​Most publicly listed Japanese companies have established internal whistleblowing systems within Japan. In addition, many Japanese companies have set up a "locally self-contained overseas reporting hotline," where, say, employees of a Thai subsidiary can report through an internal whistleblowing system within that Thai subsidiary. Because such reports cannot be made to the Japan head office, however, this is merely an "overseas reporting hotline" and cannot be called a "global whistleblowing system."

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Only a minority of Japanese companies have introduced a system that allows officers and employees of overseas subsidiaries to report to a unified hotline at the Japan head office.

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Q | Why is it necessary to introduce a global whistleblowing system?

Today, corporate misconduct is very often uncovered through internal whistleblowing reports. However, a "locally self-contained internal reporting system" (for example, a system that allows officers and employees of a Thai subsidiary to report only to a hotline at the Thai local entity) cannot be expected to reveal information about serious misconduct in which the local management itself is suspected of involvement.

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Employees of a local subsidiary may hesitate to report out of fear of retaliation from local management. And even if they not subjected to retaliation, they cannot necessarily expect an appropriate investigation and fair disciplinary action to be conducted locally.

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For this reason, introducing a global whistleblowing system is essential in order to gather, through an internal reporting system, information about serious misconduct at overseas sites in which local management is suspected of involvement. In particular, a global whistleblowing system is an effective means of uncovering misconduct at local subsidiaries — such as bribery, antitrust violations, accounting fraud, conflicts of interest (including kickbacks), quality-data falsification, and tax issues — in which local management is often involved.

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In this regard, while most Western multinational companies have introduced global whistleblowing systems, major Japanese companies — despite actively expanding overseas — have not introduced this kind of global system. This situation can be described as a significant "gap" in the compliance systems of Japanese companies.

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Deloitte’s 2017 survey (of roughly 200 Japanese companies)

• 99% had established a domestic (Japan) reporting hotline

• 61% had established an overseas hotline

• Regarding a global whistleblowing system, 71% responded that they were simply "considering" one

 

Under these circumstances, it cannot be said that a listed company is satisfying its obligation to build an appropriate system for whistleblowing, as required for the management of overseas subsidiaries.

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What does "an appropriate system" mean?

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A listed company should develop an appropriate whistleblowing system so that its employees can report illegal or improper conduct or information/disclosures, or share genuine concerns about such matters, without fear of suffering any disadvantage as a result — and so that the reported information and concerns may be objectively verified and appropriately addressed. A company’s Board of Directors bears responsibility for realizing such a system and should oversee how it is operated.

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Reference: Corporate Governance Code, Principle 2-5

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Q | What laws and regulations should be kept in mind when introducing a global whistleblowing system?

Compliance is primarily required with respect to: (1) local personal data protection laws; (2) labor-related laws; and (3) laws specifically regulating whistleblowing/internal reporting systems.

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1. Personal Data Protection Laws

The Japan head office will be collecting and processing highly sensitive personal information about local officers and employees. It will also be transferring personal information across borders, from the local jurisdiction to Japan. Accordingly, compliance with local personal data protection laws is required. The most representative such law is the General Data Protection Regulation (GDPR), which applies within the European Union (EU)/European Economic Area (EEA), and building a system to comply with it requires a certain amount of effort.

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On this point, companies that introduced global whistleblowing systems in the past have often done so without taking GDPR compliance into account, so caution is warranted. In addition, personal data protection legislation is currently being developed across various Asian countries (Thailand, Singapore, China, and others). It should also be noted that Russia requires personal data to be stored on local servers, and that Turkey and Switzerland require filings to be made with local authorities.

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2. Labor-Related Laws

Particularly under the local laws of various European countries, consultation with, or agreement from, a Works Council may be required when introducing a whistleblowing system. In most cases, consultation with the Works Council is sufficient, but in countries such as Germany actual agreement (codetermination) is required, so the time needed for this process should be factored into the implementation schedule.

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3. Laws Specifically Regulating Whistleblowing Systems

Various local laws exist in this area. For example, some countries require a separate internal reporting line to be established in addition to a global whistleblowing system (such as "Eligible Recipients" in Australia or the "Supervisory Body" in Italy). France’s Sapin II law requires a response to be given to the whistleblower within a set period. Additionally, in countries such as Portugal anonymous reporting is, in principle, prohibited, or a whistleblowing system may only be permitted to cover certain designated categories of reportable matters. Because local laws contain these kinds of special whistleblowing-related requirements, it is necessary to check them carefully.

 

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Q | Is it possible to handle this in-house by setting up an internal reception hotline?

