International Fraud & Asset Tracing 2021 Comparisons

Last Updated April 30, 2021

Law and Practice

Authors



Anderson Mori & Tomotsune is one of the largest international firms in Japan and has been known for serving overseas companies doing business in Japan since the early 1950s. The firm prides itself on its long tradition of serving the international business and legal communities and its reputation as one of the largest full-service law firms in Japan. Its combined expertise enables it to deliver comprehensive advice on virtually all legal issues that may arise from a corporate transaction. Anderson Mori & Tomotsune has more than 500 attorneys and the majority of its lawyers are bilingual and experienced with communicating and negotiating across borders and around the globe. It has a global presence with overseas offices in Beijing, Shanghai, Hong Kong, Singapore, Bangkok, Ho Chi Minh City and Jakarta.

In Japan, in order to recover damages caused by fraud from a fraudster, it is common for the victim to file a lawsuit for damages, claiming that said fraudster committed an illegal act. This claim may be based on an improper act, such as deceptively obtaining assets. Alternatively, in the context of an investment contract, the claim could be based on a false statement of intent to invest in the investment described in the investment contract, or on the use of funds for an investment other than the original stated investment purpose. Furthermore, cases where there is no investment at all due to fraudulent descriptions or terms in the investment contract (such as Ponzi schemes) can be regarded as a breach of contract.

In addition, any conspiracy to operate, or aid and abet, a fraudulent scheme also creates potential liability for damages as an unlawful act.

In Japan, the act of offering a bribe is an illegal act in itself. A person who commits this illegal act cannot demand the return of the bribe, as they are deemed to know that their offer was illegal in the first instance (Article 708 of Civil Code).

There have been two particularly notable fraud cases in recent decades.

Japan Life

The Japan Life Company scandal, a large-scale fraud case, was exposed in 2020. Japan Life solicited investments by selling expensive magnetic necklaces and vests at prices of between JPY1–6 million via door-to-door sales. In these sales, the purchaser entrusted the purchased goods to Japan Life, which advertised that the purchaser would earn an annual dividend of 6% if they became a "rental owner" by lending the goods to another customer. Japan Life illegally collected approximately JPY210 billion (approximately USD210 million) from around 10,000 elderly victims across Japan, while concealing the fact that the its liabilities exceeded its assets. This scheme is typical of fraudulent financial investments targeted at elderly people under the prevailing zero interest rate economic situation in Japan. The president of Japan Life, who was the architect of the scheme, and several sales representatives who received high commissions on sales, were also liable for damages as joint tortfeasors for conspiracy, or for aiding in the deceptive scheme.

World Ocean Farm

In 2007, a global investment fraud case involving the World Ocean Farm was uncovered. In this case, a fraudulent company raised about JPY85 billion from approximately 35,000 people under the pretext that investment in a shrimp aquaculture business in the Philippines would pay double dividends within one year. While the company claimed to be seeking investors to run a shrimp facility in the Philippines, where it purportedly raised shrimp in a farm the size of 450 stadiums, the fraudulent company actually repeatedly used the money it collected to pay dividends.

In Japan, both offering and accepting bribes are illegal acts that violate the Penal Code. Article 708 of the Civil Code provides that "[a] person who has tendered performance of an obligation for an unlawful cause may not demand the return of the thing tendered." This is why a person who has offered a bribe cannot demand the return of the bribe from the recipient. The above principle is based on the “clean hands” principle, which holds that courts will not provide legal remedies to those whose hands are "dirty" (ie, those who have acted unethically).

Furthermore, a person who learns that their agent has taken an illegal bribe cannot demand that the agent turn over the bribe. Even if the claimant files a lawsuit against their agent for transfer of the bribe, the court will not recognise the applicant’s right to make a claim for the bribe. This is because the court will not enforce an illegal claim: if the court allows the applicant to demand the transfer of a bribe, the court would essentially be assisting in a demand for illegal profits.

Overall, in a civil trial, an agent who has received a bribe is not required to comply with a claim for repayment of the bribe from the person who paid the bribe, nor for a transfer of the bribe from the agent's principal. However, since the act of accepting a bribe is a crime, if this act is brought to light, it is normal for the recipient to voluntarily return the bribe. This is because retaining the bribe would increase their potential criminal penalty. However, the bribe recipient is not legally compelled to return the bribe to the provider.

Article 719, paragraph (1) of the Civil Code provides that "[i]f more than one person has inflicted damages on others by joint tort, each person shall be jointly and severally liable to compensate for such damages." Furthermore, Article 719, paragraph (2) provides that "[t]he provision of the preceding paragraph shall apply to a person who induces or aids a person who commits an act, by deeming them to be a concerted person." Therefore, those who support or assist tortfeasors are jointly and severally liable for damages as joint tortfeasors.

