White-Collar Crime 2019

Last Updated October 21, 2019

Japan

Trends and Developments


New Era of Government Investigations

In May 2016, Japan’s Code of Criminal Procedure was amended to introduce a new plea bargaining system, which came into effect on 1 June 2018. This brought a huge change in the way criminal investigations were conducted in Japan.

For global companies doing business in Japan, there are two more recent trends and changes they should be aware of: one is the practice of “independent investigation committees” (daisansha iinkai) and the other involves changes to whistle-blower protections in Japan.

Plea Bargaining Started in 2018

Under the 2016 amendments to the Code of Criminal Procedure, Japan introduced its brand new plea bargaining system, which took effect in June 2018. This amendment was based on the criticism that Japanese prosecutors’ investigations relied too much upon interrogation and confession. Also, there was an analysis that it was becoming more difficult for the prosecutors’ office to investigate white-collar crimes than before because businesses and business activities had become more complex and more cross-border focused, and that traditional methods of investigation such as conducting raids and searches were no longer as effective as they had been in the past. These problems led to calls for a new style of government investigation, especially one that featured co-operation between the prosecutors’ office and suspects and/or defendants. In addition, the great success of the leniency programme that was introduced in 2006 for investigations and enforcements involving alleged violations of the Antimonopoly Act, such as bid rigging, was a factor that supported the argument to introduce a plea bargaining system.

Overview of the plea bargaining system

Under the new plea bargaining system, prosecutors and suspects and/or indicted defendants with their defence counsel will negotiate a settlement agreement. The suspects/defendants agree to co-operate with investigations related to criminal charges against third parties, and the prosecutors will give merits, such as non-prosecution agreements and reduction of charges.

It should be noted that Japan’s new plea bargaining system is different from so-called self-reporting systems in that the co-operating party (suspect/defendant) needs to provide prosecutors with information related to the investigation of a third party’s criminal conduct, not for investigations into the co-operating party’s conduct.

Crimes covered by plea bargaining

The scope of the plea bargaining system is limited to “specific crimes”, which could be categorised into three areas: (i) organised crimes, (ii) white-collar crimes and (iii) the destruction of evidence in cases related to alleged crimes included in categories (i) and (ii).

This limitation has two important consequences: first, the suspect and/or the defendant must be under investigation for these specific crimes, and secondly, the suspect and/or the defendant must co-operate by providing the prosecutor with information regarding the specific crimes of third parties. There is no requirement that the crimes committed by the co-operating suspect and/or defendant and the crimes allegedly committed by the third parties be the same.

Category (i) organised crimes include drug crimes, firearms-related crimes and other crimes typically committed by antisocial organizations like the Yakuza. These types of crimes were likely included in the new system because in many investigations related to these crimes, it is quite difficult to indict higher-ranking members of criminal organisations who actually instructed or incited lower-ranking members to commit crimes. Under the new plea bargaining system, lower-ranked suspects/defendants can co-operate with the prosecutor by providing information regarding the instructions given by the higher-ranking members of the criminal organisation.

As with category (i) crimes, white-collar or category (ii) crimes are specifically listed in the Code. These offences include bribery, fraud, violations of the Antimonopoly Act, embezzlement, tax law, foreign bribery and insider trading.

Category (iii) crimes include the destruction of evidence, intimidation of witnesses and harbouring criminals, in cases involving crimes listed in categories (i) and (ii).

Negotiation and agreement

The parties to the negotiation and the settlement agreement are the public prosecutor and the suspect (before indictment) and/or the defendant (after indictment). Also, it is required that defence counsel for the suspect and/or defendant is involved because it is not expected that the suspect and/or defendant can fully negotiate with the prosecutor without counsel’s involvement.

In addition to individual suspects/defendants, corporations can use the new plea bargaining system. This is because a corporation can be a suspect or a defendant in cases where the Criminal Code provides criminal liability for a corporation based on the criminal conduct of one of its directors or employees. For example, if a director or employee of a corporation commits specific types of crimes, such as tax evasion and foreign bribery, the corporation can be criminally liable (fine).

The Code of Criminal Procedures does not stipulate who is entitled to initiate plea bargaining negotiations, so either the prosecutor side or the suspect/defendant side may do so.

If the parties reach a settlement, the settlement agreement needs to be signed by all of the parties, the prosecutor, the suspect/defendant and defence counsel.

