China boasts strong tradition in conducting internal investigations

China

Whistleblower series

The Chinese economy may be young and growing, but its business community already boasts an established and sophisticated tradition for conducting internal investigations.

These traditions may be rooted in the international character of its corporate culture: the fact that many Chinese corporations conduct business with international partners based in countries that have their own systems for internal investigations and Whistleblowing.

Whatever the reason, internal investigations in Chinese companies are used in response to the same types of misconduct that occur in other jurisdictions: reports of breaches of national laws and regulations (e.g. fraud and bribery), violations of company polices and rules (e.g. breaching trade secrets), and breaking internal policies established to protect employee rights.

And like in other countries, Chinese companies usually become aware of a wrongdoing through the following ways: a report from a Whistleblower inside or outside of the firm, an internal audit, or as a result of a random discovery.

In regard to Whistleblowing: although some countries require firms to set up Whistleblower protocols, China has no such requirement. Nevertheless, many companies operating in China have recognised the benefits of having such reporting systems in place and have created channels (such as a hotline or an e-mail account) for employees, managers or clients to make a report, anonymously or not. Some companies consider these reporting systems so valuable, they have set up anonymous reporting systems that focus on specific wrongdoings, such as bribery.

Initiating an investigation

When a company receives a report of possible misconduct and has policies in place to respond with an in-house inquiry, it is advisable to proceed in the following way. Firstly, the company's management should quickly decide whether the report is credible and the charge warrants an internal investigation (i.e. does the allegation directly implicate or involve the company). A company may well decide that the evidence is too weak to warrant an investigation or that the allegations are not applicable to its business activities.

If the decision is made to conduct an investigation, the company's management will select an official (often from the company's HR or legal departments) to oversee the inquiry process. At this time, the firm will also determine whether it should also seek the help of outside experts to conduct the investigation. Normally, involving the company's trade union is not necessary. Also note that if a company decides that it lacks the in-house expertise to conduct a proper investigation, responsibility for the inquiry can be contracted to outside experts, such as a law firm or chartered accountancy with direct experience in these matters.

Once an investigation official is appointed, he should draft a plan for probing the allegations, which include the individuals to be interviewed, the exact topic to be investigated, the timeline for conducting the inquiry and whether immediate action is necessary to prevent the alleged misconduct from recurring or to stop further damage, etc.

A company and its investigation team will have to make quick decisions on protecting the integrity of the investigation, particularly during the interview process. In short, to prevent witnesses from being harassed and evidence from being manipulated, a company may decide to place the employee who is the target of the investigation on paid furlough (i.e. "garden leave") to remove him from the workplace and separate him from other workers until the investigation is concluded.

Once the policies and procedures for the investigation have been established, one important question remains: what are the company's limitations when conducting an inquiry? In terms of collecting evidence against individuals, companies in China are legally permitted to investigate employees suspected of wrongdoing and can expand their queries to include employees who may have evidence but are not directly involved in the alleged misconduct.

A company has a number of techniques at its disposal that it can employ to collect evidence. These include the physical inspection of files and documents; examining pertinent electronic communications, such as email and mobile phone text messages; checking company computers and smartphones for files pertinent to the investigation; gathering information from any third parties (e.g. suppliers, costumers) and interviewing employees.

Companies, however, also have responsibilities to their employees. When conducting an investigation, a company must not violate – through its searches, interviews and treatment – the personal rights of any employee. The protections that must be safeguarded include an employee's right to personal privacy, to freedom and to data protection.

As for personal freedom, employers cannot physically restrain or search an employee. During interviews, questions should be delivered in a professional manner with the objective of gaining clarity of a given event. Employees should not be intimidated or insulted during this process.

In regard to processing employee data, the investigation must follow Chinese data-protection laws to the letter in order to protect itself from court action that could stem from any data-privacy infringements.

In addition, an investigation must limit its physical and online searches to company property, and cannot search the personal belongings (e.g. personal papers) or private data (i.e. personal files or communications, such as personal emails) of an employee without the individual’s express consent.

