Insights & Reports > Kroll Global Fraud Report

The financial crisis has silenced pundits’ claims that China is decoupled from Western economies. News is spreading of major factory closings. The real estate market, which has played a significant role in China’s growth, is declining and growth projections for 2009 are being rethought.

With cost reduction more important than ever, buyers, exporters, and distributors are continuing to demand high quality and low prices from Chinese suppliers, while they are also increasingly concerned about risks such as product contamination that could hurt both customers and corporate reputations. As a result, companies are ramping up on the ground supervision and audits.

Economic hard times and greater oversight invariably lead to the uncovering of more fraud. As companies put their ears to the ground in China, they should prepare to hear the feedback of Chinese white and blue collar workers. Even those accustomed to dealing with whistle-blowers need to be aware of the particular traits of Chinese ones in order to gain the maximum benefit from the revelations they may bring.

As elsewhere, Chinese whistle-blowing is usually anonymous, frequently by email, and can come from any part of the company – from factory workers through to senior level managers. The message’s content and the style can help point towards a writer, and letters written in English may contain clues in themselves. For example, spelling might indicate that the writer speaks Cantonese or comes from Taiwan. Although less common, letters sent by post might show the sender’s location on the postmark, so the envelope should be retained.

Chinese whistle-blowers also very rarely keep to a single accusation, instead damning the subject of their message with a list of charges: one that we saw recently made allegations about everything from company suppliers to the treatment of girlfriends and relatives by the person accused. Accordingly, investigators should first focus widely, and then progress towards the claims most likely to reveal serious liabilities for the company. Unfortunately, the shift toward highly specific facts and evidence is often the most difficult part of the process for all concerned, for several reasons.

First, language and culture are important. Mandarin speakers can be specific if they wish, but if seeking to avoid a question – or embarrassed about not knowing the answer – they may employ vague language. A good interviewer will probe into the facts from several angles to ensure consistency, uncover detail and validate the source. Second, gathering concrete evidence can be nearly impossible. Kickbacks, for example, often take the form of cash or untraceable gifts. Chinese whistle-blowers, however, may see their role as simply reporting allegations, sometimes based on unfounded rumors, rather than verification.

These issues merely complicate the universal problems of using whistle-blowers, such as whistleblowers having been involved in past violations about which they are less than frank, or even whistleblowers seeking revenge.

Finally, the identities of whistle-blowers in China, as elsewhere, must be kept highly confidential during and after the investigation. An eight year American academic study found that 69 percent of whistle-blowers were fired as a result of reporting wrongdoing, a figure which rose to 80 percent if the report was to an external authority. More than half suffered family problems. There is no reason to believe that the environment in China is any better, since there are fewer formal protections for the practice. Thus, only a limited group should see the whistle-blower letter and, with those who reveal themselves, meetings should occur outside the workplace, at times and locations that will not raise suspicion among co-workers. If whistle-blowing is perceived to be too dangerous for employees to do – potentially risking their jobs, which may have additional adverse effects on their personal lives – then companies will need to consider alternative ways of uncovering potential wrongdoing.

Nicholas Blank is an associate managing director and head of Kroll’s Seoul office. Fluent in Mandarin and with over ten years of experience working in China, Nick oversees a team of directors, analysts and investigators that serve Kroll’s global clientele with a range of business consulting services.