The International Investigations Review: Japan
As in many other jurisdictions, corporations in Japan must comply with laws relating to their business areas, and to secure the compliance of corporations, the laws provide criminal sanctions and, additionally where a regulatory body exists, administrative sanctions.
Criminal sanctions against corporations constitute economic sanctions such as criminal fines, confiscation and the subsequent collection of money. A caveat is that criminal fines in Japan are generally not severe in terms of monetary amount for large international companies and, therefore, the disadvantage of criminal sanctions for such companies exists mainly in reputation damages and the time and cost burdens of criminal proceedings, which may include requiring a representative director to be present at court.
One of the features of the Japanese criminal justice system is that the sole authority responsible for criminal procedures is the Public Prosecutor's Office (Prosecutor's Office). Therefore, even if a company violates a law of a specific business area that is regularly monitored by another authority, the Prosecutor's Office has the sole authority and discretion to determine whether it will indict the company. When the company is indicted, the case moves to the proceedings at the criminal court.
However, it is not feasible to impose criminal sanctions on every company that committed misconduct because the Prosecutor's Office does not have any regulatory monitoring functions in specific business areas, and it requires considerable time and resources to impose criminal sanctions through criminal court proceedings. Thus, practically speaking, administrative sanctions have an important deterrent role against illegal misconduct by corporations. These administrative sanctions include, typically, cease-and-desist orders and surcharge orders (administrative fines). For example, in bid-rigging and cartel cases, the amount of surcharge is calculated based on the relevant sales amount of the company and, therefore, surcharge orders can potentially become quite large from an economic point of view.
With respect to the power of investigation, 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 Code of Criminal Procedure. The National Police Agency (NPA) has the same authority. Other authorities, such as the Japan Fair Trade Commission (JFTC), have the authority to conduct an on-site inspection as part of an administrative investigation. In a legal sense, this kind of inspection is different from the dawn raid conducted by the Prosecutor's Office or the NPA in terms of the authorities' coercive power, but in practice, the process is similar.
In almost all cases, a suspected company officially states that it is cooperating with investigation including search and seizure conducted by the Prosecutor's Office and other authorities. Although arguments on the necessity or scope of search and seizure can be raised by the company, it would be difficult to successfully resist it in practice.
If a company successfully detects possible misconduct in advance of the commencement of the competent authority's investigation, the company would have to proceed very cautiously with the necessary steps, including an internal investigation process and application of the leniency programme if available. Internal investigation may also be required in certain cases where, for example, the competent authority issues a reporting order for a suspected misconduct, or accounting auditor requires it for the purpose of its opinion on the company's financial statement.
Typical areas of laws relevant to corporate activities and competent authorities are as follows:
|Areas of laws||Administrative sanctions||Criminal sanctions|
|General criminal code (Penal Code) offences (embezzlement, breach of trust, fraud, bribery, etc.)||N/A||As a general rule, the Prosecutor's Office and the NPA are in charge of all punitive provisions under Japanese law.|
|Act on Prevention of Transfer of Criminal Proceeds||Respective authorities that supervise the industry|
|Companies Act (special breach of trust, illegal dividends, benefits, etc.)||Ministry of Justice|
|Competition laws such as Antimonopoly Act (cartel, bid-rigging), Sub-Contracting Act, etc.||Japan Fair Trade Commission (JFTC)|
|Securities law such as Financial Instruments and Exchange Act (misrepresentation of financial statements, insider dealing, etc.)||Securities Exchange and Surveillance Committee (SESC) and Financial Services Agency (FSA)|
|Tax laws such as Income Tax Act, Corporation Tax Act||National Tax Agency (NTA)|
|Banking Act, money-lending business law, etc.||Financial Services Agency (FSA)|
|Consumer protection-related regulations, such as Act on Specified Commercial Transactions and Act against Unjustifiable Premiums and Misleading Representations||Consumer Affairs Agency (CAA)|
|Personal information law, such as Act on the Protection of Personal Information||Personal Information Protection Commission|
|Labour law, such as Labour Standards Act||Labour Standards Inspection Office|
|Pharmaceutical law, such as Act on Securing Quality, Efficacy and Safety of Products Including Pharmaceuticals and Medical Devices||Ministry of Health, Labour and Welfare|
If a company detects illegal corporate activities, the company may obtain certain advantageous treatment from the authority by voluntarily reporting it. Below are some examples.