In order to make sure an investigation follows data protection rules, investigators should take special care to identify the hardware and files that are pertinent to the query and limit their searches to company property. When it comes to company-owned phones and laptops, firms have a legal right to search these devices without employee consent. To gain access to this equipment, investigators can ask employees to surrender these devices, and if deemed necessary, investigators can conduct searches of these devices without the employee's direct knowledge.

If a company asks an employee to surrender a device, such as a company phone, and the employee refuses on the grounds that it contains personal information, the company can instruct the employee to delete this data or copy it to another personal device before surrendering the phone. The employee has no legal grounds to withhold such a device if a company requests its return.

Furthermore, to protect itself from such personal privacy issues, companies can establish a policy, communicated to all employees upon their hiring, which prohibits the use of company devices for personal use and for storing personal private information. By establishing this policy, the legal risk of infringing employee privacy and data-protection rights can be reduced when a company conducts searches of company devices. Such a policy, however, does not permit a company to ignore the employee's privacy and data-protection rights. When inspecting a company device, if investigators notice the existence of any private information in the device, the investigators must avoid accessing, copying, using and disclosing any of this private data.

Interviews

One of the most important tools for collecting evidence is interviews with employees, which raises the question: is an employee obliged to participate in interviews? The answer is yes. In addition, according to Chinese laws, a company does not need to forewarn an employee about an interview and can question employees at any time during working hours.

If the questions posed by investigators concern company matters, the employee is obliged to answer completely and truthfully.

It should be noted that given the importance of the interview process in establishing the veracity of an allegation, investigators should first conduct document and data searches and collect detailed physical evidence before interviewing the suspect and any witnesses. The interview process can only be revealing if the investigators have fully prepared themselves and have devised lines of questioning with precise objectives in mind.

In terms of making official records of interviews, Chinese law does not prohibit investigators from making either audio or visual recordings. Also, employee consent or even awareness of these audio-visual recordings is not necessary. But because an electronic recording of an employee's interview represents a form of electronic data evidence, the authenticity and legality of the recording could be more easily challenged in court. Hence, it is recommended that a written transcript or report of every interview be created, which interviewees should verify and sign. In this way, a company can then use the signed transcript as evidence supporting any electronic recordings that have been made.

Role of trade unions

Another question is the role of trade unions in internal investigations. Chinese law does not require companies to inform or involve trade unions during internal investigations with one exception: if an inquiry directly concerns a work-related injury or issues related to employee health and hygiene.

After an investigation is completed, if an employee has been found guilty of misconduct and the company decides to respond with immediate dismissal, this decision must be communicated to the trade union.

Conclusion of an investigation

In addition, once an investigation is concluded, the investigators must then compile all the findings, analyse these facts and determine whether there is sufficient evidence to prove the allegation. If the evidence reveals that a company employee is guilty of misconduct (i.e. that he violated company regulations or the law), the investigation team must then recommend a response.

If the misconduct is deemed to be minor, the employee may be issued a warning. For more serious cases, a demotion may be called for. And in extreme cases, the employee may need to be dismissed. Such disciplinary measures must be determined and carried out according to the company’s established rules and regulations.

If the misconduct carries civil liability, the employee can be asked to pay damages if the misconduct resulted in tangible losses to the company. But to seek damages from an employee, the company must have direct evidence linking the misconduct to the damages and evidence to prove the amount of damages requested.

If the investigation uncovers evidence of a crime, the company, of course, is obliged to report the employee to Chinese law enforcement. However, there is no statutory law that specifies a penalty for failure to report an employee to authorities who is deemed guilty of a crime. Hence, companies should use their own discretion, based on the severity of the crime and the evidence gathered, whether to go to authorities with the finding of an internal investigation.

Lastly, investigators are highly advised to compile a detailed report of the investigation, the evidence collected, and the judgment rendered in case the findings are later challenged in any way.

For more information on conducting internal investigations in China, contact your regular CMS advisor or local CMS experts:

Jeanette Wu, Partner, CMS China

Sophy Wang, Associate Lawyer, CMS China