The International Investigations Review: Japan
In recent years, a number of Japanese companies have faced serious scandals, including accounting fraud and falsification of product quality. Sanctions against those companies or their management are broadly divided into three categories: criminal (e.g., fines and imprisonment with labour), administrative (e.g., surcharge payment orders and revocation of permits) and civil (e.g., claims for damages).
Regarding criminal sanctions, the Public Prosecutors Office (the Prosecutors Office) in principle has the exclusive authority to decide whether to prosecute a case. The Prosecutors Office will do so if it is clear from the evidence that the suspect committed the crime and it is deemed necessary to prosecute. In other words, the Prosecutors Office may elect not to prosecute, even if it believes that the alleged conduct constitutes a crime. Only when the case is prosecuted will the courts hear the case and determine whether and what kind of criminal sanction should be imposed. The Prosecutors Office has the authority, with a court warrant, to arrest and detain suspects, to search relevant locations such as a suspect's residence and to seize relevant articles. In the course of exercising its authority, the Prosecutors Office has substantial power to use physical coercion in certain cases, such as where the suspect resists such searches or seizures.
Each administrative agency may conduct certain investigations and impose administrative sanctions in accordance with provisions of individual laws and regulations under the agency's jurisdiction. Even if companies cannot be physically coerced to follow an administrative agency's requests in investigations, applicable laws and regulations authorise agencies to impose sanctions on companies that refuse to cooperate. In light of these sanctions, among other consequences, it is unlikely for anyone to reject the authorities' requests and taking an adversarial stance towards them is likely to worsen the situation, although companies do not need to accept the authorities' allegations of possible illegal conduct. Therefore, while companies should follow the authorities' reasonable requests regarding investigations, they may also deny all or part of the allegations made against them.
The following are typical examples of powers held by certain authorities.
i The Financial Services Agency
The Financial Services Agency (FSA) has the authority to issue surcharge payment orders against certain companies that disclose securities reports containing false statements. In these cases, the Securities and Exchange Surveillance Commission (SESC), which is a subordinate organisation of the FSA, may conduct investigations. The SESC has the authority to (1) order certain persons to submit reports or materials, and (2) inspect books and documents when necessary and appropriate under Article 26 of the Financial Instruments and Exchange Act (FIEA).2
The SESC cannot physically compel persons to comply with its requests, but refusal may lead to penal sanctions, which entail imprisonment with labour for up to six months, a fine of up to 500,000 yen, or both, under Article 205 of the FIEA. In addition, the SESC may, when necessary to investigate certain crimes, conduct inspections, searches and seizures in accordance with court warrants under Article 211 of the FIEA.
ii The Japan Fair Trade Commission
The Japan Fair Trade Commission (JFTC) is also authorised to issue surcharge payment orders against businesses that commit illegal acts such as running cartels or bid-rigging. The levied amount is calculated by multiplying the amount of sales or purchases made of goods or services during the term in which the illegal acts were committed (retroactively from the investigation start date for a maximum of 10 years) by the calculation rate stipulated in the Act on the Prohibition of Private Monopolisation and Maintenance of Fair Trade (the Antimonopoly Act) (for example, 6 per cent or 10 per cent in the case of a private monopoly).
The JFTC may conduct on-site inspections of business offices and interviews in the event of suspected violations under Article 47 of the Antimonopoly Act. The JFTC cannot physically compel persons to comply with its requests, but refusal may lead to penal sanctions, which entail imprisonment with labour for up to one year or a fine of up to 3 million yen under Article 94 of the Antimonopoly Act. If certain officers or employees refuse to be interviewed or have their companies' businesses or assets inspected, the companies themselves are also subject to a fine of up to 200 million yen under Article 95 of the Antimonopoly Act. In addition, the JFTC may, when necessary to investigate certain crimes, also conduct inspections, searches and seizures in accordance with court warrants under Article 102 of the Antimonopoly Act.
iii The National Tax Agency
The National Tax Agency (NTA) has the power to impose a heavy penalty tax under certain conditions, such as when a taxpayer conceals or disguises certain facts upon which its taxes are based. The heavy penalty tax is calculated according to the legally prescribed method. The NTA has the authority to (1) obligate certain persons to answer questions or submit books, documents or other materials, and (2) inspect those materials under Article 74-2 of the Act on General Rules for National Taxes (AGRNT). Criminal sanction (i.e., imprisonment with labour for up to one year or a fine of up to 500,000 yen) shall be imposed on persons who violate such obligations under Article 128 of the AGRNT. When necessary to investigate certain crimes, the NTA may also conduct inspections, searches and seizures in accordance with a court warrant under Article 132 of the AGRNT.
