Slump may see rise in complaints on ethics
Lay-offs by American firms operating in China in the event of a persistent downturn may increase the risk of whistle-blowing because of a recent change in law, lawyers warn.
The US Dodd-Frank Wall Street Reform and Consumer Protection Act, which came into effect in August, introduced rewards for whistle-blowers. Those providing original information might get 10 per cent to 30 per cent of the monetary sanctions obtained by the US Securities and Exchange Commission from a company, said Tham Yuet Ming, a partner at DLA Piper, a US-British law firm.
'This law is a game-changer for many companies. Reports to US regulators will only increase with time. If the economy in China and the rest of Asia deteriorates and people are laid off, whistle-blowing will go up even more. I have seen this trend with every downturn in Asia. Now there is a financial incentive,' Tham said.
'When the economy is down, more people are laid off, so more disgruntled employees blow the whistle. I saw how the last economic downturn [in 2008] led to a spike in complaints to my clients' internal ethics hotlines. If there are more job losses this year, the Dodd-Frank regulations will lead to even more complaints to US regulators. We are talking about rewards that can go up to tens or even hundreds of millions of US dollars.'
The monetary incentive was one of the controversial aspects of the whistle-blower rules, said Karl Egbert, a registered foreign lawyer with Dechert, a US law firm that has handled whistle-blowing involving China-based entities.
Tham has been involved with a number of investigations originating from whistle-blowers in China. One of her cases involved a US company with manufacturing operations in Zhongshan city, Guangdong.
'The former chief financial officer, a disgruntled ex-employee, complained to the company's US headquarters that the senior local management had been giving red packets with substantial cash to Chinese officials. We were then engaged by the US headquarters to conduct an independent investigation into the allegations. The senior employees accused later left the company.'
In November, the US SEC issued its first and only report on the programme, covering tips that it received between August 12 and September 30 last year. Over this seven-week period, 32 of the 334 whistle-blowing tips came from abroad, with the most, 10, coming from China, followed by Britain at nine.
As China hosts the most US companies operating abroad, the risk of whistle-blowing is higher.One reason so many whistle-blowers come out of China is tips can be reported online with relative anonymity, according to Egbert.
'China has a tradition of reporting alleged company impropriety on the internet, so tipsters may feel comfortable reporting online as well.'