Financial crime in Japan: overview

A Q&A guide to financial and business crime law in Japan.

The Q&A gives a high level overview of matters relating to corporate fraud, bribery and corruption, insider dealing and market abuse, money laundering and terrorist financing, financial record keeping, due diligence, corporate liability, immunity and leniency, and whistleblowing.

To compare answers across multiple jurisdictions, visit the Financial and Business Crime Country Q&A tool.

This Q&A is part of the global guide to financial and business crime law. For a full list of jurisdictional Q&As visit www.practicallaw.com/corporatecrime-mjg.

James E Hough, Daniel P Levison and Yukihiro Terazawa, Morrison & Foerster LLP (Registered associated offices of Ito & Mitomi)
Contents

Fraud

Regulatory provisions and authorities

1. What are the main regulatory provisions and legislation relevant to corporate or business fraud?

The principal statutes that apply to corporate or business fraud and the principal investigative or regulatory authorities are:

  • The Penal Code (Act No. 45 of 24 April, 1907) (Penal Code). The regulatory authority is the Ministry of Justice (MOJ).

  • The Companies Act (Act No. 86 of 26 July, 2005) (Companies Act). The regulatory authority is the MOJ.

  • The Financial Instruments and Exchange Act (Act No. 25 of 13 April, 1948) (FIEA). The regulatory authority is the Financial Services Agency (FSA) and the Securities and Exchange Surveillance Commission (SESC).

  • The Unfair Competition Prevention Act (Act No. 47 of 19 May, 1993) (UCPA). The regulatory authority is the Ministry of Economy, Trade and Industry (METI).

Where an individual or corporation is suspected of violating these statutes, the police and/or the public prosecutor's office have the power to conduct investigations into such suspected misconduct. The SESC can also conduct investigations into suspected violations of the FIEA.

The Penal Code, which includes core criminal offences, such as fraud and bribery, applies only to individuals. It applies to Japanese nationals for crimes committed anywhere in the world, as well as to non-Japanese nationals for crimes committed in Japan. Prohibitions against corporate criminal conduct are set forth in specific statutes, such as the UCPA. These statutes can also apply to criminal acts outside of Japan.

Generally, businesses in Japan are regulated through specific legislation (for example, the Pharmaceutical and Medical Device Act, the Law against Unjustifiable Premiums and Misleading Representations, the Food Sanitation Law, the Insurance Business Law, and so on). Various ministries and agencies within the Japanese government supervise businesses subject to these laws. These agencies also promulgate administrative guidelines.

See Question 4, Civil/administrative proceedings or sanctions.

For more information on the MOJ, the FSA, the SESC, METI and the public prosecutor's office see box, The regulatory authorities.

Offences

2. What are the specific offences relevant to corporate or business fraud?

In order to convict a corporation or individual of a criminal offence, the public prosecutor must establish beyond reasonable doubt both that the criminal act occurred, as well as that there was sufficient criminal intent.

Fraud

Article 246 of the Penal Code prohibits individuals from defrauding another person and/or company of property. Where a person obtains a trade secret through an act of fraud, that person can be charged with violating Article 21 of the Unfair Competition Prevention Act (UCPA). Under the revised UCPA, which became law on 3 July 2015 and will come into force on 3 December 2015, a victim of trade secret theft does not need to submit a complaint in order for the prosecutor to bring a charge, contrary to the prior provision.

Theft

Individuals are prohibited from stealing the property of another person and/or company under Article 235 of the Penal Code. Theft of a trade secret is also punishable under Article 21 of the UCPA. As discussed above, under the revised UCPA, which will come into force on 3 December 2105, a victim of trade secret theft does not need to submit a complaint in order for the prosecutor to bring a charge, contrary to the prior provision.

Misappropriation (embezzlement)

Individuals are prohibited from embezzling the property of another person and/or a company in the course of the management or operation of a company (Article 253, Penal Code).

General breach of trust

An individual who breaches his duties to another person and/or company, with whose affairs he is charged, for the purpose of promoting his own interest or a third party's interest, or inflicting damage on another person and/or company can be prosecuted under Article 247 of the Penal Code.

Aggravated breach of trust by an officer or director

An officer or director who breaches his or her duties to a joint stock company (kabushiki kaisha) for the purpose of promoting his own interest or the interest of a third party, or inflicting damage on the joint stock company (for example, where a director of a bank approves a loan to a third party without adequate repayment capacity and causes financial damage to the bank) can be prosecuted under Article 960 of the Companies Act.

Misrepresentation

Individuals who file an offering disclosure document containing a false statement, or who, in the course of a securities transaction, conduct an illegal act (such as threatening investors or misrepresentation) can be prosecuted under Articles 157 and 158 of the Financial Instruments and Exchange Act (FIEA). An officer or director who makes false statements at the time of the sale of shares, stock options, bonds, or bonds with stock options can be prosecuted under Article 964 of the Companies Act.

A person who has misrepresented information about goods or service can be prosecuted under Article 21 of the UCPA.

