I INTRODUCTION

Under Japanese law criminal sanctions are imposed on individuals, not on legal entities such as corporations. A corporation could be subject to criminal sanctions based upon certain ‘two-sided penalty provisions', which stipulate that criminal penalties will be imposed on a company only if a person who belongs to the company commits a certain crime and such person's conduct can be deemed the company's illegal conduct. Criminal sanctions against corporations constitute economic sanctions like fines, confiscation, and the subsequent collection of money.

In addition to criminal sanctions, under Japanese law, various authorities may impose administrative sanctions, including cease and desist orders, surcharge orders, and the imposition of heavy additional taxes, etc. Thus, practically speaking, administrative sanctions play an important deterrent role against illegal misconduct by corporations. Administrative sanctions can potentially become quite large from an economic point of view.

Further, in Japan, strong social criticism against companies involved in corporate wrongdoing may seriously impair an entity's viability as a going concern. Thus, once a company gets involved in a scandal and it becomes public, the company must proceed with the necessary steps, including the internal investigation process, very cautiously.

In Japan, crimes related to corporate activities can be primarily categorised as follows:

a crimes to which the general Criminal Code applies - classic types of crimes such as embezzlement of company assets, breach of trust, fraud, etc. The Criminal Code also applies to bribery and corruption;

b corporate crimes to which special provisions under the Companies Act apply - illegal dividend distribution, provisions of illegal benefits to shareholders, etc. The penalty for breach of trust in the case of directors under the Companies Act is stricter than typical cases under the Criminal Code;

c securities crimes under the Securities Law (the Financial Instruments and Exchange Act). In connection with recent accounting fraud cases, false statement on financial statements is often applied. In addition, insider trading is a crime under the Securities Law. The Securities Law also provides an administrative fine;

d crimes to which other laws, such as the Antimonopoly Act (Competition Law) or tax laws apply (such as, the Corporation Tax Act, the Local Tax Act and the Income Tax Act). The surcharge on illegal conduct or the penalty tax can often become a serious problem for companies from an economic or reputational perspective; and

e business-operations crimes, such as violations of environmental law, the Waste Disposal Law, the Food Sanitation Act, the Food Safety Act, etc. In most cases, the sanction would be minor but a company needs to pay attention to the impact on its reputation.

The sole authority responsible for criminal procedures in Japan is the Public Prosecutor's Office (the Prosecutors Office). Corporate crimes that many people pay attention to or controversial economic cases are handled by the Special Investigation Department, in which many prominent prosecutors are gathered and work with a great deal of drive and purpose.

With respect to some specific areas, other authorities conduct the primary investigation. The Securities and Exchange Surveillance Committee handles securities crimes, the Japan Fair Trade Commission (JFTC) handles matters concerning the Antimonopoly Act, and the National Tax Service Agency conducts tax investigations under the relevant tax laws. These authorities may issue a cease and desist order, a surcharge order or administer a heavy tax through administrative procedures. If these authorities determine that a case is especially malicious, they may refer it to the Prosecutors Office along with the results of their investigation. The Prosecutors Office may prosecute the person who is involved and the company, as necessary.

The Prosecutors Office has the authority to conduct a search and seizure as compulsory enforcement, in other words, a dawn raid. This is accomplished with a court's warrant under the Criminal Procedure Law. The National Police Agency has the same authority. Other authorities, like the JFTC, have the authority to conduct an on-site inspection as part of an administrative investigation.2 In a legal sense, this inspection is basically a voluntary procedure and is different from the dawn raid process conducted by the Prosecutors Office or the National Police Agency. However, the authorities are entitled to issue the submission order of relevant documents against a suspected company. Therefore, in a practical sense, the process is similar in effect.

It is possible for a suspected company or person to contend its innocence. However, it may be difficult to prevent the authorities from obtaining materials that they believe are relevant to the case during a dawn raid or inspection process.3

Provisions of criminal sanctions regarding corporate activities are as follows:

Relevant authority

Provisions of criminal sanctions

Prosecutors Office, National Police Agency (NPA)

General penal code offences (embezzlement, breach of trust, fraud, bribery, etc.)

Penal provision stipulated in the Companies Act (special breach of trust, illegal dividends, benefits, etc.)

Corruption offences such as the Political Funds Control Law, Public Offices Election Law

Business-related laws such as waste disposal law

As a general rule, the Prosecutors Office and the National Police Agency are in charge of all punitive provisions under Japanese law.

Securities transactions monitoring committee (SESC)

The SESC is a committee of the Financial Services Agency (FSA).

Penal provisions stipulated in the Securities Act of the Financial Instruments and Exchange Law (fraudulent statement of securities, etc.)