If a tortfeasor illegally acquires property and subsequently transfers that property to another person who knows that the property was acquired via tortious conduct, it becomes difficult for the victim to recover the property via a claim in tort. Therefore, such a transfer may (i) fall under the definition of aiding and abetting the tort and (ii) be subject to compensation for damages.

Article 724 of the Civil Code stipulates that “the right to claim damages in tort shall be extinguished by prescription if not exercised by the victim or their legal representative within three years from the time when he/she comes to know of the damages and the tortfeasor. The same shall apply when 20 years have elapsed from the time of the tort."

Normally, in cases of tortious damages claims, such as those arising out of fraudulent schemes, the victim or their legal representative is more likely to know the damage and less likely to know the identity of the tortfeasor. Therefore, the right to claim may lapse after three years due to the statute of limitations. However, a 20-year statute of limitations applies to cases where fraud has been committed but the identity of the tortfeasor is not known to the victim. In other words, as long as the tortfeasor is identified within 20 years, the claimant has three years from the date of identification to file a claim. However, the claimant’s rights to claim are extinguished 20 years after the date of the incident, regardless of whether the damage or the identity of the tortfeasor was known to the claimant.

If the owner of any property transfers it due to fraud, and the recipient further disposes of that property to a third party, that third party may be requested to return the property to its rightful owner if they received said property in bad faith (eg, knowing that it was fraudulently obtained). However, if the person who acquired the property did so in good faith, the property itself cannot be forcibly transferred to its rightful owner. Despite this, the original property owner can claim the proceeds from the sale of the property as damages from the original tortfeasor. If the fraudulently obtained property has been disposed of for funds, the claimant can demand payment of those funds as damages even if the proceeds have been mixed with other money.

If the tortfeasor invests the proceeds and obtains more money as a result, the original victim may only claim an amount equal to their original loss, not the increased amount. This is because claims for damages due to tort can be made only to the extent that there is a reasonable causal relationship. Where the claimed money has been used to make a large amount of profit, which the claimant could not reasonably foresee, it is not possible to claim the return of the full amount of profits created as a result of the original funds.

Provisional attachment and provisional injunction procedures exist in order to prevent the property of tortfeasors from being dispersed or hidden. These procedures exist for civil claims in general and there are no special preservation systems which apply only for claims for damages arising from fraud.

Freezing Fraudulent Accounts for Victim Redress

There exists one exceptional system of special relief for victims of fraud in Japan. This system allows victims of wire fraud and similar offences to recover some of their losses by empowering banks to make payments to victims out of the funds seized from the proceeds of said fraud (pursuant to the Act on Damage Recovery Benefits Distributed from Funds in Bank Accounts Used for Crimes). This system was established in order to provide relief to victims of wire fraud by paying them compensation from money which has been transferred to the account of a financial institution as a result of such fraud and which is still identifiable.

Specifically, when a financial institution finds that there are reasonable grounds to suspect that a deposit account has been used for crime, that institution must promptly suspend transactions with said account and freeze it. The financial institution must then make a request to the Deposit Insurance Corporation, a government agency, to give public notice of the commencement of a procedure for seizing the monies deposited in said account. The Deposit Insurance Corporation shall, upon receiving such a request, give public notice without delay. This public notice must be made available for public inspection via the internet, and any person who has suffered damage as a result of the crime may request payment of damage recovery benefits.

Difficulties with This Process

There are two notable problems with this system.

The first is the speed with which financial institutions freeze the deposits. When a bank decides whether an account is used for a crime, it takes into consideration information provided by investigative authorities, as well as the results of its own investigation into the status of transactions related to the account, and the whereabouts of the account holder. Therefore, the speed of the bank's own investigation is important because there is a high possibility that the tortfeasor may withdraw the funds from the bank account between the time the bank receives information about a criminal wrongdoing from the victim or the Consumer Affairs Centre, but before a formal police investigation is conducted. The bank must conduct its own investigation to prevent the attitude of "[i]f there is no information from the police indicating that the account has been used in crime, that account shall not be frozen" from taking hold. Moreover, if a financial institution takes measures to suspend transactions in a deposit account upon notification from the victim or their attorney, and measures to freeze the deposit account are taken before the tortfeasor withdraws the funds, such measures will be an effective means of allowing the victim to recover damages.

