This narrow rule applies to apps handling user-generated content or communications — if illegal activity endangering a child is discovered, Apple expects the developer to have a process for reporting it to the relevant authorities, not just removing the content.
Comes up almost exclusively for social or messaging apps during the CSAM-detection and reporting-pipeline review that accompanies UGC app submissions.
"Your app facilitates content involving the exploitation of minors without an adequate mechanism to report it to appropriate authorities, per guideline 1.7."