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 that person's conduct can be deemed the company's illegal conduct. Criminal sanctions against corporations constitute economic sanctions such as 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. Thus, practically speaking, administrative sanctions have an important deterrent role against illegal misconduct by corporations. Administrative sanctions can potentially become quite large from an economic point of view.
Further, 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.
Crimes related to corporate activities can be primarily categorised as follows:
- crimes to which the general Criminal Code applies – classic types of crimes such as embezzlement of company assets, breach of trust and fraud. The Criminal Code also applies to bribery and corruption;
- 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;
- securities crimes under the Securities Law (the Financial Instruments and Exchange Act). In connection with certain 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;
- 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
- business operations crimes, such as violations of environmental law, the Waste Disposal Law, the Food Sanitation Act and the Food Safety Act. In most cases, the sanction would be minor but a company needs to pay attention to the effect on its reputation.
The sole authority responsible for criminal procedures in Japan is the Public Prosecutor's Office (the Prosecutor's 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.
Other authorities conduct primary investigations in certain other specific areas. 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 Prosecutor's Office with the results of their own investigation. The Prosecutor's Office may prosecute the person who is involved and the company, as necessary.
The Prosecutor's 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, such as 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 Prosecutor's 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.
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|
|Public Prosecutor's Office, National Police Agency||
• 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 Public Prosecutor's Office and the National Police Agency are in charge of all punitive provisions under Japanese law.
|Securities transactions monitoring committee, a division of the Financial Services Agency.||
• 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|
|Japan Fair Trade Commission||Penal provisions stipulated in competition laws such as Antimonopoly Act, Sub-Contracting Act, etc.|
|National Tax Agency||Penal provisions stipulated in tax laws such as income tax law, corporate tax law|
|Japan Financial Intelligence Centre||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||Penal provisions stipulated in consumer protection-related regulations, such as the Act on Specified Commercial Transactions and the Premiums Labelling Act|
|Financial Services Agency||Investment law, money-lending business law, etc.|
If a company detects illegal corporate activities, the company may obtain certain advantageous treatment from the authority by voluntarily disclosing it. Below are some examples.
- 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 to the JFTC a case of wrongdoing (i.e., a cartel or bid rigging) that may constitute a violation of competition law, 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 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 investigation, the reduction percentage becomes smaller, but it is still possible to receive a 30 per cent reduction for a company ranking first.4
- 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 self-reports a law violation. There is no specific leniency programme stipulated in current regulations.
- 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 a violation to the Consumer Affairs Agency, it can receive a 50 per cent reduction in fine.
- As a general rule under criminal law, if a person who commits a crime declares his or her wrongdoing to the relevant authority before it is discovered, he or she may receive a reduction in the term of imprisonment or the amount of penalty – known as 'voluntary surrender' – subject to a criminal judge's discretion, on the condition that the declaration is made before the authority in question discovers a crime or identifies a suspect. It should be noted, in general, that self-reporting may be considered 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.
- A new framework for an immunity agreement between a criminal suspect and the relevant authority has been adopted through an amendment to the Criminal Procedure Code. The new law is effective from 1 June 2018. Under this new system, if a criminal suspect provides the information used for another party's criminal wrongdoings to an investigating agency under an 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 a requirement to provide information about the criminal acts of others. In that regard, this system is different from similar systems in other jurisdictions, such as a plea agreement in the United States. See Section IV.
ii 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. An increasing number of cases are being discovered through companies' internal reporting systems (whistle-blower systems) or through the provision of information by outside parties. In recent years, many Japanese companies (typically auto-parts makers) have been implicated in international cases, and the target companies have only become aware of legal action by receiving a subpoena or other governmental notice from overseas authorities.
iii Internal investigations
As a recently adopted practice, when certain illegal activities are committed within a company, the company sets up a special committee and entrusts it with conducting a fact-finding internal investigation. The investigation committee gathers documents inside the company, interviews relevant employees or third parties and obtains opinions from outside experts. During the process of collecting documents, 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 believes the issue is extremely serious and there is potential for public scrutiny, it may appoint an independent third party, such as an external lawyer, or an expert, such as an accountant, as a member of the investigation committee. This is done to ensure objectivity and neutrality. The number of cases in which investigation committees include a third-party expert is increasing. In this context, the Japan Federation of Bar Associations (JFBA) issued the Third-party Committee Guidelines for Corporate Misconducts on 15 July 2010, based on the fact that such investigation committees have become popular.5 Although it is not compulsory to adhere to the JFBA guidelines, investigative committees established in response to instances of corporate misconduct are often established and operated in general accordance with the guidelines, and otherwise refer to or explain reasons why the guidelines are not being followed in a given situation. 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 a third-party committee (members should be truly independent and have no shared interests in the company under investigation).