The second problem is the low level of public awareness of the public notices issued by the Deposit Insurance Corporation. There may be victims who cannot (or do not) see the internet announcements, or do not know that these notices exist. A common example is elderly people, who are common targets of fraudulent schemes, who may also have difficulty using the internet. In this case, it is important for the victim to contact the police or lawyers, file a damage report promptly, and request payment of damage recovery benefits from the Deposit Insurance Corporation when a public notice is issued.

Provisional seizure and provisional injunction procedures can be used in order to prevent the concealment or dissipation of illegally obtained property by tortfeasors.

Provisional Seizure (Provisional Attachment)

For a monetary claim, a provisional seizure can be used as a means to maintain the status quo and preserve the efficacy of future compulsory execution orders. This procedure operates by selecting appropriate funds corresponding to the amount of the claim from among the monies that were allegedly tortiously obtained. When a person is deprived of cash or physical valuables by a deceptive fraudulent act, it is difficult to find out where that dishonestly acquired cash or property is being held. However, in the case of a fraudulent request to transfer money to a specific bank account, it is possible to obtain a provisional seizure order and request the freezing of the account concerned. As a general rule, banks do not freeze deposits without an order of provisional seizure issued by a court, so victims must go through the procedure of obtaining an order for provisional seizure. This attachment procedure falls under the jurisdiction of the debtor's residence, or the jurisdiction where the funds are located.

Provisional Injunction

A provisional injunction is a measure intended to maintain the status quo of a physical object when the victim of a tort has a right to demand return of that specific object from the tortfeasor and the current physical or legal status of the object may change, potentially frustrating the enforcement of that right in the future. In cases where compulsory execution is hindered or is likely to be hindered (such as when the property is converted into cash or when real estate is disposed of, when it becomes difficult to recover the property, or when it becomes difficult to locate the property due to the escape or relocation of the debtor) preservation will usually be judged to be necessary. This provisional injunction procedure is subject to the jurisdiction of the debtor's address or the place where their property is located.

Effectiveness of Seizures and Injunctions

Even if further transfer of property is made in violation of a provisional seizure or provisional injunction, as described above, that transfer does not have legal validity and will be revoked. An order for provisional injunction against real property is recorded in the real property registry, so it is deemed to be known by any person who receives the assignment of the real property and is effective against them. In other words, provisional orders in respect to land are also effective against third parties after the provisional injunction order is acquired and registered in the registry.

Security Deposit

In addition, in order to obtain an order of provisional seizure or provisional injunction, the applicant is required to provide a security deposit of approximately one third of the value of the property to be held as security in order to preserve the defendant’s right to claim damages.

A property disclosure order can only be made after the acquisition of a judgment, and an application for such an order cannot be made before the acquisition of the judgment.

A claimant in a monetary claim who has an enforceable authenticated copy of a title of obligation may file a petition for an order to disclose property against the holder of the claimed property when there is prima facie evidence showing failure to obtain full performance of a monetary claim, or prima facie evidence of failure to obtain full performance of a monetary claim even if compulsory execution against known property is implemented (Article 197 of the Civil Execution Act).

Since Japan does not have a unexplained wealth order (UWO) system, such as that of the United Kingdom, there is no way to confirm the existence of the debtor's property unless the victim files a petition for a provisional seizure order with the court, obtains the court's decision, and goes through seizure procedures against bank accounts or other property.

Therefore, there are no legal preservation procedures for property before the acquisition of a judgment, except for the provisional seizure order and provisional injunction order as described in 1.7 Prevention of Defendants Dissipating or Secreting Assets. However, these procedures cannot be executed when the property of the defendant is not known to the claimant. In addition, a petition for provisional seizure or provisional injunction may only be filed against the defendant themselves, and not a nominee.

Furthermore, in order to obtain an order of provisional seizure or provisional injunction, the applicant is required to provide a security deposit of approximately one third of the property’s value, to be held as security in order to preserve the defendant’s right to claim damages.

In Japan, there is a procedure for preserving evidence under the Code of Civil Procedure. This procedure can be used by the parties in cases where there is a risk that evidence expected to be used in civil litigation is likely to be destroyed or tampered with (Article 234 of the Code of Civil Procedure). The requirement for this procedure to be invoked is: "where the court finds that there are circumstances under which it would be difficult to use the evidence unless it has conducted an examination of that evidence in advance." This is understood to refer to cases where evidence is likely to be lost, or where the usefulness of that evidence is likely to deteriorate with the passage of time.

It should be noted that this procedure is for the court to preserve evidence by conducting an examination of evidence, such as via the examination of a witness, examination of a party, observation of physical evidence, or examination of documentary evidence, at the request of a party. Therefore, the examination of evidence is carried out by the court and not by the parties. In Japan, there is no procedure by which the parties themselves are allowed, with the permission of the court, to search for and preserve evidence at the residence or place of business of the other party.