Types of co-operation by suspects/defendants

The suspect and/or defendant will co-operate by doing the following:

  • (i) making true statements in interviews by prosecutors and/or police officers for investigations related to criminal charges against third parties;
  • (ii) making true statements as a prosecution witness in criminal trials of third parties;
  • (iii) submitting evidence relevant to investigations into criminal conducts of third parties; or
  • (iv) engaging in co-operative conduct incidental to (i), (ii) or (iii) above that is necessary for the purpose of the settlement agreement.

As mentioned above, it is an important feature that the co-operation must be for criminal investigation of a third party, not for the criminal investigation of the co-operating person’s conduct.

Quid pro quo obtained by the suspect/defendant through co-operation

As consideration for the suspect and/or defendant’s co-operation, the prosecutor will be able to give the following quid pro quo:

  • non-filing of indictment or criminal complaint;
  • dismissal or reduction of the criminal charges;
  • recommendation to the court for a lighter penalty;
  • petition for an expedited trial; and
  • request for summary order.

To decide what kind of quid pro quo should be given, a prosecutor considers a variety of factors, including the significance of the evidence obtained by the co-operation, and the seriousness, circumstances and relevance of the crimes regarding which the co-operating suspect and/or defendant will give information. Until the introduction of this plea bargaining system, prosecutors were not allowed to negotiate with a suspect/defendant by giving some merit in exchange for obtaining evidence for the investigation of others. Now, they are able to officially offer such consideration to the co-operating suspect and/or defendant.

Judges' role in settlement agreements

A judge is not a party to the settlement agreement. In this regard, theoretically, there is a risk that a judge will not adopt the quid pro quo that a prosecutor has agreed with a suspect/defendant to give. For example, even though the prosecutor makes a recommendation to the court for a lighter penalty, makes a petition for an expedited trial, or requests a summary order subject to the settlement agreement, there is no guarantee that the judge will also be subject to the settlement agreement. It should also be noted that there are no sentencing guidelines in Japan like the US federal sentencing guidelines. Thus, although there is some expectation that a judge will probably respect such settlement agreement, a risk still exists to some extent. In the meantime, some forms of quid pro quo, such as a non-prosecution agreement, are solely within the discretion of the prosecutors’ office. As such, there is very little risk that the prosecutors’ office will violate those portions of a settlement agreement.

If the agreed quid pro quo is not actually given, the suspect and/or defendant will be entitled to withdraw from the settlement agreement. In such case, the suspect/defendant will have no obligation to co-operate with the prosecutor anymore, and the prosecutor will not be able to use the evidence given through the co-operation by the suspect/defendant. Vice versa, the prosecutor will be entitled to withdraw from the settlement agreement if the suspect/defendant violates the settlement agreement. In such case, the prosecutor will not be obliged to give the suspect/defendant the agreed merits, such as non-prosecution.

Application of the plea bargaining system

Since the introduction of the new plea bargaining system, there have been two reported cases where this new system has been applied.

The first case was a foreign bribery case where Mitsubishi Hitachi Power Systems Ltd, a joint venture company between Mitsubishi and Hitachi (MHPS), co-operated with the prosecutors’ office and reached a settlement agreement in June 2018.

According to the MHPS announcement, in February 2015, an MHPS importer attempted to unload components for the construction of a power plant in Thailand. However, the unloading was stopped and a Thai official demanded to pay fees to allow the unloading to continue. To avoid the delay and damages of the construction project, MHPS executives prepared the money and made the payment through the importer to the Thai official. The amount was approximately THB11 million.

In March 2015, MHPS discovered this fact through an internal report from a whistle-blower, conducted internal investigations and submitted a report to the Tokyo district prosecutors’ office in June 2015. Since that time, the company has co-operated with the prosecutors’ investigations and the prosecutors’ office made a plea bargaining offer to MHPS in June 2018. According to the settlement agreement, three former executives of MHPS were indicted in July 2018 but the company itself was not indicted.

This case clearly demonstrated that a company is able to make use of the plea bargaining system and in such case, a company will be giving information with regard to its executives and/or employees as “third parties” against whom the prosecutor would conduct investigations.

This was a different situation from the typical case that the media and practitioners had discussed before the introduction of this system, in which a mid-level manager under arrest or investigation for a crime would co-operate with the prosecutor by giving evidence that he or she had received an instruction from his or her supervisor(s), including the executives, that led to the commission of the crime. Under these circumstances, the manager would obtain sufficient quid pro quo. However, since many companies are now making substantial efforts for compliance, they will definitely consider this plea bargaining as one option, because companies need to make the wrongdoer (its executives or employees) be fully liable for their conduct. In such cases, the company will co-operate with prosecutors by giving necessary information with regard to the criminal investigations into its executives and/or employees as “third parties.”