Insider Trading

Relevant authority

Provisions of criminal sanctions

JFTC

Penal provisions stipulated in competition laws such as Antimonopoly Act, Sub-Contracting Act, etc.

National Tax Agency (NTA)

Penal provisions stipulated in tax laws such as income tax law, corporate tax law

Japan Financial Intelligence Center (JAFIC)

Criminal profit transfer prevention law

Labour Standards Inspection Office

Penal provisions stipulated in the Labour Law, such as the Labour Standards Act

Consumer Affairs Agency (CAA)

Penal provisions stipulated in consumer protection-related regulations, such as the Act on Specified Commercial Transactions and the Premiums Labelling Act

Financial Services Agency (FSA)

Investment law, money-lending business law, etc.

II CONDUCT

i The beginning of the investigation

Typically, a company becomes aware of illegal corporate activities being carried out within the company when the authority initiates an on-site inspection or a dawn raid. Recently, more cases are discovered through the company's internal reporting system (whistle-blower system) or through the provision of information from outside parties. In recent years, many Japanese companies (typically auto-parts makers) have been implicated in international cases, where target companies became aware of actions by receiving a subpoena or other governmental notices from overseas authorities.

ii Internal investigations

As a recently adopted practice, when certain illegal activities are committed within a company, the company sets up a special committee for internal investigation and entrusts it with conducting a fact-finding investigation. The special committee gathers documents inside the company, interviews relevant employees or third parties and obtains opinions from outside experts. In the process of collecting documents conducted during this investigation, digital forensic technology is often used.

The members of the investigation committee vary according to the severity of the case or the degree of social attention. If a company assumes that the issue is exceedingly serious in nature and the potential for public scrutiny exists, it often appoints an independent third party, such as an external lawyer, or an expert, such as an accountant, as a member of such special investigation committee. This is done to ensure objectivity and neutrality. The number of cases where such investigation committees include a third-party expert is increasing. In this context, the Japan Federation of Bar Associations (JFBA) provided the Third-party Committee Guidelines for Corporate Misconducts on July 15, 2010, based on the fact that such investigation committees have become popular.4 Although these guidelines remain only voluntary ones formulated by the JFBA, recent investigative committees established at the time of corporate misconducts are established and operated generally in accordance with the guidelines. The contents of the guidelines mainly provide the activities that the third-party committee should perform (fact-finding investigation, analysis of causes and backgrounds, and generation of proposals on measures for prevention of recurrence) and the composition of members of such third-party committees (members should be truly independent and have no shared interests in the companies).

In the case of a listed company, the results discovered through such internal investigation are frequently publicly disclosed. Especially, if an internal investigation is conducted using a third-party committee as described above, the investigation report, which sometimes comprises hundreds of pages, is published on the company's website. As a result shareholders sometimes require management to resign from their position or to pay back damages to the company. Shareholder derivative lawsuits may result.

iii Self-reporting

If a company finds illegal corporate activities, the company may obtain certain advantageous treatment from the authority by voluntarily disclosing it. Below are some examples.

a The leniency programme under the Antimonopoly Law (Competition Law) and Sub-Contracting Act. Regarding the violation of competition law, there is a legal leniency programme, under which if a company voluntarily declares wrongdoing (i.e., cartels and bid rigging) that may constitute a violation of competition law to the JFTC, an administrative fine on the company would be exempted or reduced. Specifically, of the first five companies that declare voluntarily after the JFTC investigation has begun, three companies can qualify for receiving surcharge reductions or exemptions. Prior to the commencement of the JFTC's investigation, a company ranked first in the timeline of leniency applications would obtain a 100 per cent reduction and a company ranked second would obtain a 50 per cent reduction and so on. After the commencement of the JFTC's investigation, the reduction percentage becomes smaller, but it is still possible to receive a 30 per cent reduction for a company ranking first.

b As for the Sub-Contracting Act for which the JFTC has responsibility as well as the competition law, the JFTC will not issue an administrative order to a company that engages in the self-reporting of a violation of law, while there is no specific leniency programme stipulated in current regulations.

c As for special laws that contain a legal leniency programme, the Law for Preventing Unjustifiable Extra or Unexpected Benefit and Misleading Representation provides that if a company voluntarily declares the violation to the Consumer Affairs Agency, it can receive a 50 per cent reduction in fine.