For more information on directors and managers' duties and liabilities, see PLC Corporate Governance and Directors' Duties Multi-jurisdictional guide.

Enforcement

3. Which authorities have the powers of prosecution, investigation and enforcement in cases of corporate or business fraud? What are these powers and what are the consequences of non-compliance?

Authorities

The relevant authorities (see Question 1) can use a number of methods for conducting investigations, including voluntary and compulsory requests for information. They can also apply to a court for a search warrant in serious cases. Where an investigative authority concludes that a crime has been committed, it can refer the matter to the police and/or the public prosecutor.

Prosecution powers

Administrative agencies do not generally have the power to conduct searches or seizures even with a warrant, nor do they have the power to compel the businesses under their jurisdiction to respond to requests for information or documents. However, it is common for a regulatory government agency to request voluntary co-operation with a government investigation. A company that is the subject of a voluntary investigation can hire a lawyer to observe the investigation. In practical terms, the company has little option but to co-operate, because if the company refuses, it can be subject to administrative action, which can range from a mere notice of non-compliance to a business improvement order, and in the worst case, to a business suspension order, which would prevent all or part of a company's business from operating for a certain period of time.

Powers of interview

The police and/or the public prosecutor may request those who are not arrested to submit to a voluntary interview. Also, the police and/or the public prosecutor can conduct compulsory interviews of those who are arrested (Article 198(1), CCP).

Powers of search/to compel disclosure

Where there is a suspicion of a violation of the relevant statute, the police and/or the public prosecutor can apply to a court for a search warrant permitting the search and seizure of relevant evidence at the premises of a company or individual suspected of committing the violation. The application is made ex parte (that is, without notice to the subject of the search warrant) and the warrant is usually issued several days after application. Relevant documents and/or materials that establish prima facie proof of a violation must be submitted. (Some searches can be conducted by administrative agencies (that is, authorities other than the police and the public prosecutor's office), where authorised by statute, for example, the tax laws and the FIEA.)

Where a search warrant is issued, the police and/or the public prosecutor can search premises and seize any materials within the scope of the warrant. There is no exception made for materials which would be covered by legal advice privilege or litigation privilege under the common law system. However, under Articles 222 and 105 of Code of Criminal Procedure (CCP), a lawyer may object to the seizure of materials that include confidential information which is held pursuant to a legal service contract. The police and/or the public prosecutor must provide an inventory of the seized documents and/or materials to the subject of the warrant.

While the subject of a warrant can request that a lawyer be present at the investigation, the CCP does not guarantee this right and the request can be granted or refused at the discretion of the police officer and/or the public prosecutor.

Court orders or injunctions

As explained above, the police and/or the public prosecutor can apply to a court for a search warrant permitting the search and seizure of relevant evidence. The courts themselves are not involved in the review of evidence before the first court hearing takes place.

Extra-territorial jurisdiction

If a Japanese citizen or entity organised under Japanese law commits certain acts, such as business fraud, outside Japan, the Penal Code, the Unfair Competition Prevention Act (UCPA) and/or Companies Act may apply. Details regarding how Japanese enforcement agencies can conduct activities in a foreign country depend on the laws of that country and agreements that country may have entered into with Japan. Generally, a Japanese enforcement agency cannot conduct an investigation or arrest a suspect outside Japan without the co-operation of local authorities. However, the enforcement agency can request that foreign authorities conduct an investigation and arrest the suspect through diplomatic channels or, more frequently, through the International Criminal Police Organization (INTERPOL).

With regard to searches and seizures abroad, a Japanese court would not have jurisdiction to issue a search warrant to be executed outside Japan.

Protections available

With respect to voluntary interviews, although the CCP provides that those who are not arrested can leave the interview room at any time, it is reported that in many cases police and/or the public prosecutor have practically prohibited such interviewees from doing so. Interviewees for both voluntary and compulsory interview have the right to remain silent (Article 38(1)(2), Constitutional Law, Article 198(2), CCP). A right to counsel is provided under Articles 34 and 37(3) of the Constitutional Law.

Penalties

4. What are the potential sanctions or liabilities for participating in corporate or business fraud?

Civil/administrative proceedings or sanctions

Depending on the gravity of the infraction, regulatory agencies can impose penalties including:

  • Administrative penalties (surcharges).

  • Rescission of business licences or registrations.

  • Business suspension, improvement orders or recommendations.

  • Warnings against future violations.

  • Debarment from government contracts.

Before any penalty is imposed, the subject has the opportunity to be heard before the administrative agency under the Administrative Procedure Act (Act No. 88 of 12 November, 1993) (APA) or the Financial Instruments and Exchange Act (FIEA). Any decision made by the administrative agency can be appealed to a district court.

While the violation of administrative regulations and guidelines does not directly carry any criminal penalty, non-compliance can result in the relevant government agency issuing an order notifying a party of its non-compliance and ordering it to take corrective action. Non-compliance with such an order can trigger criminal penalties under the relevant statutes. For this reason, compliance with administrative guidelines is mandatory in practice.