In the case of a listed company, the Japan Exchange Regulation (JPX-R) issued the Principles for Responding to Corporate Scandals on 24 February 2016, in which third-party committees are required to be independent, neutral and professional. The JPX-R alleged there had been times when some listed companies did not properly respond to their wrongdoings.6 Under these circumstances, where the interest in wrongdoing is particularly pronounced, the results of an internal investigation are frequently publicly disclosed. In particular, 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 managers to resign from their position or to pay damages to the company. Shareholder derivative lawsuits may result.
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 100 of the Enforcement Regulations of the Corporation Law and Article 62(4) (6), (5) of the Companies Act). The contact for an 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 use for reporting has been established more broadly. In practice, the number of cases in which corporate scandals are 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 dealt with 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. To help a company set up an internal control system, the Consumer Affairs Agency (CAA) issued new Guidelines for Business Operators Regarding the Establishment, Maintenance and Operation of Internal Reporting Systems Based on the Whistle-blowers Protection Act of 9 December 2016.7
i Criminal procedure
Investigation by the Prosecutor's Office or the National Police Agency
From a legal standpoint, all criminal offences are charged by the Prosecutor's 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 resources may rather be directed towards 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 Securities and Exchange Surveillance Commission, JFTC, Tax Office and others
The administrative procedure that is conducted by authorities such as the Securities and Exchange Surveillance Commission (SESC), the JFTC, the Tax Office and the CAA eventually leads to administrative orders or sanctions, such as a corrective order, cease and desist order or surcharge order. Primarily, an administrative investigation is carried out against violations of laws and regulations engaged in through corporate activities.
The aforementioned organisations have no authority to conduct a compulsory investigation. Therefore, all actions during an investigation should be processed voluntarily, in principle, on the premise of cooperation by the company. However, under many laws, any act preventing inspection by an authority itself 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 by 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 can be divided into two categories: administrative investigation and investigation for criminal cases. Almost all cases will involve an administrative investigation, in which enforcement of the law is in the form of an administrative order or the imposition of a surcharge by the authority. In certain extreme cases, the procedure changes to an investigation for criminal cases, under which the authority collects evidence for future criminal cases and refers the case to the Prosecutor's Office at the end of the procedure, unless the case cannot be established.
The administrative procedure and investigation for criminal cases differ in that, in principle, evidence obtained during an administrative investigation should not be used for an investigation for criminal cases or other criminal procedure if the case becomes a criminal case.
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.8
|Cases of violations related to Antimonopoly Act||180||275||150||128||138||149|
|Cases in which administrative orders were issued as a result of violations of Antimonopoly Act||22||20||18||10||9||11|
|The aggregate amount of surcharge (billion ¥)||44.257||25.076||30.242||17.143||8.510||9.143|
Cases of leniency applications
(actually applied cases (only announced))
|Cases of violations related to Sub-Contracting Act||18||16||10||7||4||9|
|Cases in which JFTC made administrative directions following violations of Sub-Contracting Act||4,326||4,550||4,949||5,461||5,980||6,302|
With regard to violations of the Antimonopoly Act (Competition Law), the overall number of cases is decreasing, whereas 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 trend is mainly because companies have become more aware of the risks of violating the Antimonopoly Act, not because enforcement by the JFTC has weakened. The JFTC is shifting its resources to enforcing violations of the Sub-Contracting Act.
iv Local law considerations
Under Japanese law, there are no privilege doctrines per se, such as attorney–client privilege or attorney work product, that may be used as defensive measures against an 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,9 although there are a lot of current arguments that the protection of privilege should be expanded.10
However, some substantially equivalent rights to protect attorney–client communications are provided under Japanese law. The Criminal Procedure Code provides the right of refusal against confiscation, particularly based on the expert's duty of confidentiality.11 Further, in civil proceedings, a party has the right of refusal against production of documents on the grounds of 'internal use'.
There are no comprehensive disclosure requirements during civil proceedings such as 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 the 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.
i Basic framework under the Japanese Criminal Act
The Criminal Act stipulates the jurisdictional scope of Japanese criminal law (Articles 1 to 4-2). As a general rule, criminal law applies to domestic crimes, and 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 aircraft), Japanese criminal law is applicable. This adheres to the basic principle of jurisdiction.