The second case concerns Nissan Motor Co’s chairman Carlos Ghosn, which is still under ongoing investigations (at the time of this writing). Nissan announced that this case started from whistle-blower information, and after conducting thorough internal investigations, the prosecutors’ office and other executives of Nissan had agreed to a plea bargain.

Importance of robust compliance programmes

Because this plea bargaining system has brought about a new style of government investigation in the area of white-collar crimes, companies and executives now have a potential risk of being investigated by using this new plea bargaining system through the co-operation of lower-level employees of their own company or executives or employees of other companies. Companies doing business in Japan now need to know that the importance of having a robust compliance programme is even more acute, especially the importance of having a well-designed and well-working internal whistle-blowing system.

Independent Investigation Committees

Another topic that companies doing businesses in Japan should know relates to the practice of creating a so-called Independent Investigation Committee (daisansha iinkai), which Japanese companies organise when white-collar crimes or other corporate fraud cases occur. It has been widely used in practice for Japanese companies to conduct internal investigations, and there are some unique features.

Formation of independent investigation committees

An independent investigation committee is not required or regulated under the Japanese laws. Instead, there is a soft law rule: the Guidelines for Independent Investigation Committees published by the Japan Federation of Bar Associations in 2010 (the “JFBA Guidelines”). The JFBA Guidelines are not compulsory, but it is a common practice in Japan to consider the requirements, at least to some extent, and in many cases, a company dealing with a scandal fully complies with the JFBA Guidelines.

The distinguishing feature of the JFBA Guidelines is a very high-level requirement of the independence of the committee. No one who has any interest in relation to the company under investigation can become a member of the committee. For example, a “komon” lawyer, who is a regular outside counsel to the company, cannot be a member. Also, the power to write the final report belongs fully to the committee, and the committee will not disclose the final report, even in part, before the committee officially submits it to the company.

Also, the JFBA Guidelines require that the corporation under investigation disclose the final report submitted by the independent investigation committee to the stakeholders without delay unless some exception applies. As for the meaning of “stakeholders,” the JFBA Guidelines state that it will be decided on a case-by-case basis, but if the scandal is about a public company and affects the trust of the capital market, or if it is related to an indefinite or a large number of consumers, the JFBA Guidelines require the publication of the whole of the final report in principle.

The ultimate purpose of the JFBA Guidelines is for the company in issue to recover its trustworthiness and sustainability, and for this purpose, the JFBA Guidelines require the company to voluntarily organise an independent investigation committee to fulfil its accountability to the stakeholders in terms of corporate social responsibility. The practice of using independent investigation committees has been growing because of increased awareness of the committees and their importance. However, there has been strong criticism that in several cases, companies facing scandals created independent investigation committees that did not have enough independence to conduct thorough investigations.

In February 2016, Japan Exchange Group, Inc (JPX) published the “Principles for Responding to Corporate Scandals” (the “JPX Principles”). As the background of this new set of principles, JPX noted, “not all companies address scandals with the proper sense of resolve and urgency. There are cases where companies fail to pinpoint the root causes of problems or implement sufficient recurrence-prevention measures, for example. In other cases, companies might not ensure that their investigative frameworks have an objective, neutral standpoint or disclose information in a prompt, accurate manner.” The JPX Principles emphasise that when a company in scandal establishes an independent investigation committee, the committee will need to have the necessary independence, neutrality and expertise. The essence of the JFBA Guidelines is once again recognised.

Litigation risk and privilege issues under the JFBA Guidelines

From another standpoint, there is an argument that the JFBA Guidelines need to be reconsidered, especially in that the requirement that the final report be published can bring risks to the corporation such as litigation. For instance, in the case of corporate fraud that could have effects inside and outside of Japan, like the case of Kobe Steel Group in 2017, it is extremely difficult for the company in issue to fully publish the independent investigation committee’s final report because it could easily lead to litigation in countries with extensive evidence disclosure requirements, such as the USA with its pre-trial discovery process. The company would need to consider how much it could make use of its attorney-client privilege and when it might need to waive it. At present, the JFBA Guidelines do not appear to include such considerations.

Global companies doing businesses in Japan will need to consider both compliance with the JFBA Guidelines and such litigation risk and attorney-client privilege.