d As a general rule under the criminal law, if a person who commits a crime declares his or her wrongdoing to the authority before it is discovered, he or she may receive a reduction of the term of imprisonment or the amount of penalty - known as ‘voluntary surrender' - subject to a criminal judge's discretion, on the condition that such declaration should be made before the authority in question discovers a crime or identifies a suspect. It should be noted, generally speaking, that self-reporting to the authority may be considered as a good reason to reduce a potential penalty, whether it falls under the legal definition of voluntary surrender or not, although it is only a circumstantial factor.

e With respect to the self-reporting system, a new framework of the immunity agreement between a criminal suspect and the authority has been adopted through the amendment to the Criminal Procedure Code. The new law will take effect in 2018. Under this new system, if a criminal suspect provides the information used for another party's criminal wrongdoings to an investigating agency under certain immunity agreement with a prosecutor, he or she may receive beneficial treatment in light of his or her responsibility. However, voluntary declaration of his or her wrongdoings only will not suffice as providing information on criminal acts of others is required. In that regard, this system is different from a similar system in other jurisdictions, like a plea agreement in the United States. See Section IV, infra.

iv Whistle-blowers

Under the Companies Act, a company with a certain level of capital or assets is required to establish an internal reporting system as a part of its internal control system (Article 362 (4) (6), (5) of the Companies Act, Article 100 of the Enforcement Regulations of the Corporation Law). The contact of this internal reporting system often takes the form of a specific department within a company or a hotline to an outside counsel office (which may be a law office). Thus, the framework that whistle-blowers may utilise for reporting has been established more broadly. In actuality, the number of cases in which corporate scandals were initially detected by internal reporting is rapidly increasing.

As the protection for internal whistle-blowers, the Whistle-blowers Protection Act (enforced in April 2006) stipulates that an employee should not be handled disadvantageously by the employer on the grounds of making an internal report for public interest. Specifically, it prohibits the dismissal or discriminatory treatment of whistle-blowers.

III ENFORCEMENT

i Criminal procedure - investigation by the Prosecutors Office or the National Police Agency

Legally speaking, all criminal offences are finally charged by the Prosecutors Office, even if other authorities initiate an investigation or inspection and impose an administrative order. This is the case even for misconduct related to corporate activities. Having said that, since the number of public prosecutors in Japan is fairly limited, in the context of illegal corporate activities, its resource may rather be addressed to serious or socially controversial misconduct, such as corruption involving famous politicians, large embezzlement cases or breaches of trust implicating the public.

ii Administrative procedure - investigation by the SESC, JFTC, Tax Office, etc.

The administrative procedure, which is conducted by the SESC, JFTC, Tax Office, and CAA, eventually aims at administrative orders or sanctions, such as corrective order, cease and desist order, surcharge order, etc. Primarily, this administrative investigation is carried out against the violations of laws and regulations engaged in through corporate activities.

In a legal sense, these bodies have no authority to conduct a compulsory investigation. Therefore, all actions during the investigation by the authority should be processed on a voluntary basis, in principle, on the premise of cooperation by the company. However, in many laws, any act preventing the authority's inspection constitutes a violation of law and is subject to criminal sanctions (indirect enforcement: the authorities have no power to conduct a compulsory investigation, but the company is effectively required to cooperate with the inspection). Thus, the investigative procedure of these authorities is enforced in a similar manner to the compulsory procedure, and companies typically follow and cooperate with the investigative procedure voluntarily, unless there are any special circumstances.

The administrative procedure by the authorities can be divided into two categories, ‘administrative investigation' and ‘investigation for criminal cases'. In almost all cases, the administrative procedure falls under the administrative investigation, in which the enforcement of law comes in the form of an administrative order or the imposition of a surcharge by the authority. In certain extreme cases, the procedure changes to the investigation for criminal cases, under which the authority collects evidence for future criminal cases and refers the case to the Prosecutors Office at the end of the procedure, unless the case cannot be established.

The administrative procedure and investigation for criminal cases are different procedures. For instance, evidence obtained during an administrative investigation should not be used for an investigation for criminal cases or other criminal procedures if the case becomes a criminal case, in principle.

iii The JFTC's enforcement

As an example of the latest enforcement activity in Japan, the number of enforcements by the JFTC is illustrated in the following chart.5

Enforcement activity

FY2011

FY2012

FY2013

FY2014

FY2015

Cases of violations related to the Antimonopoly Act

180

275

150

128

138

Cases in which administrative orders were issued due to violations of the Antimonopoly Act

22

20

18

10

9

The aggregate amount of surcharge (billion ¥)

44.257

25.076

30.242

17.143

8.510

Cases of leniency applications

143

102

50

61

102

Cases of violations related to the Sub-Contracting Act

18

16

10

7

4

Cases in which the JFTC made administrative directions due to violations of Sub-Contracting Act

4,326

4,550

4,949

5,461

5,980

With regard to the Antimonopoly Act (Competition Law) violation, the overall number of cases themselves is decreasing, while the number of administrative directions under the Sub-Contracting Act is gradually increasing. The latter is a relatively minor violation from the perspective of the protection of sub-contractors, compared to other major corporate offences such as cartel or bid-rigging cases.