Companies are expected to voluntarily report internal wrongdoings in the following circumstances.
Cartel conduct and bid-rigging
As mentioned in Section I, the JFTC has the authority to issue surcharge payment orders against companies for certain violations of the Antimonopoly Act, such as running cartels or bid-rigging. When a company participates in those illegal activities and voluntarily reports them to the JFTC, the surcharge amount may be reduced or the order discharged in its entirety. The reduced rate is based on the company's place in the order of applications for leniency for the same activity and the degree of the company's contribution in reporting the matter, and it is calculated as follows.
|Order of leniency application||Reduced rate (1), based on order of application||Reduced rate (2), based on degree of contributory reporting||Total reduced rate (3) (1 + 2 = 3)|
|Before investigation start date||1st||100%||–||100%|
|2nd||20%||Up to 40%||Up to 60%|
|3rd to 5th||10%||Up to 50%|
|6th and after||5%||Up to 45%|
|After investigation start date||1st to 3rd|
(1st to 5th, including applicants who applied before the investigation start date)
|10%||Up to 20%||Up to 30%|
|Other than the above||5%||Up to 25%|
Filling certain disclosure documents containing false statements
If a company files certain disclosure documents containing false statements, the FSA has the authority to issue a surcharge payment order against the company. If the company reports the violation to the SESC prior to the commencement of the investigation, the surcharge will be reduced by half. The levied amount is calculated based on the formula stipulated in the FIEA, which differs according to the type of violation. For example, the formula for the surcharge for filing an annual securities report containing false statements is 6/100,000 of the total market value of the issued share certificates or 6 million yen, whichever is larger.
Violations of the Act against Unjustifiable Premiums and Misleading Representations
The Consumer Affairs Agency (CAA) is authorised to issue surcharge payment orders against companies that make certain misrepresentations as defined in the Act against Unjustifiable Premiums and Misleading Representations (AUPMR). If a company voluntarily reports a misrepresentation to the CAA, the surcharge amount will be reduced by half, except in cases where the report is made in anticipation of the issuance of a surcharge payment order because of an investigation of the misrepresentation. The surcharge is calculated by multiplying the sales of the products or services concerned by 3 per cent over a three-year period.
In June 2018, a plea-bargaining system was introduced whereby the Prosecutors Office may agree to give favourable treatment to suspects or accused parties in exchange for their cooperation in solidifying a criminal case against another person, with the consent of the defence counsel of the suspect or accused. See Section V for more information on the plea-bargaining system.
Surrendering to the investigative authorities
Under the Penal Code, if a person who has committed a crime surrenders to the investigative authorities before the crime is discovered by the authorities, the sanction may be reduced at the court's discretion. It is also possible for companies to surrender themselves to the investigative authorities.
ii Internal investigations
When a company discovers wrongdoing, it will determine whether or not and how to investigate the wrongdoing, taking into account the nature of the act, the expected consequences and other relevant factors. Investigations may be conducted by (1) independent experts who do not have interests in the company, (2) internal executives and outside experts, or (3) internal executives and employees. There is no legislation that requires companies to choose which method to use. In some cases, companies must also give careful consideration to the opinions of the authorities or auditors.
To determine whether internal or external counsel should be retained, a variety of factors, such as the degree of objectivity required for the investigation and the nature of the wrongdoing, must be considered. In Japan, since neither attorney–client nor work-product privilege is generally granted (as described in Section V), the matter of privilege does not have to be taken into consideration, except in limited cases where quasi-attorney–client privilege is granted (as explained in Section VI) and engaging an external counsel is preferable.
The basic investigative techniques consist of interviewing the concerned parties and reviewing the relevant materials. Recently, conducting digital forensic investigations has become widely established. In addition, for the purpose of looking into the existence of other similar acts, companies may distribute questionnaires to officers and employees and set up a hotline to encourage whistle-blowing. Regarding interviews, while interviewees are certainly able to retain their own counsel to protect themselves from legal risks, such as incurring future criminal sanctions or damages, it is not usual in Japan for an interviewee's lawyer to attend the interview.
