EXPERT INSIGHT 60 WWW.LAWYER-MONTHLY.COM | MAR 2022 Navigating the Fraud Landscape of Japan W The Japanese legal system is unique in its approach to allegations of corporate fraud. Corporations where signs of fraud are detected are also expected to address the issue proactively and transparently. Yoshie Midorikawa of Miura & Partners expounds on these aspects of Japanese law and how they have shaped the landscape of whitecollar crime in the country today. hat kinds of fraud investigations are growing more common in Japan? The most common types of fraud investigations in Japan involve accounting fraud, falsification of data or quality of products, and insider trading. Regarding falsification of data or quality of products, companies often conduct their own investigation and issue a news release on their own, even if the falsification is not likely to trigger a compulsory recall or any serious violation of regulations. Companies conduct their investigations to avoid damage to their reputation from being seen as trying to hide their problems from the public. In addition to these classic fraud cases, investigations concerning “greenwashing” are likely to become the next trend. Since 2017, when the Government Pension Investment Fund (GPIF) – the largest of its kind in the world – began allocating its funds to ESG investment, more and more Japanese companies have embarked on ESG-related investments. Although there are not yet any disclosure rules that specifically regulate ESG-related investments in Japan, the market awaits the disclosure regulations on “greenwashing.” Once the regulators implement the disclosure rules, violations would fall within the scope of false statements of the securities report, which could become another type of fraud investigation. How would a typical company respond to a sign of fraud being uncovered? When a listed company finds a sign of fraud, the most common response is to voluntarily establish a committee to conduct an internal investigation or a special committee to conduct an independent investigation. The sign of fraud could be found through an internal audit process, whistleblowing, or tipping off from business partners or consumers. It is important for the suspected company to commence its own investigation voluntarily to show good faith to the market and consumers even before the beginning of governmental investigations. In most cases, the company appoints accountants and lawyers as their investigation committee members if they establish a special committee. Former judges and prosecutors are the preferred candidates. The report prepared by the committee is often released to the public to show the company’s good faith to the market and consumers. This is a practice that is unique to Japan. The report often identifies the causes of the problem, who is responsible for the problem, and what the company should do to prevent a similar case from occurring in the future. What would happen after such a report was released? The release of the report may trigger a formal government investigation. In a case regarding false statements in securities reports, the Securities and Exchange Surveillance Commission (SESC) may commence their own investigation which could result in an administrative fine on the company. Following the SESC investigation, interested parties may subsequently opt for litigation. For example, parties that were involved in fraudulent transactions without realising that the transactions were fraudulent could seek damages against the company. Another example would be securities litigation. Some investors may commence litigation against the company to seek damages caused by the scandal. The investors may also commence deliberative action against directors of the company. The company should be mindful of this possible series of events which might follow the disclosure of the reports by the investigation committee. In practice, the committee prepares two sets of reports, one for the company and another to be disclosed to the
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