A petitioner for the preservation of evidence is not required to make a pledge or provide any collateral to cover any potential loss that might be incurred by the other party.

In Japanese civil suits, there are several evidence-collecting procedures that allow for the disclosure of documentary evidence and other evidence from third parties.

Procedures Available Prior to the Filing of an Action

Attorney inquiry system

The attorney inquiry system is governed by the Attorney Act. Using this procedure, a bar association to which an attorney belongs makes an inquiry, at the request of that attorney – to a specific public office, or a public or private organisation – for information necessary for that attorney’s case (Article 23, paragraph (2) of the Attorney Act). If the bar association finds that an attorney’s inquiry request is reasonable, it may, in accordance with that request, make an inquiry to public offices or public or private organisations and request that they submit the necessary evidence.

However, if the matters relating to the inquiry are outside the jurisdiction of the specified public office, or the public or private organisation, or if the inquiry violates the reputation or dignity of any person, the bar association will reject the inquiry request as inappropriate. The public office, or public or private organisation subject to the inquiry has a legal obligation to report back to the bar association. Despite this obligation, there have been cases in which the target office or organisation refused to answer on the grounds of protecting the privacy of its customers, or the confidentiality obligations of public officials. There is no enforceability mechanism or penalty for non-compliance with this legal obligation. Therefore, in practice, inquiries in relation to tax, postal and telegraphic matters, and bank deposits are often rejected.

Procedures Available After the Filing of an Action

Request for document production

Upon the petition of a party, the court may request that a person in possession of specific documents (such as the Legal Affairs Bureau) send those documents to the court for use as evidence (Article 226 of the Code of Civil Procedure). Public agencies and offices have a general obligation to accept the request of the court, but they may refuse a request in certain cases, such as where the disclosure of the documents may infringe upon the privacy of an individual. On the other hand, private persons have no obligation to accept a request from the court.

Request for examination

One of the procedures that can be used after the filing of an action is a request for examination (Article 186 of the Code of Civil Procedure). This is an evidentiary examination procedure in which the court makes requests to public offices, schools, chambers of commerce and industry, stock exchanges, and other public and private organisations to conduct necessary examinations of disputed matter in the litigation. It is understood that the entities subject to the request have a public obligation to comply with the court, but there is no penalty for refusing to do so.

Document submission order

Upon the petition of a party, the court may issue an order to the other party, which holds a relevant document, to submit that document to the court (Article 223, paragraph (1) of the Code of Civil Procedure). It is also possible for the court to issue the same order to a third party, and if the third party does not comply with the order, the court can impose a non-criminal fine of up to JPY200,000 on that third party (Article 225, paragraph (1) of the Code of Civil Procedure). The current Code of Civil Procedure contains a general obligation to submit documents, and any document may be subject to a document submission order. However, the Code of Civil Procedure also provides grounds for excluding certain documents from that obligation.

When filing a petition for a document submission order, it is necessary to clearly identify and specify each document that the applicant wishes be subject to the order. However, there are cases where, at the time of filing, the applicant has insufficient information to specify the target document. In these cases, if at least the "matters by which the holder of the document can identify the document pertaining to the petition" have been specified, the court can request that the holder of the document identify and submit the document (Article 222, paragraph (1) of the Code of Civil Procedure). It is generally understood that this requires the applicant to provide criteria or information which enables the holder of the document to identify the requested document from other documents without an unreasonable amount of time or labour.

In general, a document submission order in a Japanese civil suit is merely a procedure to have necessary documents submitted as evidence; this is quite different from the discovery process found in common law, which requires extensive disclosure of evidence relevant to the case when the necessity of that evidence is not yet completely clear.

Preservation procedures such as attachment and provisional injunctions, described in 1.7 Prevention of Defendants Dissipating or Secreting Assets, need to be implemented in such a way so that the other party is not aware of them in advance, in order to ensure their effectiveness. The degree of necessary secrecy depends on the type of preservation procedure. For attachment and provisional injunctions in relation to a disputed subject matter (which are normally used in suits for the recovery of damages for wrongful harm) the court may issue a preservation order as a provisional remedy following a written hearing consisting only of a written petition and prima facie evidence (without a full hearing to give parties an opportunity to present their opinions). Even if a hearing is held, it is sufficient for the court to hear only the party filing the petition.