When officers or employees systematically commit wrongdoing, companies cannot usually expect information about the misconduct to be duly relayed under their normal internal rules or policies on reporting lines. Therefore, companies establish internal reporting systems that encourage officers and employees to 'blow the whistle', especially in the case of systematic wrongdoing. In fact, most large companies have internal reporting systems that may also cover group companies.
Currently, under the Whistleblower Protection Act (WPA), and under certain conditions, employees who, without wrongful purposes, report to certain parties that certain actions stipulated in the WPA have occurred or are about to occur are provided with special legal protection. For example, if an employer dismisses an employee on the grounds that the whistle-blowing employee 'blew the whistle' (as defined in the WPA), the dismissal will be void and the employee will be able to return to his or her original position and be entitled to back pay.
The June 2020 amendment to the WPA (to be enforced by June 2022) requires companies with more than 300 employees to establish the necessary systems to respond appropriately to whistle-blowing. In addition, those in charge of handling whistle-blowing are required to keep confidential any information identifying the whistle-blower or else they face criminal sanction (a fine of up to 300,000 yen) for violating this obligation. Also, the amendment covers not only current employees, but also former employees within one year of retirement and officers. Furthermore, the amendment stipulates that claims for damages on the grounds that the company incurred damage as a result of whistle-blowing cannot be made against the whistle-blower concerned. However, the amendment does not establish any system to grant financial incentives to whistle-blowers.3
The CAA introduced a whistle-blowing compliance management system with the purpose of improving the quality of internal reporting systems by providing more incentives for business operators to develop and promote those systems. The CAA is considering two types of internal reporting certification systems: (1) a self-declaration of conformity registration programme in which the business operator itself confirms that its internal reporting system meets certain criteria, and (2) an independent certification programme in which a neutral and fair third-party organisation will review and certify a business operator's internal reporting system. Currently, only the first type has been introduced. More than 100 companies are registered under the self-declaration of conformity registration programme.
i Corporate liability
Regarding criminal liability, in principle, when a wrongdoing is committed, only the violating employee is subject to criminal penalties and thus the company as the employee's employer itself is not penalised. However, certain laws and regulations provide that when an employee is punished, the company as employer will also be punished. For example, Article 207 of the FIEA provides that when a company employee makes a false statement on important matters in a securities registration statement, both the employee and the company will be punished – the employee with imprisonment with labour for up to 10 years or a fine of up to 10 million yen, or both, under Article 197 of the FIEA, and the company with a fine of up to 700 million yen.
Regarding civil liability, in principle, if an employee commits a wrongful act, only the employee will be liable for damages. However, there are some exceptions in which the company will be held civilly liable for the wrongdoing of its employees. For example, Article 715 of the Civil Code provides that any person, including companies, who employs another person for a business shall be liable for certain damages to any third party caused by the employee in the execution of the business unless the employer proves that it exercised reasonable care in appointing the employee and supervising the business. Therefore, companies are highly likely to be liable if their employees wrongfully damage any third party in the course of their employment.
Also, under Article 350 of the Companies Act, companies will be liable for damage to third parties caused by their representative directors or certain representatives in the performance of their duties. Moreover, it is possible for the companies themselves to be liable for damage caused in the course of business of the companies under Article 709 of the Civil Code. Plaintiffs utilise this theory in cases where they have difficulty in specifying negligence on an individual level as required under Article 715 of the Civil Code or Article 350 of the Companies Act.
Since a company may also be liable for damages arising from an illegal act committed by its employee, it can seek an indemnity from the employee, causing an actual conflict of interest between the two parties if the company pays damages. Therefore, having the same attorney represent both the company and the employee should be avoided, although there may be exceptional cases, such as where the claim against employee and company is likely to be considered groundless and unlikely to be accepted, meaning that the risk of a conflict of interest is limited.
Both criminal and administrative sanctions may be imposed on companies by the authorities depending on the applicable laws and regulations. There are various types of administrative sanctions. Representative examples include (1) issuance of surcharge payment orders that require cash payment, and (2) revocation of licences that may be indispensable for the company to continue its business.
For example, the FSA has the authority to impose administrative sanctions, such as the issuance of surcharge payment, business improvement or business suspension orders, or the revocation of registration, on financial instruments business operators.