Criminal proceedings

Penalties. As discussed above, the Penal Code only applies to individuals. However, a fine can be imposed on legal persons where the relevant statute prescribes liability. Generally, imprisonment includes hard labour. Any proceeds of fraudulent conduct are subject to confiscation (or collection of a sum of equivalent value in lieu of confiscation) (Articles 19 and 19-2, Penal Code).

The Penal Code stipulates the following penalties:

  • Fraud. Fraud is punishable by imprisonment of up to ten years (Article 246, Penal Code).

  • Theft. Theft is punishable by imprisonment of up to ten years or a fine of up to JPY500,000 (Article 235, Penal Code).

  • Misappropriation (embezzlement). Embezzlement is punishable by imprisonment of up to ten years (Article 253, Penal Code).

  • General breach of trust. General breach of trust is punishable by imprisonment of up to five years or a fine of up to JPY500,000 (Article 247, Penal Code).

  • Criminal proceedings under the Companies Act. There are various criminal proceedings which can be brought under the Companies Act, including:

    • Aggravated breach of trust by an officer or director of a joint stock company is subject to imprisonment of up to ten years or a fine of up to JPY10 million, or both (Article 960, Companies Act).

    • Misrepresentation by an officer or director of a company in connection with the issuance of shares or bonds is subject to imprisonment of up to five years or a fine of up to JPY5 million, or both (Article 964, Companies Act).

  • Criminal proceedings under the UCPA. Under Article 21 of the Unfair Competition Prevention Act (UCPA), a person who obtains a trade secret by an act of fraud or theft is subject to imprisonment of up to ten years or a fine of up to JPY10 million, or both. If such fraud or theft was conducted in relation to the employer's business, the employer is subject to a fine up to JPY300 million. Under the revised UCPA, the following cases are punished more severely:

    • A person who obtains a trade secret by an act of fraud or theft is subject to imprisonment of up to ten years or a fine of up to JPY20 million, or both. If such fraud or theft was conducted in relation to the employer's business, the fine imposed on the employer will be up to JPY500 million.

    • If the act involves the use or sale of trade secrets overseas, it is punishable by imprisonment of up to ten years or a fine of up to JPY30 million, or both. If such fraud or theft was conducted in relation to the employer's business, the fine imposed on the employer will be up to JPY1 billion.

  • Criminal proceedings under the FIEA. Under Article 197 of the FIEA, securities-related fraud can be punished by imprisonment of up to ten years, or a fine of up to JPY10 million, or both. Where a representative or employee of a company commits such an act, the company can be punished by a fine of up to JPY700 million (Article 207, FIEA).

Right to bail

Voluntary or mandatory bail is available after indictment subject to court discretion and payment of bail. The bail rate is still relatively low in Japan (less than 20% of those detained are granted bail).

A sentence of imprisonment may be suspended for one to five years. When such suspended sentence is imposed, the accused may avoid imprisonment if he does not commit any crime again during the period of the suspended sentence (Article 25, Penal Code).

A person sentenced to imprisonment (without suspension of execution) may be paroled by a disposition of the Ministry of Justice after that person has served one-third of the term sentenced or ten years in the case of life imprisonment (Article 28, Penal Code).

Civil suits

An aggrieved party can file an action for damages or for restitution for unjust enrichment under the Civil Code.

Class actions

Class actions are not recognised in Japan. However, Japan has adopted a so-called "consumer organisation litigation system" whereby the Prime Minister can certify particular consumer organisations, such as the Consumers Organisation of Japan, as qualified to represent consumers generally. These organisations, acting on behalf of consumers, can file for injunctions against companies that commit fraudulent acts. Two major differences between this system and the US class action system are that:

  • Classes cannot be formed under the guidance of attorneys, actions can only be filed by qualified consumer organisations.

  • Qualified consumer organisations are only able to apply for injunctions, they are not permitted to file a claim for damages.

 

Bribery and corruption

Regulatory provisions and authorities

5. What are the main regulatory provisions and legislation relevant to bribery and corruption?

Criminal procedures

The bribery of domestic and foreign officials, as well as commercial bribery, is prohibited under the following legislation:

  • Article 198 of the Penal Code prohibits the bribery of Japanese public officials.

  • Article 18 of the Unfair Competition Prevention Act (UCPA) prohibits the bribery of foreign public officials.

  • Articles 967 and 968 of the Companies Act prohibit the bribery of a director to cause the director to violate his fiduciary duties to the company or to shareholders.

  • The preparation of financial records and statements in order to conceal bribes is prohibited under the Companies Act and the Financial Instruments and Exchange Act (FIEA) (see Question 23).

Supervisory and other guidelines

METI has published best practice guidelines entitled "Guidelines to Prevent Bribery of Foreign Public Officials" (METI Guidelines, revised on 30 July 2015). In addition, the FSA has issued supervisory guidelines on internal controls. The FSA's inspection manuals also contain recommendations and guidance for best practice regarding compliance generally. While bribery is not explicitly covered in the FSA's guidelines and inspection manuals, robust internal controls and compliance procedures are likely to help minimise the risk of corrupt conduct. See also Question 4, Civil/administrative proceedings or sanctions.