The procedure for the preservation of evidence, explained in 2.2 Preserving Evidence, can be carried out even if the intended defendant is unknown and cannot be identified. In this case, the court may appoint a special agent for the prospective defendant (Article 236 of the Code of Civil Procedure). When the proceedings for the preservation of evidence are undertaken against an identified defendant, however, the court is required to summon both parties on the date for the examination of evidence in order to give them both the opportunity to attend the proceedings. However, it is not necessary to summon either or both parties in "case[s] requiring urgency" (Article 240 of the Code of Civil Procedure). For example, it is generally understood that a "case requiring urgency" is one where examination of evidence becomes impossible if both parties are summoned, such as when a witness is in critical condition, or when an incident site cannot be left unattended.

Plaintiffs in civil suits in Japan lack access to strong evidence collection procedures such as discovery in common law systems. Therefore, plaintiffs need to gather sufficient evidence by themselves to prove the alleged wrongdoing. In general, however, it is quite difficult for a party to independently collect sufficient evidence to obtain a successful judgment in a lawsuit.

There are many cases in which victims cannot identify fraudsters in the first place. Therefore, victims often file criminal complaints expecting that the investigating authorities (such as the police) will reveal the identity of fraudsters and the relevant facts of the fraud. In practice, it is common for victims to reach settlements with fraudsters in order to recover damages in the course of criminal procedures. In such cases, there is an incentive for fraudsters to compensate victims because a public prosecutor may decide to drop the case against them, or seek a less severe penalty at trial. As a result, in many cases, an out-of-court settlement is reached without civil proceedings and the victim’s damages are made good to a considerable extent.

In fact, it is difficult for a fraudster to deal with civil suits in cases where they are detained during the investigation and trial of the associated criminal case. Accordingly, civil suits are often initiated after the criminal cases have been resolved. Because of this, the records of criminal cases are often used as evidence in civil proceedings by plaintiffs using means such as the attorney inquiry system or the document submission order described in 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties.

On the other hand, there is also a system which allows a sort of parallel criminal-and-civil proceeding, in the form of the restitution order system (Act on Measures Incidental to Criminal Procedures for Purpose of Protection of Rights and Interests of Crime Victims, Chapter 7). This system provides a simple and speedy solution to the issue of damages by allowing the court in a criminal trial to hear a civil claim after the defendant’s culpability has been established, and order the defendant to pay damages to victims. However, this system is available only in cases where a person is killed or injured by intentional criminal acts, such as murder or assault, and cannot be used to recover damages caused by white-collar crime.

When a plaintiff files a civil action, the court designates a first hearing date. However, if the defendant does not appear on the first hearing date and does not submit a written plea, all the facts alleged by the plaintiff in the complaint will be deemed to be true by the court (Article 159, paragraph (3) of the Code of Civil Procedure). Since the court does not need to conduct any further examination of evidence, it immediately concludes oral arguments and makes a judgment in favour of the plaintiff. Such a ruling is called a judgment by default.

If the defendant is absent on the first hearing date but submits a written plea demanding dismissal of the plaintiff's claim instead, the defendant shall be deemed to have made a statement (Article 158 of the Code of Civil Procedure). However, if the court finds it to be appropriate, in consideration of the circumstances of the trial and the status of the defendant, it may, at the request of the plaintiff, conclude oral arguments and render a judgment in favour of the plaintiff unless the defendant attends on a subsequent date.

There are also cases where the defendant attends court hearings but makes incomprehensible arguments. It is up to the defendant to decide what kind of argument to make in a civil court and to submit evidence. Therefore, if the defendant does not properly defend the case, it is possible for the plaintiff to obtain a judgment in its favour at an early stage. However, courts have the authority to ask questions and request proof in order to clarify facts or legal relationships. In some cases, the court is expected to actively exercise that authority if they do not believe that the truth has been found and, therefore, that an early judgment is likely to be inappropriate. Accordingly, in cases where the court determines that the plaintiff's victory would not deliver justice, the plaintiff may not necessarily receive a judgment in their favour at an early stage.

There are no special rules or professional codes of conduct for making allegations of fraud. As explained in 2.5 Criminal Redress, victims of fraud often seek to recover their damages from fraud in the course of criminal proceedings rather than civil proceedings. However, in practice, the hurdle for victims of fraud to have the investigative authorities accept criminal complaints, and then to commence an investigation is generally high.

In particular, when a company files a criminal complaint as a victim of corporate crime, it is necessary to conduct an internal investigation and collect as much evidence as possible regarding relevant facts, as well as seek legal advice from outside legal counsel on any legal issues relating to criminal enforcement. In fact, if the company does not respond promptly and appropriately to requests for submission of documents, authorities will not be able to take the necessary actions to investigate the alleged fraud.