Also, the JFTC has the authority to impose administrative sanctions such as the issuance of surcharge payment or cease-and-desist orders. For example, in the case of price cartels, the JFTC may void a price-hike decision and order measures to prevent recurrence.
Note also that administrative sanctions imposed by an administrative agency may result in other administrative agencies imposing other administrative sanctions. For example, in one case, the JFTC issued a surcharge payment order to a construction company for violating the Antimonopoly Act, which caused the local government to suspend the company's eligibility to bid on a project.
iii Compliance programmes
The existence of a compliance programme is not a legal defence. However, the authorities may perceive a company's implementation of its programme favourably when determining sanctions.
For example, when determining administrative sanctions in the financial sector, the FSA considers the appropriateness of the governance or operational control system that caused or contributed to the violation. In addition, the FSA takes into consideration as a mitigating factor whether or not the financial institution is making voluntary efforts in an appropriate manner based on the principles shared by the institution with the authorities.4
Also, in light of a Supreme Court precedent, the courts may take into account the existence and due operation of an efficient compliance programme, although, in practice, the courts would very rarely discharge the criminal liability of a company based solely on that factor. On the other hand, criminal penalties may be mitigated. In a precedent involving the bribery of a public railway corporation in relation to official development assistance projects in Indonesia, Vietnam and Uzbekistan, the Tokyo District Court considered the fact that the corporations reviewed their compliance systems and took preventive measures after the violation was committed as a factor in its relatively favourable decision for the defendant when determining the criminal sanctions.
iv Prosecution of individuals
When an authority seeks to impose legal sanctions on an employee, it is possible for the company to retain a lawyer for the employee and pay the legal fees. However, since the company as the employee's employer may also be held liable for the employee's wrongdoing, a potential conflict of interest is created between the two parties. Also, the provision of any benefits of this kind to violating employees may result in a breach of the company's officers' duty of due care of a prudent manager. Therefore, the company should carefully consider whether to provide any benefits at all to such employees.
The authorities rarely explicitly request businesses to dismiss employees involved in the wrongdoing. The reason for this may be that dismissal is severely restricted under the Labour Contracts Act. However, there may be cases in which, for example, the wrongdoing is so malicious that the authorities may not be satisfied if the company-led investigation does not result in the dismissal of the violating employee. Also, it is often necessary for companies to strictly punish violating employees to demonstrate to the authorities their tough stance against wrongdoing.
i Extraterritorial jurisdiction
In principle, the Penal Code applies to all persons who commit crimes in Japan, which holds true even if part of the crime is carried out outside the country, as long as the criminal action or result thereof is partially committed or occurs here.
On the other hand, certain laws and regulations of Japan apply to acts committed outside the country. For example, the Supreme Court held that even if a cartel is being run outside Japan, surcharge payment and cease-and-desist orders may apply if the cartel infringes upon the economic order of free competition in the country. Also, Japanese nationals may be punished for bribing foreign public officials even if they commit the bribery outside Japan.
ii International cooperation
The Japanese government may provide evidence, including transferring sentenced inmate witnesses, which may be necessary for the investigation of criminal cases in foreign states at the request of those foreign states under the Act on International Assistance in Investigation and Other Related Matters. Japan may also request investigative and other related assistance from other countries. To ensure that assistance is received, Japan has also concluded bilateral treaties on mutual legal assistance in criminal affairs with many countries.
In accordance with the Act of Extradition, Japan may respond to claims for the extradition of fugitives to any foreign country with whom it has not concluded extradition treaties, with a warranty of reciprocity to do the same for Japan as far as the laws and regulations of that country permit. In addition, where extradition treaties have been concluded with Japan, fugitives are required to be extradited under certain conditions. At present, Japan has concluded extradition treaties with the United States and the Republic of Korea.
iii Local law considerations
Non-existence of attorney–client or work-product privilege
In Japan, neither attorney–client nor work-product privilege has been acknowledged, but quasi-attorney–client privilege is recognised in limited situations (see Section V for details).
Non-existence of comprehensive discovery system
Japan does not have a comprehensive system of discovery. Parties to a civil action may, in principle, decide at their discretion whether to produce evidence. However, the court may voluntarily seek specific evidence and issue an order to produce documents under the Code of Civil Procedure. The party against whom the order is issued is obliged to produce the indicated documents, otherwise the court may (1) find the content of the documents to be true even without their being reviewed, or (2) impose a civil fine of up to 200,000 yen.