- The leniency programme under the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Antimonopoly Act, a basic competition law in Japan). Regarding the violation of Antimonopoly Act, there is a legal leniency programme, under which if a company voluntarily declares to the JFTC a case of wrongdoing (for example, a cartel or bid rigging) that may constitute a violation of the Antimonopoly Act, an administrative fine against the company would be exempted or reduced. This leniency programme was amended in 2019.2 Specifically, prior to the commencement of the JFTC investigation, a company that ranked first in the timeline of leniency applications would obtain a 100 per cent reduction and a company ranked second would obtain a 20–60 per cent reduction, etc. After the commencement of the JFTC investigation, the reduction percentage becomes smaller, but it is still possible to receive a 10–30 per cent reduction for a company ranking first. The amendment granted the JFTC discretion to decide the actual reduction percentage based on the value of evidence provided by a company.
- Other certain regulatory frameworks also provide a legal leniency programme. For instance, the false advertising law (the Act against Unjustifiable Premiums and Misleading Representations) provides that if a company voluntarily declares a violation to the CAA, it can receive a 50 per cent reduction in surcharge.
- 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. In general, 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 prosecutor in charge has been adopted through an amendment to the Code of Criminal Procedure. The new law has been effective from 1 June 2018. Under this new framework, if a criminal suspect provides the information used for another party's criminal wrongdoing 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. See Section V for details.
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 (including whistle-blower systems) or through the provision of information by outside parties. In recent years, quite a few Japanese companies have been implicated in international cases, and some target companies only become aware of illegal activities by receiving a subpoena, a request for information letter 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 establishes 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 (whether the company management is involved, for example) 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 outside counsel in most cases, and an expert in other professional areas, such as an accountant, to constitute the investigation committee. This is done to ensure objectivity and neutrality. 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.3 However, as the JFBA guidelines set some strict rules and it is not compulsory to adhere to the guidelines, there is a tendency that certain portions of such companies establish investigation committees called Special Committee or Internal Committee and avoid full application of the guidelines. The attorney–client privilege and work-product doctrine are gradually becoming recognised and must be carefully treated in cases where any international aspects exist, because Japanese law generally does not recognise such privileges while there are no strict discovery rules in domestic litigation (see Section III.iv for details).
In the case of a listed company, if the scandal might impact the company's financial reporting, the accounting auditor would demand the company to establish a special committee investigating the case for the purpose of issuing its opinion. The stock exchange also comes into play concerning the listed company's response. The Japan Exchange Regulation (JPX-R) issued the Principles for Responding to Corporate Scandals on 24 February 2016. The JPX-R alleged there had been times when some listed companies did not properly respond to their wrongdoings.4 Under these circumstances, where the interest in wrongdoing is particularly pronounced, the results of an internal investigation are frequently publicly disclosed. As a result, the company controlled by subsequent management might take legal action to seek damage compensation against the former management in cases where the management had been in violation of its duty of care. In addition, 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 Companies Act and Articles 362(4)(vi), (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 the office of outside counsel. 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 for the protection for internal whistle-blowers, the Whistleblower Protection Act 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 assist companies in establishing internal control systems, the CAA issued new Guidelines for Business Operators Regarding the Establishment, Maintenance and Operation of Internal Reporting Systems Based on the Whistleblower Protection Act of 9 December 2016.5
i Criminal procedure
Investigation by the Prosecutor's Office or the NPA
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, as explained in Section I, in the context of illegal corporate activities, the administrative authority that monitors the business regularly would recognise and investigate the case and if it is judged malicious, it would refer the case to the Prosecutor's Office. For example, the JFTC has referred malicious cases of bid-rigging.