Specific cases

There has been relatively little enforcement of Japan's foreign anti-bribery laws. There are only four reported cases:

  • The first case involved the bribery of two foreign government officials by a senior executive and a lower ranking employee of a foreign subsidiary of a Japanese company in order to obtain favourable treatment in a foreign public procurement contracting process. The bribes were in the form of gifts, worth approximately JPY800,000. The company did not win the contract, the value of which is not specified. The senior executive, a Japanese national, was convicted and fined JPY500,000. The employee, also a Japanese national, was convicted and fined JPY200,000. The facts that gave rise to the case took place in 2004, and the convictions were obtained in 2007. This case was detected through a whistleblower.

  • The second case involved the bribery of a senior official of a foreign public procurement authority in relation to a substantial infrastructure project that was financed in part by official development assistance from Japan. Four Japanese defendants were convicted under the foreign bribery offence in the UCPA. A senior executive of a Japanese company was sentenced to imprisonment with hard labour for two years and another executive of the company, a manager of the company, and a representative of a paper subsidiary in a third country, were sentenced to imprisonment for two and a half years, one and a half years, and 20 months, respectively (the execution of the custodial sentences was suspended for three years). The company was also convicted and fined JPY70 million.

  • The third case involved the bribery of a Chinese local government official by a senior managing director of a Japanese automobile parts manufacturer so that the local government official would overlook illegal factory operations. The managing director was accused of paying HKD30,000 and giving a luxury bag worth approximately JPY140,000. The senior managing director was subject to a summary procedure and fined JPY500,000. The bribes were allegedly more than JPY50 million in aggregate, but the public prosecutor was unable to prosecute the entire amount because of the statute of limitations.

  • The fourth case involved the payment of a total of nearly JPY150 million in bribes to Vietnamese, Indonesian and Uzbek railways officials in return for work on state-run railway projects funded by Japanese Overseas Development Assistance by executives of a transportation consulting company. With respect to Vietnam, the defendants paid nearly JPY70 million in kickbacks to three Vietnamese officials between 2009 and 2014 to obtain work orders for various urban rail projects. The defendants also gave JPY20 million in rebates to five Indonesian transportation ministry officials between 2010 and 2013, and JPY54 million to three Uzbek railway officials from 2012 to 2013. The conduct relating to Vietnam was uncovered by the Japanese tax authorities in April 2013. Three executives and former executives pled guilty, and all of them were given a two to three year suspended sentence of imprisonment. The company was also convicted and fined JPY90 million.

For more information on METI and the FSA, see box, The regulatory authorities.

 
6. What international anti-corruption conventions apply in your jurisdiction?

Japan signed the OECD Convention on Combating Bribery of Foreign Public Officials 1997. On 18 September 1998 implementing legislation in the form of amendments to the Unfair Competition Prevention Act (UCPA) (to become Article 18 of the UCPA) was enacted, which came into force on 15 February 1999.

Offences

7. What are the specific bribery and corruption offences in your jurisdiction?

Foreign public officials

Giving, offering, or promising to provide any gain to a foreign (that is, non-Japanese) public official for the purpose of causing that foreign public official to act or refrain from acting in relation to his duties to acquire an improper business advantage in an international commercial transaction is prohibited (Article 18(1), Unfair Competition Prevention Act (UCPA)). This applies both where a Japanese citizen offers a bribe to a foreign public official (whether inside or outside Japan) and where a foreign national offers a bribe to a foreign public official in Japan.

In addition to individual liability, where a representative or employee of a company offers a bribe to a foreign public official, the company is also subject to prosecution.

Domestic public officials

Article 198 of the Penal Code prohibits any person from giving, offering or promising to give a bribe to a Japanese public official (or a person who is to be appointed as a public official or any former public official).

For the purposes of the Penal Code, a public official is defined as "a national or local government official, a member of an assembly or committee, or other employee engaged in the performance of public duties in accordance with laws and regulations." Specific laws or regulations designate certain employees of government affiliated entities as "employees engaged in the performance of public duties" within the meaning of the Penal Code, and thus subject to its domestic anti-bribery provisions. The National Public Service Ethics Law and the National Public Service Official's Ethics Code also apply to certain national public officials, such as Japanese government ministry employees and other bureaucrats in the national government. The Ethics Code places limits on the types of gifts and entertainment a national public official can receive.

Private commercial bribery

Article 967 of the Companies Act prohibits officers and directors of Japanese companies from offering bribes in connection with the management of the company. Article 968 of the Companies Act prohibits officers and directors from offering bribes in response to unlawful requests relating to shareholders' meetings, for example:

  • "Greenmail" (purchasing enough shares in a company to threaten a takeover, thereby forcing the target company to buy back the shares at a premium to prevent the takeover).

