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China's new breed of whistleblowers takes on big business

Lawyer Hao Junbo stands outside a court in Beijing, in this picture taken August 18, 2009. REUTERS/Stringer
Lawyer Hao Junbo stands outside a court in Beijing, in this picture taken August 18, 2009. REUTERS/Stringer

By Adam Jourdan

SHANGHAI (Reuters) - Chinese lawyer Hao Junbo wants to make you rich if you're a whistleblower after a bounty. For big business in China he's a headache, part of a small but fast-growing industry built around exposing corporate wrongdoing.

The U.S. Securities and Exchange Commission received a tip-off a week from China last year, double the year before and five times more than in 2011. The attraction is a recently bulked up offer for as much as 30 percent of any fine if new information leads to the recovery of investor money over $1 million. Last year, one Wall Street whistleblower pocketed $14 million.

The SEC is just one of many channels for this new breed of Chinese whistleblowers whose information has helped lead to investigations in China of firms including British drugmaker GlaxoSmithKline Plc and French dairy Danone SA.

"It can't be denied that the financial benefits are an important incentive," said Hao, a Beijing-based whistleblower lawyer. Hao advertises online for whistleblowers 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 whistleblowers had helped the sector come out into the open, with 150,000 tips investigated by authorities last year. But there is still a way to go to catch up with the well-established "no-win-no-fee" lawyers in the United States and Europe.

Indeed, blowing the whistle in China can be a risky proposition, with those who come forward often facing a backlash from the local 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.

JOINING BATTLE

Whistleblowers in China 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 corporate corruption.

"At this point 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 whistleblowers.

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

Companies have also recruited law firms, investigators and compliance experts to stop potential whistleblowers 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 whistleblower can have a serious impact.

GSK's China sales plunged after police accusations that it funneled up to 3 billion yuan ($482.99 million) to travel agencies to facilitate bribes to doctors and officials to boost its drug sales.

The investigation was sparked 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.

"Whistleblowers 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.

China's leaders have also put their weight behind the anti-corruption crackdown, with President Xi Jinping calling on Chinese officials to "sweat" corruption out of the system. Firms in sectors from energy and autos to food and healthcare have come under the spotlight.

China's disciplinary watchdog also launched an online portal to encourage whistleblowers this month. The site allows people to view cases by region and gives them as easy way to make their own reports.

WHISTLEBLOWER SHEPHERDS

There is a small network of lawyers in China and even overseas to encourage and direct whistleblowers in the country, while official channels have been set up to uncover officials' bad behavior at state-owned enterprises and within government.

Activists have also set up forums for whistleblowers to interact, such as the popular 'People Supervision Net', a muckraking portal headed by prominent Chinese whistleblower Zhu Ruifeng.

"You can find law firms, accounting firms and consultants who have built up businesses around being the 'shepherds' for whistle blowers, helping 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 whistleblowers to collect the information needed to report to the SEC, which leads U.S. investigations against corruption and corporate malpractice. U.S. companies operating in China and Chinese firms with U.S. stock exchange listings are also subject to SEC oversight.

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

Bounties under earlier programs 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 help 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 U.S. Justice Department.

The SEC declined to comment.

FROM TEXAS TO CHINA

Some U.S. lawyers are jumping into the fray.

Jason Coomer, who heads a small practice in Austin, Texas, has a Chinese language website offering assistance to whistleblowers. His office has received around 25 whistleblower 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 whistleblowers are insiders at the corporations and have witnessed elaborate bribery schemes," he told Reuters in on telephone interview from Texas. He declined to give further details about the cases.

Whistleblowers from China first make contact online before sending packages of documents to his firm, he said. Chinese-speaking lawyers then translate and unpick the contents, before deciding whether the case can be taken further to the SEC.

The rise of this whistleblower industry - both fighting for and against corporations in China - 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 AG was hit by a record $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 whistleblower lawyers," said lawyer Edmonds.

"That just didn't exist three years ago." ($1 = 6.2113 Chinese Yuan)

(Additional reporting by Sarah N. Lynch in Washington; Editing by Emily Kaiser)

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