On the other hand, a corporate crime that many people pay attention to or controversial economic cases are handled by the Special Investigation Department, which is a part of the Prosecutor's Office. For example, the Olympus case and the Nissan case (see Section V for details) were handled by the Special Investigation Department.
When the criminal investigation is ongoing against the company in addition to the individual employee, it would be typical practice to separate the lawyers representing the company and the individual employee.
ii Administrative procedure
Investigation by the SESC, JFTC, NTA and others
The administrative procedure that is conducted by authorities such as the SESC, the JFTC, the NTA 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.
As compared to the criminal procedure, the administrative procedure targets the company and does not target the individual employees. Therefore, in most cases, it would not be necessary to retain outside counsel to represent individual employees in response to the administrative procedure.
Further, it is possible that those conducting the administrative investigation do not assume (and even dislike the situation) that outside counsel plays a certain role in a company's response, because the administrative authority may have the mindset that the facts to be reported should not be touched or diverted by outside counsel. However, as obviously the outside counsel is better positioned to help companies under administrative investigation, it would be advisable to consult with counsel on the legal rights of the company, fact-finding activities, accuracy of the company's description of facts and overall strategy for the company's response to the authority and other stakeholders.
Based on the constitutional requirement of due process, 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.6
|Reports of cases of alleged violations of Antimonopoly Act||6,886||6,331||7,224||5,578||3,620|
|Cases in which administrative orders were issued as a result of violations of Antimonopoly Act||10||9||11||13||8|
|The aggregate amount of surcharge (billion ¥)||17.143||8.510||9.143||1.892||0.261|
|Cases of leniency applications under Antimonopoly Act|
(actually applied cases (only announced))
(actually applied entities (only announced))
|Cases in which administrative orders were issued as a result of violations of the Sub-Contracting Act||7||4||11||9||7|
With regard to violations of the Antimonopoly Act, the overall number of cases and the amount of surcharges are decreasing. This decreasing trend is mainly because companies have become more aware of the risks of violating the Antimonopoly Act. The JFTC is shifting its resources to enforcing violations of other categories of regulation.
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. Because 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,7 although there are a lot of current arguments that the protection of privilege should be expanded.
In March 2019, the JFTC announced that attorney–client privilege will be adopted in the JFTC rules at the timing of the effective date of the next amendment to the Antimonopoly Act, which was published in June 2019 and will be effective by December 2020. Currently, this attorney–client privilege rule in the JFTC rules will only apply to cases under the JFTC's administrative procedure of its investigation regarding violation of a certain category of the Antimonopoly Act.
Other than this, some substantially equivalent rights to protect attorney–client communications are provided under Japanese law. The Code of Criminal Procedure provides the right of refusal against confiscation, particularly based on the expert's duty of confidentiality.8 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' (or, disclosure) procedure often seen in common-law 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 Consumer Contract Act and the Act on Special Measures Concerning Civil Court Proceedings for the Collective Redress for Property Damage Incurred by Consumers and claims are limited to those concerning consumer contracts.
i Basic framework under the Japanese Penal Code
The Penal Code 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 Penal Code 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 stipulates a framework of coordination with foreign authorities. In addition, there are a number of criminal assistance treaties as bilateral treaties.
The 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 2019, the total number of instances of exchange of information through Interpol was 78,114. There were 1,545 Interpol requests for investigation assistance and cooperation from foreign countries to Japan, and 38 via diplomatic routes. The NPA requested assistance from foreign countries in 424 instances via Interpol and on 186 occasions through diplomatic channels.9
The Act of Extradition governs the relevant issues regarding extradition of a criminal offender to foreign countries. Japan has concluded the Treaty on Extradition 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 that the crime is committed in Japan or the United States, and 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 be at the discretion of the Japanese government as to whether it would 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).