If any part of the crime is committed outside Japan territory, 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 (Articles 2 to 4-2), as follows:
- those who commit crimes concerning the sovereign rights of Japan;
- a Japanese citizen who commits a crime abroad;
- those who carry out criminal offences against Japanese citizens abroad;
- a public officer who commits a crime abroad; and
- foreign crimes committed under a treaty.
ii International cooperation
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 National Police Agency (NPA) 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 2017, there were 1,815 Interpol requests for investigation assistance and cooperation from foreign countries to Japan, and 32 via diplomatic routes. The NPA requested assistance from foreign countries in 327 instances via Interpol and on 109 occasions through diplomatic channels.12
The Act of Extradition (Act No. 68 of 21 July 1947) governs the relevant issues regarding extradition of a criminal offender to foreign countries. Japan has concluded the Criminal Extradition Treaty as a bilateral treaty with only the United States and South Korea.
The Japanese government will promise to extradite a criminal offender to the United States at the request of the US government if certain criteria are met. The general requirements are (1) that the crime is committed in Japan or the United States and (2) that penalties can be imposed in Japan and the United States. 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. It is at the discretion of the government to decide whether or not he or she should be extradited. Thus, if the criminal is a Japanese citizen, it will at the discretion of the Japanese government as to whether they respond when an extradition is requested. Consideration will be given to the nature of the crime, the influence exerted, the possibility of punishment being imposed 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 activities 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 sanctions, 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 II.i, point e). By executing an immunity agreement with the Prosecutor's Office, a criminal offender can receive leniency concerning its own crimes by providing information to prosecutors about the criminal acts of others. The new law is effective from 1 June 2018.
The key points of the new system are:
- that a confession of his or her own crime is not necessary; in other words, the system differs from a guilty plea under US law;
- that the crimes regarding which the new system will be used are limited to certain categories. Corporate crimes, violations of antitrust law, tax law violations, violations of the securities law and bribery are applicable crimes;
- the court will not get involved in this agreement;
- the content to be included in the agreement is limited in the law; and
- 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 corporate crime cases
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 an extremely large amount for a judgment in Japan. This means that it is now necessary for managers to keep in mind the potential for damages of such magnitude.
On 12 February 2015, the SESC issued a request for a report to Toshiba Corporation (Toshiba). Toshiba formed a special investigation committee, and then a 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 that it should pay a penalty owing 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. Counter to that, 36 lawsuits seeking payment of damages for a total of approximately ¥174 billion have been filed against Toshiba.13
In October 2017, Kobe Steel Ltd (KOBELCO), a major steel manufacturing company, announced that it had engaged in data falsification concerning its aluminium products, copper and other steel-related products over a period of many years. KOBELCO's materials were delivered to other major manufacturing companies, including Mitsubishi Heavy Industries, IHI and SUBARU. The chairman and the president of KOBELCO resigned from theirs positions in March 2018 to take responsibility for not detecting the problems.
VI CONCLUSIONS AND OUTLOOK
As stated above, with respect to corporate activities, an administrative sanction may have an effect on a company's operation, and cases are sometimes referred to the Prosecutor's Office and then develop into criminal prosecutions. More recently, companies are voluntarily establishing special committees to conduct internal investigations when a 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 On-site inspections during administrative proceedings may be conducted by the Japan Fair Trade Commission (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 According to some news reports, in December 2017, Obayashi Corporation, one of the biggest general contractor companies in Japan, voluntarily declared its bid rigging regarding the construction of a new central bullet train (shinkansen). If the leniency programme is applied to Obayashi Corporation, it might be exempted from administrative fines of billions of yen. Subsequent to Obayashi Corporation, Shimizu Corporation, another of the largest general contractor companies, voluntarily declared its violation of competition law. It might be a case where not only the leniency programme in competition law is applied but also the new framework of the immunity agreement between a criminal suspect and the authority in Criminal Procedure Code (see Section II.i, point e) is applied because a violation of competition law is also criminal offence.
5 Updated on 17 December 2010.
Subsequently, the JPX-R issued the Principles for Preventing Corporate Scandals on 30 March 2018, based on the following thought: 'Now that corporate scandals are no longer uncommon, however, there is an imperative need for listed companies to take effective measures to prevent the occurrence of corporate scandals.'
The latest annual report (English version) can be seen at www.jftc.go.jp/en/topics/topics151026 and the latest annual summary at www.jftc.go.jp/en/pressreleases/yearly-2017/June/170607.
9 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.
10 The JFTC released the study report of The Antimonopoly Act, in which attorney–client privilege was under discussion. See: www.jftc.go.jp/en/pressreleases/yearly-2017/April/170425. For further arguments against this report (in Japanese), see: www.jftc.go.jp/houdou/pressrelease/h29/aug/170808.
11 Experts include an attorney, doctor, nurse, midwife and patent attorney.