[A Beginner’s Guide] What is a Whistleblowing System? Procedures for Implementation, System Design, and Basic Knowledge

Why is a Whistleblowing System Important? Lessons from Corporate Misconduct

On July 28, 2025, Alt Inc. released its “Notice Regarding the Publication of the Third-Party Committee Investigation Report (Public Version).”  This report revealed that Alt Inc. had engaged in recording fictitious sales through a circular trading scheme.

The investigation report pointed out that although Alt Inc. had a whistleblowing system in place, there had been no actual use of it. This is not unique to Alt Inc.; numerous third-party investigation reports on corporate scandals have cited the “hollowing out” or “dysfunction” of whistleblowing systems as a root cause of misconduct.

Furthermore, in December 2025, the Tokyo Stock Exchange (TSE) and the Japan Exchange Regulation (JPX-R) published “The Exchange’s Measures in Response to Accounting Fraud Cases at the Time of IPO.” This document clarifies their policy to strengthen audits for the appropriate establishment of whistleblowing systems and to enhance the collection and sharing of fraud-related information.

In essence, an effective whistleblowing system serves the following functions:

1. Detect misconduct or potential compliance violations at an early stage.
2. Identify problematic workplace environments or corporate cultures that may foster such misconduct.

Through these functions, companies can conduct timely investigations, identify root causes, implement preventive measures, and effectively manage risks, and this risk management ultimately contributes to the maximization of corporate value.

Legal Regulations and Practical Considerations

The primary legislation governing internal reporting is the Whistleblower Protection Act.

This Act aims to:

• Protect whistleblowers by invalidating dismissals and prohibiting unfavorable treatment based on whistleblowing.
• Ensure compliance with laws protecting life, body, property, and other public interests by prescribing measures to be taken by businesses and administrative authorities.

The Act defines the requirements for whistleblower protection and imposes an obligation on business operators to establish internal systems. This obligation applies to businesses with more than 300 “regularly employed” workers ^[1], summarized as follows:

• Designating personnel in charge of whistleblowing matters.
• Establishing a cross-departmental system.
• Ensuring mechanisms to protect whistleblowers.
• Taking measures to ensure effective functioning.

The specific details of these measures are outlined in the Statutory Guidelines (the “Measures to Be Taken by Enterprises based on Article 11, Paragraphs 1 and 2 of the Whistleblower Protection Act”) and their official commentary.

Even businesses not legally obligated to establish such a system (i.e. those under a “duly to make an effort”) are expected to design their systems in accordance with these Statutory Guidelines. Moreover, as mentioned above, companies preparing for IPOs should establish these systems as their status will be verified during the listing examination process.

The Whistleblower Protection Act was amended in 2025, with key revisions including:

1. Expansion of the scope of protected whistleblowing
2. Strengthening of protections against unfavorable treatment
3. Enhancement of required measures by business operators (including addressing factors that hinder whistleblowing).

This amendment will come into effect on December 1, 2026. It is crucial to stay updated, as revisions to the Statutory Guidelines and their commentary are expected.

For an overview of the amended Whistleblower Protection Act, please also refer to the following article.

Below, we will outline the fundamental flow and essential considerations for setting up a whistleblowing system.

Basic Flow of Building a Whistleblowing System

Overview of System Requirements

Based on the Statutory Guidelines, businesses must establish the following:

Personnel in Charge:

Formally designate “Designated Personnel” in writing—those who handle reports and have access to information that identifies the whistleblower.

Cross-Departmental Systems:

• Hotline Setup: Clearly define the departments and persons responsible for intake, investigation, and corrective action.
• Independence: Ensure independence from senior management when a report involves them.
• Implementation of Whistleblowing Response Operations: Receive internal reports, conduct necessary investigations unless there is a justifiable reason to do otherwise, promptly take corrective measures if a legal violation is identified, and verify the effectiveness of such measures.
• Elimination of Conflicts of Interest: Ensure that anyone involved in the reported matter does not participate in the investigation or handling of that report.

Whistleblower Protection Systems:

• Prevention of Adverse Treatment: Take measures to prevent adverse treatment, monitor for the occurrence of such treatment, and implement appropriate remedial or restorative measures if identified. Impose disciplinary actions or other appropriate measures on individuals who violate these provisions.
• Prevention of Unauthorized Sharing and Identification: Unless a highly necessary investigation cannot be conducted without identifying the whistleblower, take measures to prevent the out-of-scope sharing of information and any attempts to identify the whistleblower. Impose disciplinary actions or other appropriate measures on individuals who violate these provisions.

Ensuring Effective Operation:

• Education/Awareness: Provide training to employees, officers, and retirees.
• Feedback: Promptly notify the whistleblower of the results of the investigation and corrective measures.
• Records and Improvement: Maintain records, conduct periodic evaluations, and disclose operational summaries to employees and officers.
• Formulation and Operation of Internal Regulations: Stipulate the matters required by the Guidelines in the internal regulations and operate the system in accordance with them.

Key Points in System Design

Based on the above, the following are the primary points to consider in actual system design:

Establishing Reporting Hotlines and Appointing Responsible Personnel:

To eliminate factors that might deter reporting—such as the fear of adverse treatment—it is effective to designate a compliance department that is independent of the human resources evaluation process.