Year in review
i An amendment to the Code of Criminal Procedure
In 2016, the Code of Criminal Procedure was amended and the immunity agreement system was newly adopted (as stated at Section II.i, bullet 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 was 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.
In June 2018, Mitsubishi Hitachi Power Systems, Ltd (MHPS) became the first company to which the immunity agreement system was applied in Japan. Consequently, the Prosecutor's Office charged only two former officers and one former manager of MHPS on suspicion of bribery to a foreign public officer (violating the Unfair Competition Prevention Act). MHPS has not been indicted.
On 19 November 2018, Carlos Ghosn, a former representative director and chairman of Nissan Motor Co, Ltd (Nissan), and Greg Kelly, a former representative director of Nissan, were arrested for violating the Financial Instruments and Exchange Act (FIEA) (namely for making false disclosures in annual securities reports) and indicted on 10 December 2018. It has been reported that an officer and a manager of Nissan entered into immunity agreements with the Prosecutor's Office and submitted evidence to the Office.
ii Remarkable corporate crime cases
Olympus Corporation, a manufacturer of precision machineries and instruments, had been concealing losses of more than ¥100 billion that derived from its financial investment activity and was accused of misrepresenting its financial statements. The company set up a Third-Party Investigation Committee, which issued a report in December 2011. In July 2012, the FSA issued a surcharge order of ¥190 million against the company, based on the result of the SESC's investigation. The former directors were sentenced to imprisonment with suspension in July 2012, as the SESC also referred the case to the Prosecutor's Office. In addition, the company filed a civil lawsuit against the former directors. In a relatively recent development, on 16 May 2019, the Tokyo High Court ruled that the former management should be liable for damages of approximately ¥59.4 billion incurred by Olympus.
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.10
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 their positions in March 2018 to take responsibility for not detecting the problems.
On 19 November 2018, Carlos Ghosn, a former representative director and chairman of Nissan, and Greg Kelly, a former representative director of Nissan, were arrested for violating the FIEA. Ghosn, Kelley and Nissan as a legal entity were indicted on charges of violating the FIEA on 10 December 2018. The Prosecutor's Office alleged the underreporting of Ghosn's remuneration as a Nissan director in past annual securities reports. Ghosn was also arrested for aggravated a breach of trust based upon the allegation that Ghosn embezzled Nissan's money by using several foreign investment vehicles and using them for his personal benefit. It was reported that Nissan conducted an internal investigation on the alleged misconduct of top management and voluntarily contacted the Prosecutor's Office. However, Nissan was indicted together with Ghosn and Kelly, and they strongly denied the charges. As widely reported, Ghosn was smuggled out of Japan to Lebanon on 30 December 2019. The criminal procedure against Ghosn was cancelled because the criminal trial needs the accused present at the court.
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 that then develop into criminal prosecutions. More recently, companies have been 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 Rin Moriguchi is a partner and Ryota Asakura is an associate at Momo-o, Matsuo & Namba.
2 The amended Antimonopoly Act was published in June 2019 and will be effective by December 2020 (the actual Effective Date has not been decided yet). See: www.jftc.go.jp/en/pressreleases/yearly-2019/June/19061907.html.
3 Updated on 17 December 2010.
4 See: www.jpx.co.jp/english/news/3030/b5b4pj0000022z5j-att/responding_20180330.pdf. 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.' See also: www.jpx.co.jp/english/news/3030/b5b4pj0000022z5j-att/preventive_20180330.pdf.
6 See: www.jftc.go.jp/soshiki/nenpou/index_files/h30nennpou.pdf, www.jftc.go.jp/houdou/pressrelease/2019/may/190529.html and www.jftc.go.jp/houdou/pressrelease/2019/jun/190605.html. The latest annual report (English version) can be seen at www.jftc.go.jp/en/about_jftc/annual_reports/AnnualReport_files/annualreport2018.pdf.
7 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.
8 Experts include an attorney, doctor, nurse, midwife and patent attorney.