  • Sōkaiya demands (a form of corporate blackmail unique to Japan where money is extorted by threatening to publicly humiliate companies and their management, usually at their annual meeting (often associated with organised crime)).

Articles 967 and 968 of the Companies Act also prohibit an individual from accepting payments.

These provisions apply even if a violation is committed outside Japan (Article 971, Companies Act). If a company accepts a bribe, these provisions apply to the directors involved (Article 972, Companies Act).

Defences

8. What defences, safe harbours or exemptions are available and who can qualify?

Indirect bribery

The Penal Code prohibits the payment of a bribe to a Japanese government official through third party agents. The METI Guidelines state that the same prohibition applies with respect to bribes to foreign government officials under the Unfair Competition Prevention Act (UCPA).

Gifts within the scope of social courtesy

Under case law there is a defence to the crime of domestic bribery (see Question 7, Domestic public officials) where a gift is given within the scope of social courtesy. If the gift was provided in consideration for certain conduct within the scope of the official's authority, the defence does not apply.

The METI Guidelines state that whether a gift to a foreign public official is considered an improper bribe depends on the specific facts and circumstances of each case.

The METI Guidelines state that a gift to a foreign public official for social purposes and without an improper purpose (such as asking for favourable treatment) may not always be regarded as a bribe. Under the current METI Guidelines, the following acts are less likely to be regarded as a bribe: provision of promotional products for general distribution, such as calendars, provision of sweets and drinks at business meetings, use of company cars when foreign officials visit the company for business purposes when such use is needed due to transportation conditions, provision of inexpensive seasonal gifts according to local custom, and provision of travel and meal expenses when inspection of factory and laboratory facilities is needed and where display at exhibitions is not enough to gain understanding of a company's products, services and quality.

Facilitation payments

The UCPA's anti-bribery provision contains no exception or defence for facilitation payments.

Japanese law does not provide for a de minimis exception for payments of minor amounts. The METI Guidelines previously stated that, in some cases, a facilitation payment may not be considered a bribe but such explanation has been omitted in the latest version.

 
9. Can associated persons (such as spouses) and agents be liable for these offences and in what circumstances?

Japanese law provides for accessory (for example, conspiracy and aiding/abetting) liability for both domestic and foreign bribery.

The METI Guidelines state that agents can be liable for violation of the UCPA's prohibitions against foreign bribery (see Question 7).

Enforcement

10. Which authorities have the powers of prosecution, investigation and enforcement in cases of bribery and corruption? What are these powers and what are the consequences of non-compliance?

Authorities

The police and the public prosecutor's office have the same investigatory, enforcement and prosecutorial powers in cases of bribery and corruption as they do in general business fraud cases. See Question 3.

For more information on the prosecuting authority, see The authorities.

Prosecution powers

See Question 3.

Powers of interview

See Question 3.

Powers of search/to compel disclosure

See Question 3.

Court orders or injunctions

See Question 3.

Protections available

See Question 3.

Penalties

11. What are the potential penalties for participating in bribery and corruption?

Civil/administrative proceedings or penalties

If an officer or director of a company offers, promises or pays a bribe, the company can be subject to administrative sanctions (for example, the rescission of its business licence or registration, a business suspension or improvement order, or a notice of non-compliance with agency guidelines or orders) from the relevant regulatory government agency on the grounds that the company's internal controls were deficient or that its business operations are unsound. Corporations can be debarred from government contracts as part of an administrative sanction.

Criminal proceedings or penalties

Penalties. There are the following penalties for bribery and corruption:

  • Domestic bribery. A person who offers, promises or pays a bribe to a Japanese public official is subject to up to three years' imprisonment or a fine of up to JPY2.5 million (Article 198, Penal Code). There is no corporate liability under the Penal Code for domestic bribery, even if the employee was acting within the scope of employment.

  • Foreign bribery. A person who violates the UCPA's foreign bribery provision is subject to imprisonment of up to five years or a fine of up to JPY5 million yen, or both (Article 21, Unfair Competition Prevention Act (UCPA)). If an individual who violates the UCPA's foreign bribery provision is an employee, an agent, an officer or director of a company (and where the bribe is made in connection with the company's business), the company is subject to a fine of up to JPY300 million (Article 22, UCPA).

  • Commercial bribery. Sanctions depend on what form the bribery takes:

    • Bribery involving officers or directors. If an officer or director of a Japanese company accepts a bribe, he can be punished by imprisonment of up to five years or a fine of up to JPY5 million (Article 967(1), Companies Act). A person who offers, promises or pays a bribe to an officer or director of a Japanese company in connection with his duties, can face up to three years' imprisonment or a fine of up to JPY3 million (Article 967(2), Companies Act).

      In addition, if an officer or director offers a bribe in connection with his duties, it is possible that this conduct could be considered an aggravated breach of trust, which is punishable by imprisonment of up to ten years or a fine of up to JPY10 million, or both (Article 960, Companies Act).

      A bribe can be confiscated (or a sum of equivalent value collected in lieu of confiscation) (Article 969, Companies Act).