When introducing a whistleblowing system, there are two approaches: (1) an approach in which the company sets up its own dedicated webpage and telephone line to receive reports (an "in-house reception hotline"); and (2) an approach in which the company outsources report reception to an external whistleblowing reception provider (an "external reception hotline").

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When introducing a global whistleblowing system, it is common to choose option (2), the external reception hotline.

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The main reasons are the ability to support multiple languages and the reliability of the reporting system. An in-house reception hotline may not be able to handle telephone reception in local languages, and even for email reception, it takes considerable effort to find a translation company each time a report comes in. Moreover, if a system error prevents an important report from being received, or if information is leaked externally, this could become a serious legal problem.

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Accordingly, we recommend engaging a specialized whistleblowing reception provider that can support multiple languages and that has a reliable system, including from a security standpoint.

 

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Q | What are the key points for selecting a whistleblowing reception provider?

Whistleblowing reception service providers fall into two categories: (1) global vendors based in countries such as the United States; and (2) external reception hotlines that Japanese companies have traditionally used for domestic (Japan) reporting. Category (1), the global vendors, includes independent companies that specialize in whistleblowing reception (such as NAVEX Global, the largest player in the industry), as well as companies affiliated with major accounting firms.

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Each category of service providers has its own advantages and disadvantages. We suggest deciding based on consideration of the following points:

• Is multilingual support (web and telephone reception) sufficient?

• How reliable is the system (including its security measures)?

• Does it comply with the GDPR (Standard Contractual Clauses, response to the Schrems II ruling)?

• Is there sufficient track record with global whistleblowing systems?

• Are the implementation and operating costs reasonable?

• Is the support structure satisfactory?

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Q | What should be done if a large volume of reports comes in from overseas immediately after introducing the system?​

Many companies worry that if a whistleblowing system is introduced at all overseas sites, a flood of reports will come in from overseas and overwhelm the limited resources of the Japan legal/compliance department. In our experience, however, it is in fact rare for such a large volume of reports to come in. What matters more is to continue publicizing the system so as to build awareness among local officers and employees, earn their trust, and gradually grow the number of reports to a healthy level.

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If the Japan legal/compliance staff lack confidence in handling international fraud investigations, we recommend engaging outside experts. At GI&T Law Office, we offer a service in which, whenever the reception provider receives a report, notice is sent simultaneously to both the head office’s legal/compliance department and to our firm, so that we can advise on a response in real time.

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As in Japan, most reports concern HR-related matters such as sexual harassment and power harassment. The Japan head office does not need to handle all of these matters itself; instead they can be delegated to local legal/compliance or HR personnel for handling. It is worth noting that a high proportion of relatively minor cases of this kind is not itself a bad sign — rather, it reflects a healthy level of trust in the reporting system. As long as even one important report is found among several dozen, the whistleblowing system has more than justified its existence.

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Q | If a report is made from an overseas site under a global whistleblowing system, does Japan’s Whistleblower Protection Act apply?

Japan’s Whistleblower Protection Act was amended in June 2020, requiring business operators to establish necessary systems such as setting up a reporting hotline, conducting investigations, and taking corrective measures, and introducing administrative guidance, criminal penalties (fines), and administrative fines for violations.

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As stated in the purpose clause under Article 1, the Whistleblower Protection Act is intended to protect "citizens" (i.e., Japanese nationals) and limits its scope of application to "workers" and others to whom Japan’s Labor Standards Act and similar laws apply (i.e., those employed by a Japanese business operator and engaged in business in Japan) (Article 2, Paragraph 1, each item of the same Act).

Accordingly, among reports made under a global whistleblowing system, those from workers hired at an overseas site and engaged in business overseas are, in principle, not covered by the Whistleblower Protection Act.

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That said, even for a worker hired at an overseas site and engaged in business overseas, if the labor contract designates Japanese law as the governing law, the Whistleblower Protection Act may apply to that worker. Even in that case, however, because the "facts subject to reporting" under the Whistleblower Protection Act are limited to laws whose primary scope of application is Japan (Article 2, Item 3 of the same Act), the Act will not apply if the content of the report concerns facts relating to a violation of foreign law.

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Q | What are the steps for introducing a global whistleblowing system?​

The basic implementation steps are as follows:

Step 1: Determine the overseas sites at which the global whistleblowing system will be introduced

Step 2: Select a whistleblowing reception provider

Step 3: Draft the relevant rules, review local laws, and translate into local languages

Step 4: Complete any filings required under local law and any requirement of Works Councils, etc.

Step 5: Conduct local briefing sessions and roll out the system

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For details on how to implement the system, please feel free to contact us.

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