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The business of whistle-blowing

Lawyers are teaming up with insiders to expose corporate corruption on the mainland, with big rewards on offer for recovery of investors' money

PUBLISHED : Saturday, 19 April, 2014, 3:26am
UPDATED : Saturday, 19 April, 2014, 3:46am

Lawyer Hao Junbo wants to make you rich if you're a whistle-blower after a bounty.

But for big business on the mainland he's a headache - part of a small but fast-growing industry built around exposing corporate wrongdoing.

The US Securities and Exchange Commission (SEC) received a tip-off every week from China last year, double the year before and five times more than in 2011.

The attraction is a recently bulked-up offer of as much as 30 per cent of any fine if new information leads to the recovery of more than US$1 million of investors' money. Last year, one Wall Street whistle-blower pocketed US$14 million.

The SEC is just one of many channels for this new breed of mainland whistle-blowers, whose information has helped lead to investigations on the mainland of firms including British drugmaker GlaxoSmithKline and French dairy Danone.

"It can't be denied that the financial benefits are an important incentive," said Hao, a Beijing-based whistle-blower lawyer. Hao advertises online for whistle-blowers to get in touch for the chance to "uphold justice and win a huge bounty too", though he concedes he is yet to collect a reward.

Hao said signs of stronger government support for Chinese whistle-blowers had helped the sector come out into the open, with 150,000 tips investigated by authorities last year.

But there was still a way to go to catch up with the well-established "no-win-no-fee" lawyers in the US and Europe.

It can't be denied that the financial benefits are an important incentive
Hao Junbo, whistle-blower lawyer

Indeed, blowing the whistle on the mainland can be risky, with those coming forward often facing a backlash from the officials or businesses they accuse.

"Because some clients don't want to reveal their identity, they hire us lawyers to blow the whistle on their behalf," said Hao. His cut is a negotiated slice of any final bounty.

But the whistle-blowers have become more daring, lawyers and business people said, creating a tougher environment for companies, especially in sensitive sectors like pharmaceuticals where there have been a spate of probes against corruption.

"Almost every pharmaceutical company is looking at their internal rules and procedures and whether they are being complied with. It is industry-wide," said Shanghai-based lawyer John Huang, co-founder and managing partner at MWE China, which helps firms negotiate with whistle-blowers.

Huang said the firm had seen whistle-blower-related cases double over the last year, adding that companies are launching internal investigations and seeking legal assistance and training to deal with issues such as police raids and staff being arrested after insider tip-offs.

Companies have also recruited law firms, investigators and compliance experts to stop potential whistle-blowers from reporting externally, attempting to defuse the situation in-house before it sparks a wider probe.

It doesn't always work out and falling foul of a whistle-blower can have a serious impact.

GSK's China sales plunged after police accusations that it funnelled up to 3 billion yuan (HK$3.8 billion) to travel agencies to facilitate bribes to doctors and officials to boost drug sales.

The inquiry was triggered by at least one high-ranking whistleblower, a person with direct knowledge of that investigation told Reuters. The person declined to be identified because of the sensitivity of the case.

"Whistle-blowers are quite normal in China. In a place like this there are always some people like that involved because of personal interest - they're unhappy with their experience or have conflicts with others in the company," the person said.

GSK declined to comment.

Beijing has also put its weight behind the anti-corruption crackdown, with President Xi Jinping calling on officials to "sweat" corruption out of the system.

Firms in sectors from energy and cars to food and health care have gone under the spotlight. The disciplinary watchdog also launched an online portal to encourage whistle-blowers this month. There is a small network of lawyers on the mainland and even overseas to encourage and direct whistle-blowers, while official channels have been set up to uncover officials' bad behaviour at state-owned enterprises and within government.

Activists have also set up forums for whistle-blowers to interact, such as People Supervision Net, a muckraking portal headed by prominent whistle-blower Zhu Ruifeng .

"You can find law firms, accounting firms and consultants who have built up businesses around being the 'shepherds' for whistle-blowers, helping to guide them through the process, and obviously the incentive is the financial reward," said William McGovern, Hong Kong-based partner at law firm Kobre & Kim and a former SEC enforcement attorney.

The lawyers guide potential whistle-blowers to collect the information needed to report to the SEC, which leads US investigations against corruption and corporate malpractice. US companies operating in China and Chinese firms with US stock exchange listings are also subject to SEC oversight.

As part of the 2010 Dodd-Frank legislation on Wall Street reforms, a whistle-blower can receive a bounty of up to 30 per cent as long as the amount recovered is at least US$1 million.

Bounties under earlier programmes focused on insider trading and were far smaller, meaning few experts were on hand to help the few whistleblowers from China who did want to report. Now legal experts helped get everything in order for a share of the profits, several former SEC lawyers said.

"The difference now is that everything has been packaged very well with binders, tagged, invoiced and with documents that clearly come from a company, which make it very easy for the government to then build a case," said Nat Edmonds, partner at law firm Paul Hastings and former Foreign Corrupt Practices Act (FCPA) litigator at the US Justice Department.

Some US lawyers are jumping into the fray. Jason Coomer, who heads a small practice in Austin, Texas, has a website in Putonghua offering assistance to whistle-blowers. His office has received about 25 whistle-blower reports from China in the last two years and is now taking two cases forward to the SEC.

"We're talking large multinational corporations with multi-billion dollar contracts each year. The whistle-blowers are insiders at the corporations and have witnessed elaborate bribery schemes," he said.

Whistle-blowers from China first made contact online before sending packages of documents to his firm, he said. Putonghua-speaking lawyers then translated and unpick the contents, before deciding whether the case can be taken further to the SEC.

The rise of this whistle-blower industry raises a serious new hurdle and cost, lifting the chances of malpractice coming to light and the potential million dollar fines that follow.

German engineering firm Siemens was hit by a record US$800 million FCPA fine in 2008. "If you type 'FCPA' in Google or Bing in China now, the first thing that comes up on the adverts is whistle-blower lawyers," said former FCPA lawyer Edmonds. "That just didn't exist three years ago."

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chaz_hen
Yes, definitely and resolutely target foreign companies only. Then our straight, clean and incorruptible Chinese state owned companies can dominate the market. Good strategy.

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