A plaintiff is required to file a complaint with a court in order to initiate a civil action. The complaint must contain a statement as to the "party" it is brought against (Article 133, paragraphs (1) and (2) of the Code of Civil Procedure). In cases where the other party is a natural person, it is common to identify that party by their name and address. If that identification is insufficient, the court usually dismisses the complaint. One reason for this rule is a case precedent which holds that the parties to a civil suit are the persons subject to the effect of the judgment as the addressees of the judgment. Therefore, it is necessary to specify the identity of the parties to the extent that they can be distinguished from other people. However, for the same reason, it is sufficient that the parties are identified by the time the judgment is received, and it is not strictly necessary that the parties be identified at the time the lawsuit is filed.

In addition, the number of cases in which it is not easy to identify fraudsters, such as fraud perpetrated using the internet, is increasing. In some of these case precedents, the court held that in exceptional cases where it is difficult to identify the defendant, and the plaintiff is making the utmost effort to do so, it is impermissible to dismiss the complaint immediately without trying a request for examination, or using similar post-filing evidence-collecting procedures. Therefore, in cases where it is possible that the defendant can be identified by evidence-collecting procedures (eg, request for examination and document submission orders, as explained in 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties) available after the filing of a lawsuit, a lawsuit may be filed against an unidentified perpetrator.

In civil proceedings, when a party requests the examination of a witness and the court agrees, the court will summon the witness to examine them on the trial date. In principle, witnesses are obliged to appear, swear an oath, and testify (Article 190 of the Civil Procedure). If a witness does not appear without justification, a court may punish them through a non-criminal fine of up to JPY100,000 (Article 192, paragraph (1) of the Code of Civil Procedure). In addition, they may be fined up to JPY100,000 or punished by misdemeanour imprisonment without punitive labour (Article 193, paragraph (1) of the Code of Civil Procedure).

In addition, the court may subpoena a witness who fails to appear without justification. "Subpoena" in this context means detention of the witness and forced appearance in court. In addition, as explained in 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties, upon the motion of a party, a witness may be ordered by the court to produce documents in their possession via a document submission order. If a witness does not comply with an order to submit a document, the court can issue an order to punish them via a non-penal fine of not more than JPY200,000 (Article 225, paragraph (1) of the Code of Civil Procedure). This type of non-penal fine is sometimes called a "civil penalty". The amount of the fine is generally not large.

Under Japanese law, a corporation is "liable to compensate for any damage caused to a third party by its representative in the course of the performance of their duties" (Articles 78 and 197 of the Act on General Incorporated Associations and General Incorporated Foundations, Article 350 of the Companies Act). Therefore, if the acts (or omissions) of a corporation’s representatives meet all elements of liability in tort, including wilfulness or negligence, and if such acts (or omissions) were made within the scope of employment of that representative, the corporation will be jointly and severally liable with the representative.

It is understood that this tort liability does not specifically arise out of any particular type of legal personality, but rather is the general responsibility of an organisation acting through its representatives. For this reason, the law applies by analogy to associations without legal capacity, and to unions with a designated representative (ie, an executing person).

In practice, there are many cases where it is discovered during the course of a suit against a corporation for damages arising from fraud that the representative director and other directors had performed their duties while knowing that they were acting fraudulently. For example, in the cases of World Ocean Farm and Japan Life, which were large-scale fraud cases, criminal convictions were given to directors, including the representative director, who knowingly acted fraudulently. (See 1.1 General Characteristics of Fraud Claims for further details.)

Under Japanese jurisprudence and precedents, if a legal entity is merely a puppet of a natural person or another legal entity (a parent corporation) who or which effectively controls that legal entity, the courts are willing to look through the separate legal personality of a legal entity when it is not appropriate to treat that legal entity as a separate legal person.

Specifically, this principle applies when (i) legal personality is abused to avoid the application of the law, and (ii) the legal personality is a mere façade.

For example, if a representative of a company is found to have committed an illegal act in the name of that company, but the company does not have an office or any employees, it is possible that the court will look past the corporate status of the company as a mere façade and hold the representative directly responsible.

In principle, a company itself should pursue damages against one of its directors if that director commits fraud. However, if the decision on whether or not to pursue damages is left to the company, that company may neglect to hold the director responsible out of a sense of camaraderie or sentimentality.

Therefore, the Companies Act of Japan allows a shareholder to file a suit on behalf of a company to hold officers and certain other company-related persons liable (a so-called shareholder derivative action; Article 847 of the Companies Act and thereafter).

In principle, a shareholder derivative action can be filed by any shareholder who has held at least one share for at least six months (Article 847, paragraph (1)). In such a suit, it is possible to pursue the liability of incorporators, directors at incorporation, company auditors at incorporation, and liquidators in addition to the liability of officers, etc.