This decreasing tendency is mainly because companies have become more aware of the risks of violating the Antimonopoly Act, not because the enforcement by the JFTC has weakened. The JFTC is shifting its resources to enforce violations of the Sub-Contracting Act.

iv Local law considerations (attorney-client privilege in Japan)

Under Japanese law, there are no per se privilege doctrines, such as attorney-client privilege or attorney work product, that may be used as defensive measures against the authority's investigation. Since there are no rules that particularly focus on this issue, communications between attorney and client are not legally protected. In addition, attorney work product is not necessarily protected regardless of whether they were prepared in anticipation of litigation,6 although there are a lot of current arguments that the protection of privilege should be expanded.

However, under Japanese law, some substantially equivalent rights to protect attorney-client communications are provided. The Criminal Procedure Code provides the right of refusal against confiscation, particularly based on the expert's duty of confidentiality.7 Further, in civil proceedings, a party has the right of refusal against production of documents on the grounds of ‘internal use' in civil proceedings.

It should be noted that, under Japanese law, there are no comprehensive disclosure requirements during civil proceedings like the ‘discovery' procedure often seen in foreign jurisdictions. Although a class-action system has been partly adopted, it is still not considered to have a substantial impact on corporate activities because the plaintiff must be limited to the Specified Qualified Consumer Organisation: a corporation certified by the Prime Minister pursuant to Act on Special Measures Concerning Civil Court Proceedings for the Collective Redress for Property Damage Incurred by Consumers (2013 No. 96) and claims are limited to those concerning consumer contracts.

IV INTERNATIONAL crimes

i Basic framework under the Japanese Criminal Act

The Criminal Act stipulates the jurisdictional scope of Japanese criminal law (Article 1 to Article 4-2). As a general rule, the criminal law applies to domestic crimes, and also applies to foreign crimes if there is a special provision by which the authority may reach any particular crimes committed overseas.

If any part of the crime is committed within the geographical confines of Japan (including Japanese vessels and aircrafts), Japanese criminal law is applicable. This adheres to the basic principle of jurisdiction.

If any part of the crime is not committed within Japan, it is deemed a ‘foreign crime'. Foreign crimes are not subject to Japanese criminal law unless there is an applicable special provision. The Criminal Act stipulates several special provisions for foreign crimes to which the Act is applicable (Article 2 through Article 4.2), as follows:

a those who commit crimes concerning the sovereign rights of Japan;

b a Japanese citizen who commits a crime abroad;

c those who conduct criminal offences against Japanese citizens abroad;

d a public officer who commits a crime abroad; and

e foreign crimes committed under a treaty.

ii International coordination among the authorities

The Act on International Assistance in Investigation and Other Related Matters (1980 No. 69) stipulates a framework of coordination with foreign authorities. In addition, there are a number of criminal assistance treaties as bilateral treaties.

The Japanese National Police Agency is a member of Interpol and is engaged in international investigation cooperation. International coordination in criminal investigations is made through Interpol or through a diplomatic route (from the local police office to the relevant foreign ministry, and then to the relevant foreign diplomat). In 2015, there were 1993 Interpol requests for investigation assistance and cooperation from foreign countries to Japan, and 36 via diplomatic routes. The NPA requested assistance from foreign countries in 318 instances via Interpol and on 53 occasions through diplomatic channels.8

iii Extradition

As for the extradition of a criminal offender to foreign countries, the Act of Extradition (Act No. 68 of July 21, 1947) governs relevant issues. In addition, Japan concluded the Criminal Extradition Treaty as a bilateral treaty only with the United States and South Korea.

For example, in case of extradition to the United States, under the Treaty the Japanese government promises to extradite a criminal offender to the US at the request of the US government if certain requirements are met. The general requirements are as follows: (1) that the crime be committed in Japan or the US; and (2) that penalties can be imposed in Japan and the US. In a case where the criminal is a citizen of one country, it is not obligatory to extradite him or her to the other country. Whether the government extradites him or her depends on its discretion. Thus, if the target is a Japanese citizen, it will depend on the discretion of the Japanese government as to whether they respond when extradition is requested. In this case, it is said that consideration will be given to the nature of the crime, the influence exerted, the possibility of punishment being awarded in Japan, the level of trust in the international community and national sentiment.

iv Extraterritorial application of the Antimonopoly Act

The JFTC takes the view that if a foreign company is exporting products to Japan and its acts are sufficient to constitute a violation of the Antimonopoly Act of Japan, it is considered to be subject to the jurisdiction of the Antimonopoly Act. For the purposes of sanction it is not necessarily required to have a branch office or subsidiary within Japan. Thus, foreign companies may be subject to the Antimonopoly Act if they conduct anticompetitive activities that may impede competition in the Japanese market.