Disclosure practice of investigation reports
When serious wrongdoing is discovered at a listed company, the company is usually expected to establish an investigation committee to investigate the facts and causes, and finally disclose the entire investigation report made by the committee. However, if the incident involves a foreign country where attorney–client or other privilege is acknowledged, disclosure of the investigation report may result in the loss of the protection given by that privilege. From this point of view, there have been recent cases in which a report prepared by the company itself, based on the investigation committee's report prepared by attorneys, is disclosed instead.
Year in review
i Plea-bargaining system
A relatively recent critical legislative development was the introduction of the plea-bargaining system in June 2018. Under this system, suspects and the accused, including companies, can agree with the Prosecutors Office to receive favourable treatment, such as not being indicted, or receiving a lenient opinion regarding suitable sanctions, in exchange for cooperation in exposing the criminal acts of others. A lenient opinion does not legally restrict the court's discretion, but the court considers it when sentencing, meaning that a lenient opinion may lead to a lighter sentence. The involvement of the court is not required, but the suspect's or accused's counsel must be involved.
In one case in which the Tokyo High Court held officers and employees criminally liable for bribing a foreign public official, the company provided detailed information about the bribery to avoid prosecution. As this example illustrates, companies may also face situations in which they need to determine whether they will utilise the plea-bargaining system. To make this determination, it is critical for companies to establish and duly operate an efficient compliance programme that includes a proper internal reporting system to understand what is going on in a timely manner.
ii Recent amendment of the rules of the JFTC
The JFTC has introduced a procedure called the Determination Procedure, which provides quasi-attorney–client privilege. The Determination Procedure stipulates that the JFTC will not access any media containing confidential communications between a company and its attorneys with regard to legal opinions, as long as certain requirements are met. While the requirements for protection under the Determination Procedure are stricter than those for attorney–client privilege, the protection given is limited.5
To be protected under the Determination Procedure, attorneys who are involved in confidential communications with the companies they represent must be qualified under the Attorney Act and perform legal service independently of those companies. Foreign lawyers (and in-house counsel employed by companies) do not meet this requirement. However, if it is evident that the in-house counsel engages in legal business independently, without being under the direction or supervision of the company, they may meet the requirement.
Documents based mainly on facts, such as the results of questionnaire surveys conducted within the company and interview records, are not protected under the Determination Procedure.
For media containing confidential information to be protected, it is not sufficient to merely indicate 'attorney–client privilege' on the media. There must be an easily identifiable indication that the media contain information that is protected under the Determination Procedure. Further, such media must be stored in a specific location managed by the company (limited to locations managed by a department or an officer that handles consultations with attorneys) that is distinguishable from locations where other media are stored.
Conclusions and outlook
In the wake of the frequent occurrence of serious business scandals, the authorities, auditors and stakeholders in corporations, such as investors, have become increasingly strict about addressing wrongdoing, which is a trend that is likely to continue. Therefore, the damage incurred by companies that respond inappropriately to wrongdoing is expected to become even more serious and detrimental to their existence.
Although it is practically impossible to completely eliminate wrongdoing or the risk of scandals, it is certainly not impossible for companies to give their best response when such scandals or wrongdoing are discovered. To minimise damage, companies must take prompt and appropriate action with a view also to minimising possible future risks, such as litigation risk and the risk of incurring the various sanctions outlined in this chapter. As such, collaboration with experienced attorneys and other professionals is increasingly required and essential to corporate compliance.
1 Yasuhiko Fujitsu is a partner and Chihiro Tsukada is a senior associate at Mori Hamada & Matsumoto.
2 Since April 2009, the Ministry of Justice has been operating its Japanese Law Translation Database System (http://www.japaneselawtranslation.go.jp/?re=02), which can be used to search English translations of many laws and regulations. However, as stated on the website, only the original Japanese texts have legal effect and English translations are available solely for reference. Also, English translations may not reflect up-to-date revisions.
3 For an overview of the June 2020 amendment, see https://www.caa.go.jp/en/policy/consumer_system/assets/consumer_system_200714_0001.pdf.
5 For more information about the Determination Procedure, see https://www.jftc.go.jp/en/pressreleases/yearly-2020/June/200625.html.