It should be noted that, as a matter of procedure, it is not possible to file a shareholder derivative action immediately after the fraud by a company officer becomes apparent. In principle, a shareholder derivative action may only be filed when the shareholder requests that the company file a suit to hold the relevant director liable (Claims to sue, Article 817, paragraph (1), Article 217 of the Companies Ordinance) and the company does not file a suit within 60 days from the date of the filing of that request.

Supporting Party and Independent Party Participation

Under the Code of Civil Procedure, there are two systems that can be used when a party wishes to participate in a claim for a fraud initiated in Japan from overseas: (i) supporting participation, and (ii) independent party participation.

Supporting participation is a form of intervention in which a third party (the “supporting intervener”) with an interest in the outcome of an action between other parties indirectly intervenes in the action to protect its own interests by assisting one of the parties (Article 42 of the Code of Civil Procedure).

Independent party participation is a form of intervention in which, where there is a dispute between three or more parties over the same rights or legal relationships and an action is already pending between two of the parties, a person other than an existing party brings a further action against an existing party to an action as an independent party who asserts that their rights are prejudiced as a result of the existing action between the other parties and that all, or part, of the subject matter of the action relates to their rights (Article 47 of the Code of Civil Procedure). There are two types of independent party participation: (i) bringing a claim and action against both the plaintiff and defendant (two-sided participation), and (ii) bringing a claim and action against only one other party in the dispute (one-sided participation).

Extraterritorial Application of Japanese Law

The Japanese court system allows overseas victims to participate as creditors in a suit as long as they have an interest in the rights and legal relationships subject to litigation and, and have the standing to do so.

Regarding the extraterritorial application of Japanese law in civil suits, Japanese law stipulates that "the formation and effect of a claim arising from a tort shall be governed by the law of the place where the result of the wrongful act occurred." (Article 17 of the Act on General Rules for Application). Therefore, in cases where any wrongful act (such as deceit) occurs overseas and any damage is incurred in Japan as a result thereof, the laws of Japan shall apply.

On the other hand, with regard to the application of Japanese law to criminal proceedings, the basic principle of Japanese criminal law is the territorial principle. This principle holds that Japanese criminal law is applicable to any person as long as the crime is committed in Japan (Article 1, paragraph (1) of the Penal Code). With regard to some serious crimes, the principle of protectionism, in which any person who commits a crime outside Japan is subject to the Penal Code (Article 2), and the principle of nationality, in which the Penal Code applies if a Japanese national commits a crime outside Japan (Article 3), apply. However, fraud, embezzlement or special breach of trust, conducted in the course of business, which are typical examples of fraudulent misconduct, are not subject to the principle of protectionism or the principle of nationality. With regard to the bribing of foreign public officials (Article 18 of the Unfair Competition Prevention Act), the principle of nationality is adopted for offences conducted outside of Japan.

Overall, Japanese courts are more reluctant to assert jurisdiction over foreign cases of fraud than their Western counterparts.

Administrative Enforcement

In cases of misconduct, administrative measures are taken against corporations as a starting point. Specific administrative actions include (i) reporting orders, (ii) business improvement orders and business suspension orders, and (iii) revocation of permits and licences.

An order to report under (i) is an administrative disposition requiring the corporation to submit reports and materials concerning its business, and generally imposes a criminal penalty if a false report is made. A business improvement order under (ii) is an administrative disposition that requests changes in business methods or improvements in the operation of businesses or facilities, etc, when the appropriateness of said business operations is called into question. A business suspension order under (iii) is an administrative disposition to suspend business operations for a specified period of time. This is the most severe administrative disposition for the business operation of a legal person. Criminal penalties can be prescribed as an enforcement action in cases where a legal person does not comply with the above administrative dispositions. In addition, administrative authorities are empowered to conduct administrative investigations as a precondition for administrative actions to be taken, and can provide administrative guidance as necessary.

Criminal Enforcement

Criminal sanctions can be imposed against individuals and corporations that commit unlawful acts. Crimes such as fraud, or embezzlement in the course of business, and special breach of trust are typical crimes punishable under the Penal Code. In addition, criminal penalties are also prescribed under the Financial Instrument and Exchange Act, the Food Sanitation Act, and the Construction Business Act. When a member of a company commits an illegal act, it is possible to punish not only that individual, but also the company itself under a dual penalty clause.

Civil Recovery

As to measures to enforce recovery of damages, there are claims for damages against individuals and corporations through civil litigation, as well as preservative and execution procedures.

In Japan, a person’s right against self-incrimination is recognised in the right to remain silent in criminal proceedings. However, there is no provision which directly recognises these rights in civil proceedings.

