China ranks third in international OWB whistleblower contributions

Introduction
Recent trends
Whistleblower tips submitted to OWB from China
Why are OWB whistleblower submissions high in China?
Comment

Introduction

The Office of the Whistleblower (OWB) is a US entity responsible for providing monetary incentives to whistleblowers both in the United States and globally. Each year, the OWB produces a report that describes the activities of the office, details of the complaints received and the resolution of those complaints.

The 2020 OWB Annual Report states that, last year, China was the most prominent source of whistleblower tips received from outside the United States after Canada and the United Kingdom. This article explores recent trends in Chinese whistleblower tips to the OWB and looks at the possible reasons why China ranks so highly.

Recent trends

In 2020, 67 whistleblower tips were submitted to the OWB from China, representing approximately 10% of the total number of overseas tips received by the OWB during the year. This is the highest number of tips ever submitted from China – a significant increase from 2019, in which just 32 submissions were made.

However, the proportion of tips submitted from China compared with other countries has remained relatively constant over the years. China has been within the top four sources of international tips to the OWB since records began. In fact, it ranked first in the OWB's first annual report.

Whistleblower tips submitted to OWB from China

Why are OWB whistleblower submissions high in China?

China's high ranking as a top source of tips is not unexpected. The size of the country and its importance to the global economy (as both supplier and customer) cannot be ignored. The historical number of Chinese companies raising equity in US markets is also a crucial factor. Quite simply, there is an ever-larger pool of companies with operations in China that are subject to US regulatory oversight. In addition to the vast numbers of multi-nationals with large operations in China, the number of Chinese companies listed on US exchanges has increased significantly, even within the past year. In October 2020, there were 217 Chinese companies listed on US stock exchanges. That number had increased to 248 by May 2021 – and notwithstanding a potential delisting trend, US regulatory oversight will remain.

The prevalence of compliance-related issues would undoubtedly be confirmed by most risk and compliance professionals working in China, for whom active internal whistleblower hotlines are nothing new. The size of recent OWB monetary awards are likely to have attracted the attention of potential whistleblowers far beyond US borders.

The fact that the United States, Canada and the United Kingdom all rank and score much higher than China on the transparency international corruption perceptions index does suggest that awareness of the OWB reporting channel may be a key factor in influencing the number of reports being made. China's 2020 numbers would further suggest that such awareness in China is very much on the increase. This, in turn, may well be a reflection of investment in compliance programmes and a greater awareness of potential compliance issues, as well as the potential rewards on offer for information that leads to successful regulatory action.

It is too early to assess the full impact of the covid-19 pandemic on the OWB reporting and the prevalence of fraud more generally, but the impact of remote working and, in China's case especially, the continued inability of internal audit and other control functions to perform in-country reviews (as set out here), point to a likely increase in both the number and the severity of compliance-related issues.

Comment

The numbers that OWB reported for China in 2020 may represent only the tip of the iceberg. Until China opens up for travel, all businesses operating in China would be advised to focus the necessary time and resources on upgrading and enhancing digital infrastructure and controls over critical risk areas, reinforcing ethical culture and zero tolerance messaging, as well as promoting the use of internal whistleblower hotlines.

The current operating environment increases the importance of ensuring that hotline tips are promptly evaluated and relevant investigative and remediation measures are taken, with appropriate whistleblower dialogue being maintained where applicable (and possible). Such actions should help manage the situation and are likely to be viewed positively by regulators in the event that the whistleblower also decides to escalate the complaint to external regulators.

For further information on this topic please contact Colum Bancroft at AlixPartners by telephone (+852 2236 3500) or email ([email protected]). The AlixPartners website can be accessed at www.alixpartners.com.