measures specify three levels of reporting standards and corresponding reward amounts, which will ultimately be capped at CN¥1 million (US$157,000).

Protecting the integrity of the whistleblowing process

The AMRs must notify the whistleblower within 15 business days of the conclusion of its investigation about its results and findings. In addition, the Measures require the AMRs to protect the rights and interests of the whistleblower by keeping reports strictly confidential. However, the AMRs also have the ability to withdraw a reward if a whistleblower obtains the reward by forging materials or concealing facts relevant to the report.

A whistleblower may also face criminal charges if he or she deliberately fabricates facts, falsely accuses others, or uses any fraudulent or illegal means to obtain the reward associated with his or her report.

Key takeaways

The generous monetary awards set out in the Measures will likely incentivize greater reporting of market misconduct. Issuing the Measures also indicates that China is committed to tackling and deterring market misconduct creatively through the use of both the carrot and the stick.

In anticipation of the possibility of increased reporting of misconduct by both employees and other third parties, internally or to regulators, companies with operations in China should continue to:

• update and improve existing crisis management protocols, particularly as they relate to responding to internal whistleblower reports or to allegations that appear in the public domain (such as social media)
• improve access to internal reporting mechanisms by employees and third parties through compliance training, and generally promote awareness of internal reporting mechanisms record and monitor communication with whistleblowers, taking care to ensure such whistleblowers remain anonymous
• improve internal reporting mechanisms and protocols to reduce the risk of outside whistleblowing, for example, by setting up a feedback deadline to ensure prompt follow-up with the whistleblowers and
• ensure that internal reporting mechanisms are periodically monitored, with reports being tracked and analyzed to determine if there are any patterns meriting closer attention (such as reports revealing certain types of misconduct, or reports that implicate particular business divisions).

To learn more about the implications of these requirements, please contact any of the authors or your usual DLA Piper attorney.