    • Bribery in connection with an exercise of shareholder's rights. Any officer or employee of a Japanese company who makes an unlawful request to a shareholder relating to shareholders' meetings (for example requesting a vote to be exercised in favour of a resolution submitted by the company) can be punished by imprisonment of up to five years or a fine of up to JPY5 million (Article 968(2), Companies Act). Any person who accepts this bribe is subject to the same penalty.

Right to bail. See Question 4.

Tax treatment

12. Are there any circumstances under which payments such as bribes, ransoms or other payments arising from blackmail or extortion are tax-deductible as a business expense?

These payments are not tax deductible.

 

Insider dealing and market abuse

Regulatory provisions and authorities

13. What are the main regulatory provisions and legislation relevant to dealing and market abuse?

Criminal procedures

The Financial Instruments and Exchange Act (FIEA) prohibits market manipulation under Article 159 and insider trading by officers, employees, shareholders of 3% or more, or any third party with whom a listed company has a contractual relationship, or by persons who have statutory authority over a listed company (for example, government officials) (corporate insiders) under Article 166.

Supervisory and other guidelines

The FSA has published comprehensive supervisory and administrative guidelines relating to financial transactions. Other bodies such as securities exchanges (for example, the Tokyo Stock Exchange (TSE)) and industry groups (for example, the Japanese Bankers Association (JBA) and the Japan Securities Dealers Association (JSDA)) have also issued guidelines or rules for the prevention of insider trading.

For more information on the FSA, TSE, JBA and the JSDA see box, The regulatory authorities.

Offences

14. What are the specific insider dealing and market abuse offences?

Market manipulation (Article 159, Financial Instruments and Exchange Act (FIEA))

Securities transactions intended to mislead others as to market conditions are prohibited. This offence is not a strict liability offence. The prosecutor must prove that the defendant had the intent to mislead.

Insider trading (Articles 166 and 167, FIEA)

The following are offences under the FIEA:

  • A corporate insider who has come to know a material fact pertaining to the business of the company (for example, a board decision to increase the company's capital, acquire treasury shares, or enter into a business alliance with another company) in the course of his duties, or any person who has received material information from a corporate insider of a company, is prohibited from engaging in the purchase or sale of the company's securities before those material facts are publicised.

  • A corporate insider who comes to know facts concerning the launch or suspension of a tender offer in the course of his duties cannot purchase or sell shares pertaining to that tender offer before the facts of the tender offer are publicised.

  • A target company, including its officers, employees and agents, which receives facts concerning the launch or suspension of a tender offer from the officer cannot purchase or sell shares pertaining to that tender offer before the suspension of the tender offer is publicised.

Insider trading is not a strict liability offence. Wilful misconduct by the person who committed the relevant trading must be established.

Amendments to the FIEA, were passed in the Diet on 6 September 2012 and became effective on 6 September 2013. These amendments prohibit a person with material confidential information about a company event (for example. a merger or stock split) from transferring or receiving the company's securities following the merger or corporate split. However, a person is not prohibited from transferring or receiving such securities if the company event is not actually approved by management (that is, a board of directors) (for example, if merger talks break down). There are additional exceptions to the FIEA amendments that will allow certain types of transfers based on material confidential information (for example. transfers of securities to a newly established company following a merger or company split).

There were further amendments to the FIEA, passed in the Diet on 12 June 2013. These amendments prohibit a person with material confidential information regarding the business of a company, for the purpose of making a profit from either:

  • Disclosing that information to third parties.

  • Suggesting that third parties trade that company’s securities, based on the material confidential information.

For information on competition offences, see PLC Competition Global guide and PLC Leniency Global guide.

Defences

15. What defences, safe harbours or exemptions are available and who can qualify?

Safe harbours

The acquisition of share certificates by the exercise of a right to receive an allotment of shares (for example, convertible bonds) and other transactions that do not undermine the fairness and credibility of a securities market prescribed in the Financial Instruments and Exchange Act (FIEA), are safe harbours from insider trading (Articles 166(6) and 167(5), FIEA).

Reduction or exemption of surcharges

For insider trading relating to the acquisition of treasury shares by a company (among other violations, such as false statements in offering disclosure documents and ongoing disclosure documents and failure to submit a large shareholding report), if the company voluntarily reports a violation to the Securities and Exchange Surveillance Commission (SESC) before the SESC, the FSA, or any regional bureau of the Ministry of Finance (MOF) commences a voluntary investigation, the amount of the surcharge on the most recent violation will be reduced by half (Article 185-7(12), FIEA).

Statute of limitations

The statute of limitations for criminal charges of market manipulation and insider trading is seven and five years, respectively (Article 250(2), CCP; Articles 197 and 197-2, FIEA). No surcharge can be imposed after a period of five years has passed from the date on which the market manipulation or insider trading took place (Articles 178(23) and 178(27), FIEA).

Enforcement

16. Which authorities have the powers of prosecution, investigation and enforcement in cases of insider dealing and market abuse? What are these powers and what are the consequences of non-compliance?