Cases of extraterritorial applications by the JFTC include Marine Hose (2008), BHP Billiton (2008), CRT (2009) and Zimmer/Biomette (2014-2015).

V YEAR IN REVIEW

i An amendment to the Criminal Procedure Code

In 2016, the Criminal Procedure Code was amended and the immunity agreement system was newly adopted, as stated in Section iii.e, supra. By executing an immunity agreement with the Prosecutors Office, a criminal offender can receive leniency concerning its own crimes by providing information on the criminal acts of others to prosecutors. The new law will take effect in 2018.

The noted points of the new system are as follows:

a that a confession of his or her own crime is not necessary, in other words, the system is dissimilar to a guilty plea under US law;

b that the crimes regarding which the new system will be utilised are limited to certain categories. Corporate crimes, violations of antitrust law, tax law violations, violations of the securities law and bribery are applicable crimes;

c the court will not get involved in this agreement;

d the content to be included in the agreement is limited in the law; and

e a defence lawyer is required.

We cannot predict how this immunity agreement system will operate in Japan. In the future there is a possibility that voluntary declarations of company wrongdoing will increase through its usage.

ii Remarkable cases regarding corporate crimes
Olympus

On 27 April 2017, the Tokyo District Court ruled that the former management team of Olympus Corporation (Olympus) should be liable for damages of approximately ¥85.9 billion incurred by Olympus. This is a judgment on two lawsuits in which Olympus sued the former management team and launched a shareholder derivative suit against the same persons. This is not a criminal case, but ¥85.9 billion is extremely large for a judgment in Japan. This means that it is now necessary for management to keep in mind the potential for damages of such magnitude.

Toshiba

On 12 February 2015, the SESC issued a request for a report to Toshiba Corporation (Toshiba). Toshiba formulated a special investigation committee, and then the third-party committee based upon the fact that there was doubt regarding part of the accounting process - the ‘percentage-of-completion method '- in regard to the infrastructure projects. While Toshiba voluntarily disclosed the investigation report in July 2015, the Tokyo Stock Exchange requested it to pay a penalty due to a breach of covenants that a listed company should follow. On 7 December 2015, the SESC issued an administrative order that imposed a surcharge of ¥7.37 billion on Toshiba. In the face of a series of scandals, Toshiba has filed a lawsuit seeking payment of damages for a total of ¥3.2 billion against former members of management.

VI CONCLUSIONS AND OUTLOOK

As stated above, with respect to corporate activities, an administrative sanction may have an impact on a company's operation, and cases are sometimes referred to the Prosecutors Office and then develop into criminal prosecutions. More recently, companies voluntarily establish special committees to conduct internal investigations once the case comes to light. As a cultural tendency somewhat unique to Japan, strong social criticism against companies involved in corporate wrongdoing may seriously impair an entity's viability as a going concern. Thus, once a company finds itself embroiled in a public scandal, it must proceed with an internal investigation and the other necessary steps with exceeding caution and in close partnership with experienced legal counsel.


1 Kakuji Mitani is a partner and Ryota Asakura is an associate at Momo-o, Matsuo & Namba.

2 Onsite inspections during the administrative proceedings may be conducted by the JFTC (Article 47, No. 4 of the Antimonopoly Law), the Tax Office (Article 74-2 of the General Act of National Taxes), and the Financial Services Agency (Article 177(1) of the Securities Act).

3 Please note if a company uses a leniency programme for violations of the Antimonopoly Law, cooperation with the JFTC's investigation is required, in principle.

4 Updated on 17 December, 2010. Please see the following link: www.nichibenren.or.jp/library/en/opinion/report/data/100715_2.pdf.

5 Please see: www.jftc.go.jp/info/nenpou/h27/index.html and http://www.jftc.go.jp/houdou/pressrelease/h28/may/160525.html.

6 In the JASRAC case (12 September 2013, the Tokyo High Court judged that under the existing legal system in Japan, the rights and the doctrine under attorney-client privilege or work product could not be recognised.

7 Experts include an attorney, doctor, nurse, midwife, patent attorney, etc.

8 www.npa.go.jp/interpol/pic1/ICPO_Pamphlet.pdf.