Whistle-blowers Protection

In the field of white-collar criminal defence, whistle-blower protection is critically important to prevent and investigate wrongdoings at early stages. After the US movement to protect whistle-blowers after experiencing the Enron and Worldcom cases in the early 2000s, Japan had a similar movement, because of several serious corporate fraud cases that had been revealed by the efforts of whistle-blowers. Japan’s Whistleblower Protection Act was passed in 2004 and came into effect in 2006.

After more than a decade, there have been recent discussions and changes in this whistle-blowers protection area in Japan. These discussions and changes are based on corporate fraud and white-collar criminal cases where internal whistle-blowing systems did not work at all.

The Consumer Affairs Agency (CAA), the Japanese government section in charge of this area, has been reforming the whistle-blowers protection regime, especially since 2016, to contribute to corporate compliance and safer consumer life. The following are the three main areas: (i) amendment of the internal whistle-blowing system guidelines, (ii) introduction of the self-accreditation certificate regime and (iii) expected amendment of the Whistleblower Protection Act.

Guideline amendment

The CAA amended the Guidelines for enterprises with regard to the Whistleblower Protection Act issued in 2005 and published new guidelines titled “the Guidelines for enterprises with regard to maintenance and operation of internal whistleblowing systems” (the “New Guidelines”) in 2016.

The New Guidelines substantially increased in volume – the number of items more than doubled. The New Guidelines emphasise the importance of enterprises preparing an environment where employees are able to internally report or consult without concern. To do so, the New Guidelines also request the top management to take the lead to promote this effort. Protection of confidentiality of whistle-blowers and their reports and consultation, and prohibition of retaliation to whistle-blowers are the key elements.

The CAA also amended the guidelines for the national and local governmental agencies in 2017. The amended guidelines show guidance for the governmental agencies who receive information from whistle-blowers working at enterprises that the agencies supervise. This indicates that whistle-blowers working at companies are encouraged to speak up to the supervising authorities. Companies need to further polish their internal whistle-blowing systems.

Self-Accreditation Certificate regime and WCMS mark

In February 2019, the CAA started the Self-Accreditation Certificate regime, where companies self-evaluate their internal whistle-blowing systems according to the criteria issued by the registration organisation designated by the CAA. Companies who believe they satisfy the criteria submit an application to the registration organisation, and if it is confirmed that they satisfy the criteria, the companies are registered with the Self-Accreditation Certificate and allowed to use the Whistleblowing Compliance Management System Mark (the “WCMS Mark”). As of 29 October 2019, 29 companies are registered with the Self-Accreditation Certificate, and it is said a lot more companies are waiting for their registration.

The CAA also announced that later on, it will start the third-party certificate regime. Details, including the timing of the introduction of this next step, have not been decided.

Expected amendment of Whistleblower Protection Act

The CAA had planned to amend the Whistleblower Protection Act to better protect whistle-blowers. In December 2018, it was announced that the following issues will be addressed or at least discussed through this amendment: enlarge the subject scope of whistle-blowers and reportable facts under the Act, lessen requirements for whistle-blowers to be protected when reporting to the supervising authority, require corporations to have internal whistle-blowing systems and introduce administrative measures against retaliation.

As can be seen in the increasing number of registered Japanese companies with Self-Accredited Certificates, the internal whistle-blowing system has been a hot issue in Japan. Corporations doing businesses in Japan should be aware of this changing area.

Nozomi Sogo Attorneys at Law

Hulic Kojimachi Bldg. 8th floor
3-2, Kojimachi, Chiyoda-ku
Tokyo, 102-0083
Japan

+81 3 3221 2400

yuki@nozomisogo.gr.jp www.nozomisogo.gr.jp
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Trends and Development

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Nozomi Sogo Attorneys at Law is a medium-sized Japanese law firm based in Tokyo and Los Angeles, providing diverse legal services, including crisis management, white-collar criminal defence, antitrust, and various corporate and transactional matters. One of the firm's features is great relationships with the Japanese governmental and supervisory agencies: three of Nozomi's attorneys were former public prosecutors in the special investigation team, including its representative partner Tsugio Yada; the Bank of Japan; Financial Services Agency; Securities and Exchange Surveillance Commission; the Japan Fair Trade Commission; and Consumer Affairs Agency. The firm regularly handles matters relating to government investigations and compliance. The matters it has handled in the area of cross-border white-collar criminal cases include: FCPA defence, US antitrust defence and civil litigation, and advice for companies related to global compliance programmes and whistle-blower issues. With speed, integrity, passion and strong teamwork, the firm strives to help all its clients realise “Nozomi”, Japanese for “Hope”.

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