Powers of interview

The Securities and Exchange Surveillance Commission (SESC) primarily conducts voluntary investigations when considering the imposition of surcharges on those who are suspected of market manipulation or insider trading under Article 177 of the Financial Instruments and Exchange Act (FIEA). The SESC also has authority to conduct compulsory investigations into criminal cases and, if necessary, to apply to the court for permission to conduct on-site inspections (conducted by an SESC officer) or for a search warrant, under Articles 210 and 211 of the FIEA. Following the compulsory investigation, the SESC can file a complaint with the police or a public prosecutor, to whom it must provide any seized articles or evidence (Article 226, FIEA).

The SESC can ask suspects or witnesses to appear before the SESC for interview (Article 210(1), FIEA).

Powers of search/to compel disclosure

The police or a public prosecutor can, on receipt of a complaint of market manipulation or insider trading from the SESC, or at their own discretion, apply to the court for a search warrant.

The SESC can apply to a court for a search warrant permitting the search and seizure of relevant evidence (Article 211, FIEA).

See also Question 3, Extra-territorial jurisdiction.

Court orders or injunctions

See Question 3.

Protections available

There are limited protections available when responding to investigations by investigative authorities. The investigative authorities have wide discretion to investigate crimes, such as bribery and cartel activity, as well securities fraud. When information is being requested by those agencies, a company and its employees are not required to volunteer information and have the right to remain silent. The investigative authorities do not recognise any privilege over any documents in the possession of the company. However, the law recognises a lawyer’s duty of confidentiality and enforcement officials are not likely to require access to information in the possession of a lawyer under Article 105 of the CCP. This principle is less certain for in-house lawyers.

The target of an SESC voluntary investigation in connection with the potential imposition of surcharges for market manipulation or insider trading has limited protections other than to appoint a lawyer to observe the SESC’s on-site inspection.

 
17. What are the potential sanctions for participating in insider trading and market abuse?

Civil/administrative proceedings or sanctions

For insider trading or market manipulation, the FSA can impose a surcharge under Articles 174, 175 and 175-2 of the Financial Instruments and Exchange Act (FIEA). The company can also be subject to other administrative guidance or sanctions (for example notice of non-compliance with agency guidelines or orders, the rescission of its business licence or registration, or a business suspension or improvement order) on the grounds that it had a deficient compliance system.

If a person who is found liable for insider trading has already been sanctioned with a surcharge for a violation within the previous five years (counting from the day on which the trading was conducted), the surcharge amount can be increased by an additional 50% (Article 185-7(13), FIEA). The names of the persons who commit insider trading violations may be published (Article 192-2, FIEA). According to the Cabinet Office Ordinance, this publication can be made on the Internet or by other adequate means by the FSA, the Securities and Exchange Surveillance Commission (SESC), or the financial bureaus.

Criminal proceedings

Right to bail. See Question 4.

Penalties. There are the following penalties:

  • Market manipulation. A person who commits market manipulation can be punished by up to ten years' imprisonment or a fine of up to JPY10 million, or both (Article 197(1)(v), FIEA). A person who commits market manipulation and sells or purchases securities at prices that are the result of market manipulation with the intent of gaining economic benefit can be punished by up to ten years' imprisonment and a fine of up to JPY30 million (Article 197(2), FIEA). The economic benefits gained can also be confiscated or a sum of equivalent value collected in lieu of confiscation under Article 198-2 of the FIEA. Where the violation is committed by a representative, agent, or employee, the company can be punished by a fine of up to JPY700 million (Article 207(1)(i), FIEA).

  • Insider trading. A person who commits insider trading can be punished by up to five years' imprisonment or by a fine of up to JPY5 million, or both (Article 197-2(13) and (14), FIEA). The economic benefit gained can also be confiscated, or a sum of equivalent value collected in lieu of confiscation. Where the violation is committed by a representative, agent or employee, the company can be punished by a fine of up to JPY500 million (Article 207(1)(ii), FIEA).

Civil suits

A person who commits market manipulation can be liable for damages to any person who has suffered damage in connection with the sale or purchase of the securities or other financial instruments in question, at prices that resulted from the market manipulation (Article 160, FIEA). However, in practical terms when bringing a claim, it is difficult to prove that the securities were sold and purchased at prices that were a result of the market manipulation.

Article 160 sets out a shorter statute of limitations for these types of civil claims (one year from becoming aware of the violation or three years from the time when the violation is committed) than for general tort claims (three years from the time one becomes aware of the violation or 20 years from the time when the violation is committed) under the Civil Code.

Private plaintiffs can also bring a claim in tort under Article 709 of the Civil Code or a claim for restitution of unjust enrichment under Article 703 or 704 of the Civil Code. In practice, however, it is difficult to prove causation between the unlawful conduct and the damages incurred, or the amount of damages.

 

Money laundering, terrorist financing and financial/trade sanctions

Regulatory provisions and authorities

18. What are the main regulatory provisions relevant to money laundering, terrorist financing and/or breach of financial/trade sanctions?