For cases involving top management or executives, ensuring independence is crucial; this may involve appointing outside directors or corporate auditors as the dedicated contact points.

While some companies rely solely on internal hotlines, using external options like law firms can be beneficial for capturing a broader range of compliance-related issues.

Defining the Scope of Whistleblowers:

Under the Whistleblower Protection Act, protected individuals are limited to current and former employees (within one year of leaving), dispatched workers, and officers.

However, from the perspective of comprehensive compliance management, companies may choose to broaden this scope by removing these time limits and status restrictions, allowing for a wider range of individuals to report concerns.

Specifying Reportable Facts:

Under the Whistleblower Protection Act, reportable facts are limited to facts of criminal acts provided for in the Whistleblower Protection Act and laws concerning the protection of the lives, bodies, property, and other interests of the citizens (including the laws listed in the Appended Table and others thereunder; the same shall apply hereinafter), among others.

However, for the purpose of identifying a broad range of compliance-related incidents, companies may also define the scope to include a wider variety of compliance violations or facts that pose a risk of such violations.

Drafting Internal Regulations:

In addition to the points above, companies are expected to formalize the requirements set forth in the Guidelines within their internal regulations. This includes reporting methods, the confidentiality obligations of personnel handling the reports (e.g., prohibition of unauthorized information sharing), investigation workflows, and the process for providing feedback to the whistleblower. Many companies also find it helpful to create a simplified manual for employees to follow.

Additionally, it is also worth considering the creation of manuals that summarize the rules for accepting reports and conducting investigations.

Education and Awareness:

Once the system is in place, the next step is to educate and inform employees and ensure that the system is clearly communicated throughout the organization.

To encourage people to use the system, it is vital for top management to clearly state that the organization does not tolerate misconduct and will strictly protect whistleblowers from any adverse treatment.

Utilizing training sessions and easy-to-understand brochures can also significantly increase the system’s effectiveness.

Common Operational Challenges and Response Examples

The following are some typical challenges encountered during the operation of the system and examples of how to address them:

Lack of daily awareness of the system’s existence, content, and usage

Response examples: Issuing internal notices, utilizing the intranet, and creating brochures. Including photos or illustrations of the hotline staff in these brochures can make the system feel more accessible. Continuous internal training is also essential.

Insufficient Employee Trust in the Whistleblowing System

* This often occurs if there have been past instances of adverse treatment toward whistleblowers.

Response Examples: Ensuring that top management consistently communicates, for instance, that the system is vital for corporate defense, that misconduct must not be ignored, and that adverse treatment or attempts to identify whistleblowers are strictly prohibited. Conducting internal surveys to gauge employee sentiment is also effective.

Corporate Culture That Discourages Consultation

Response Examples: Improving communication among employees by institutionalizing 1-on-1 meetings and establishing a Code of Conduct. It is also important to enhance dialogue between management and employees through opinion exchange sessions or town hall meetings.

Post-implementation, Evaluation, Inspection, and Improvement of the Whistleblowing System

Statutory Guidelines require organizations to periodically evaluate and inspect their internal whistleblowing systems and make improvements as necessary. As a prerequisite for periodic evaluation, it is essential to record and store data regarding the number of reports received, the nature of those reports, investigation results, and any corrective measures taken.
Methods for evaluation and inspection include awareness surveys to gauge recognition of the whistleblowing system. It is also effective to use questionnaires to identify whether personnel have encountered or been directly involved in reportable incidents, followed by interviews to capture the specific details of any such occurrences. 

Other potential measures include conducting audits through internal audit departments or obtaining professional opinions from external experts, such as attorneys. These efforts aim to verify the status of system establishment, operation, and education, and to confirm whether the organization’s actions are in full compliance with statutory guidelines and their accompanying commentary.

The Significance of Utilizing External Experts and Lawyers

Under the Whistleblower Protection Act, establishing an external hotline is not mandatory. However, the background of the 2025 amendment to the Act highlights several key concerns:

• Potential whistleblowers may hesitate or abandon reporting due to fears of being identified by supervisors or colleagues and facing adverse treatment, or concerns that investigations may not be conducted by an independent party without conflicts of interest (Consumer Affairs Agency, "Report of the Study Group on the Whistleblower Protection System" (December 27, 2024), p. 4)(in Japanese, 消費者庁「公益通報者保護制度検討会報告書」（令和6年12月27日）4頁).
• There are concerns that businesses do not fully understand that they must refrain from actions that hinder reporting, such as attempts to identify the whistleblower (ibid., p. 11).

Fostering a Secure and Supportive Workplace Environment

As outlined above, an internal whistleblowing system is a vital mechanism for ensuring corporate compliance and providing an environment where employees can perform at their best.

We hope this article serves as a helpful starting point for your considerations when implementing such a system.
ZeLo provides one-stop support, ranging from acting as an external hotline to assisting in the design of internal whistleblowing systems and conducting investigations into reports. Please feel free to contact us for a consultation.

---

Notes:

[1] This excludes temporary workers hired only during peak seasons. “Using[employing]” refers to a relationship of command and order with the business operator, and “worker” refers to a person who falls under the definition of a worker as stipulated in Article 9 of the Labor Standards Act (Act No.49 of 1947) (Q and A on the Whistleblower Protection System | Consumer Affairs Agency)(in Japanese, 公益通報者保護制度 Q&A | 消費者庁)