The accused in criminal proceedings may remain silent at all times in open court, or may refuse to answer particular questions (Article 311, paragraph (1) of the Code of Criminal Procedure). This provision corresponds to the provision relating to the privilege against self-incrimination set forth in the Constitution of Japan (Article 38, paragraph (1) ), which means that the accused is not required to make statements, even in open court. Where the accused has exercised their right to remain silent, that exercise of that right cannot be taken into consideration in findings of fact to the detriment of the accused. In addition, it is generally believed that the person exercising the right to remain silent cannot be disadvantaged in sentencing. If the accused denies the charges, they may be disadvantaged if the accused exercises the right to remain silent without providing other reasonable grounds for the denial.

While there is no provision which directly protects the right against self-incrimination and the right to remain silent in civil suits, there are circumstances in which these rights are indirectly protected. For example, when a court orders the holder of a document to produce it as evidence, the holder of that document may refuse the production of any document that contains information that could lead to criminal prosecution against, or the conviction of, the holder or their spouse, family members, etc (Article 220, paragraph (4) (a) of the Code of Civil Procedure).

There are no general provisions for attorney-client privilege in Japan. The amended Anti-monopoly Act (and the regulations under Article 76, paragraph (1) of said Act), which came into effect on 25 December 2020, introduced limited attorney-client privilege in administrative investigation procedures regarding violations of the Act that involve unreasonable restraint of trade.

Accordingly, except in the limited circumstances described above, attorney-client communications can be disclosed during the litigation of fraud claims under the Code of Civil Procedure like any other form of evidence. Such communications are not in any way protected by attorney-client privilege.

Under Japanese tort law, compensation is granted only for the monetary value of any property damage and/or psychological damage caused by fraud. In other words, the court is not allowed to add punitive damages at its discretion in accordance with any aggravating factors for the misconduct, or to dissuade the recurrence of similar misconduct in the future.

Although punitive damages cannot be awarded, it should be noted that the court has discretion in assessing the monetary value of damages. This is due to a provision which states "where it is found that any damage has occurred, if it is extremely difficult, due to the nature of the damage, to prove the amount thereof, the court may determine a reasonable amount of damage based on the entire import of oral argument and the result of the examination of evidence." (Article 248 of the Code of Civil Procedure).

In Japan, there is no specific law governing bank secrecy which prohibits banks from providing customer information to government agencies, except under certain conditions such as when criminal charges have been brought.

However, under standard business practice or contract provisions, Japanese financial institutions are considered legally bound by a duty of confidentiality not to disclose customer information obtained from customers to third parties. Customer information includes information on the details of customers’ transactions and information about customers' reputations obtained in relation to transactions with customers. On the other hand, public information is not subject to confidentiality obligations.

It should be noted that the binding effect of the confidentiality obligation is much weaker than, for example, the legal provisions on bank secrecy which exist in Switzerland and other countries.

The basic practical response of Japanese financial institutions is to co-operate with inquiries and requests for co-operation from public investigators (such as tax offices and the police) concerning deposit transactions. This is true not only in cases of compulsory investigations (for instance, inspections), but also in cases of voluntary investigations.

In addition, when an inquiry about, for example, deposit transactions, is received from a bar association or a court, it is normal practice to respond to the inquiry after obtaining the consent of the customer, even for a voluntary inquiry.

If the court issues an order to submit a document in litigation, the financial institution in possession of that document may refuse to submit those documents if they (i) contain technical or professional secrets, or other information; or (ii) were made exclusively for use by the holder of the document (Article 220 of the Code of Civil Procedure). Therefore, it is legally possible for financial institutions to refuse to disclose documents on the grounds that said documents fall under the category of documents concerning professional secrets or documents created for their own use.

Anderson Mori & Tomotsune

Otemachi Park Building
1-1-1 Otemachi Chiyoda-ku
Tokyo 100-8136
Japan

81 3 6775 1000

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Law and Practice in Japan

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Anderson Mori & Tomotsune is one of the largest international firms in Japan and has been known for serving overseas companies doing business in Japan since the early 1950s. The firm prides itself on its long tradition of serving the international business and legal communities and its reputation as one of the largest full-service law firms in Japan. Its combined expertise enables it to deliver comprehensive advice on virtually all legal issues that may arise from a corporate transaction. Anderson Mori & Tomotsune has more than 500 attorneys and the majority of its lawyers are bilingual and experienced with communicating and negotiating across borders and around the globe. It has a global presence with overseas offices in Beijing, Shanghai, Hong Kong, Singapore, Bangkok, Ho Chi Minh City and Jakarta.