Sharpening the teeth of whistleblower protection in Japan

January 2021  |  FEATURE  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

January 2021 Issue

The extent of protection afforded to whistleblowers varies greatly across the globe. Some countries, such as the US and South Korea, have advanced provisions and procedures in place, which often yield millions in awards, while others, like Japan, are rather less effective.

In Japan, the pertinent legislation is the 2006 Whistleblower Protection Act, enacted to: “protect the whistleblower and to promote compliance with the laws and regulations concerning the protection of people by nullifying the dismissal of, and prohibiting any other disadvantageous treatment of, any whistleblower and specifying the measures that businesses and the administrative organ shall take with regard to whistleblowing, and to contribute to the stability of people’s lives and the sound development of the society and economy in Japan”.

Yet, by common consent, in the 15 years since its introduction, the Act has fallen short of many of these noble ambitions. Its critics routinely berate the legislation as toothless, unable to fully protect those it purports to serve.

According to Nobuhito Sawasaki, a partner at Anderson, Mori and Tomotsune, while some positive effects have resulted from the implementation of the Act, such as the establishment of whistleblower reporting systems, mostly at large firms, as well as efforts toward bolstering compliance focused and consumer-orientated management, many issues with the legislation have never been addressed.

“Efforts to establish whistleblower reporting systems at small- and medium-sized firms as well as to raise awareness of the Act among workers in general have been insufficient,” says Mr Sawasaki. “These inadequacies have caused incidents in which a firm’s whistleblowing system did not function satisfactorily, leading to misconduct that severely impaired the safety of citizens, or to inappropriate responses from the administrative agency that receives whistleblowing reports.”

Therefore, the need to improve the viability of the reporting system for the protection of whistleblowers was paramount – a requirement that has been met by the passing of amendments proposed by Japan’s Consumer Affairs Agency (CAA). These changes go some way toward bringing the Act’s inadequacies to an end.

Expanded scope: key amendments

Among a raft of measures, the Act – which will enter into effect within two years of promulgation – has been amended to relax certain requirements in order to facilitate whistleblower disclosures. Previously, individuals could only make whistleblower disclosures to an administrative agency when there were “reasonable grounds to believe that the reportable fact has occurred or is about to occur”.

“Under the amendments, whistleblower disclosures are permitted when a reportable fact is considered to have occurred or is about to occur,” explains Geoff Schweller, information services coordinator at Educational Perspectives. “The shift in language relaxes the requirements for a disclosure to be considered permissible. Additionally, the amendments relax the requirements of reporting to news media.”

In addition, the amendments expand both the definition of ‘whistleblower’ and the scope of reportable facts. “The definition under the amended Act now includes retired workers, temporary workers and officers, while reportable facts covered under the Act now include not only criminal acts subject to criminal punishment, but also acts subject to administrative penalties,” adds Mr Schweller.

“Another big change is that the amendments require organisations to develop systems necessary to ensure the appropriate handling of whistleblowing,” observes Hiroyuki Masuda, a lawyer at One Asia Lawyers Group. “Under the amendments, this is a mandatory obligation for business operators which hire more than 300 employees, however there is also an obligation to ‘make an effort’ for business operators which hire 300 employees or less.”

Moreover, in order to ensure compliance, those handling whistleblowing reports and investigations of the reportable facts are obliged to keep confidential information which may identify the whistleblower in the course of such an investigation. Whistleblower protection is also strengthened by organisations being unable to claim damages from the whistleblower on the grounds of such whistleblowing.

Room for improvement

While the amendments do indeed strengthen protections for Japanese whistleblowers, they still pale in comparison to the strong whistleblower legislation seen in other countries, where companies face criminal penalties for retaliating against whistleblowers and whistleblower reward programme are generous to a fault.

In the US, for example, the Securities and Exchange Commission’s (SEC’s) Whistleblower Program has proven to be highly effective, having awarded more than $500m to whistleblowers over the last 10 years (with one tipster awarded a record $114m in October 2020). Furthermore, SEC enforcement actions from whistleblower tips have resulted in more than $2bn in financial remedies.

Japanese provisions, however, clearly have some way to go. “For advocates in favour of expanded whistleblower protections, the amendment still leaves room for improvement,” opines Anora Wang, a litigation associate at Winston & Strawn LLP. “For example, there is no mechanism for penalising companies that retaliate against whistleblowers. Nevertheless, companies should prepare to comply with the new protections and consult with experienced counsel paying close attention to how the amendment will be implemented.”

For the moment, the changes introduced to the Japanese Whistleblowers Protection Act require organisations to implement systems to respond appropriately to whistleblowing disclosures – improvements which will not only increase the scope of protection for whistleblowers, but also deepen our understanding of Japanese corporate phenomena and behaviours.

© Financier Worldwide

BY

Fraser Tennant