Money laundering

Money laundering is prohibited by the:

  • Act for Punishment of Organised Crime, Control of Crime Proceeds and Other Matters (Act No. 136 of 18 August 1999) (Organised Crime Act).

  • Act on Prevention of Transfer of Criminal Proceeds (Act No. 22 of 31 March 2007) (Transfer of Proceeds Act).

  • Foreign Exchange and Foreign Trade Act (Act No. 228 of 1 December 1949) (FEFTA).

The principal provisions are contained in Articles 9, 10 and 11 of the Organised Crime Act and Articles 27 and 28 of the Transfer of Proceeds Act (see Question 19).

The Japan Financial Intelligence Centre (JAFIC) is the authority within the National Police Agency that co-ordinates investigative activities relating to money laundering.

Terrorist financing

In addition to the regulations relating to money laundering, terrorist financing is prohibited by the Act on Punishment of the Financing of Criminal Activities for the Purpose of Intimidation of the General Public and of Governments (Act No. 67 of 12 June 2002) (Terrorist Financing Suppression Act).

The JAFIC is the authority within the National Police Agency that co-ordinates investigative activities relating to the terrorist financing. Under the FEFTA, the MOF may conduct on-site inspections or questioning relating to such suspected financing.

Financial/trade sanctions

The government implements financial/trade sanctions based on Cabinet decisions (for example, against North Korea), United Nation Security Council resolutions, and International Export Control Regimes (for example, the Nuclear Suppliers Group; the Missile Technology Control Regime; the Australia Group; the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies; the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on their Destruction; and the Convention on the Prohibition of the Development, Production and Stockpiling of Bacteriological (Biological) and Toxin Weapons and on their Destruction).

Breach of financial/trade sanctions is prohibited by:

  • FEFTA:

    • METI's permission is required to export items and services relating to nuclear power, chemical weapons, biological weapons, missiles, advanced materials, integrated circuits, computers, fibre optic cables, sensors, radar, sonar, navigation systems, and so on listed in Export Trade Control Order and Foreign Exchange Order ordered by the Cabinet under the FEFTA;

    • under the Cabinet Orders listed above, METI's permission is required to export items to be used in development of weapons of mass destruction or other weapons to a country which does not participate in the International Export Control Regimes or where not sanctioned by UN Security Council resolution;

    • under the FEFTA and the above Cabinet Orders, permission of the MOF or METI is required to make capital transactions (for example, deposit contracts, trust contracts, money lending, and guarantees of debt) with a designated person or organisation, including officers or organisations of the former Iraqi government, the former president of Yugoslavia; terrorists, the Taliban and affiliates; former Liberian government officials; dealers in arms, contrabandists to the Congo, Côte d’Ivoire, the Sudan and Somalia; parties developing mass destruction weapons in North Korea, affiliates of nuclear weapon developers in Iran; Colonel Qaddafi (now deceased) and his relatives; the former Libyan governmental organisation; and President al-Assad in Syria and his relatives.

  • Act on Special Measures concerning Entry Prohibition of Specified Ships into Ports (Act No. 125 of 18 June 2004). The Cabinet has designated North Korean vessels as prohibited from entry into Japanese ports since 2006.

Under the FEFTA, the MOF or METI may conduct on-site inspections or questioning regarding a suspected breach of financial/trade sanctions. Co-operation with the MOF or METI, the police and the public prosecutor may lead the investigation.

Obligations of business operators

Financial institutions and business operators have an obligation to:

  • Conduct identity checks on customers when conducting certain transactions (for example opening accounts, or effecting cash settlements of over JPY2 million or cash remittances of over JPY100,000). In addition, under the amended Transfer of Proceeds Act, financial institutions and business operators are required to examine:

    • the nature of the transaction (for example, settlement, saving or lending);

    • the customer’s occupation/business (for example, public officer, employee of a company or independent business owner); and

    • the identity of any shareholders of the company involved in the transaction who hold more than 25% voting rights of the company.

  • Create and keep identification records for seven years.

  • Notify the relevant administrative agencies of any suspicious transactions.

The FSA has issued comprehensive supervisory and administrative guidelines and inspection manuals, primarily targeting financial institutions with regard to notification of suspicious transactions. For foreign exchange transactions, financial institutions must conduct identity checks on customers similar to the identity checks described above pursuant to the Foreign Exchange and Foreign Trade Act (FEFTA). These obligations are monitored by the Ministry of Finance of Japan (MOF). See Question 4, Civil/administrative proceedings or sanctions.

Business operators who wish to enter into a financial transaction with or export to a sanctioned party must obtain pre-approval from the MOF or METI.

For more information on the JAFIC, the MOF and the FSA see box, The regulatory authorities.

Offences

19. What are the specific offences relating to money laundering, terrorist financing and breach of financial/trade sanctions?

Money laundering

The following acts are prohibited under the Organised Crime Act:

  • Becoming a shareholder of a company using criminal proceeds and exercising authority as a shareholder for the purpose of controlling the management of the company. A person who violates the provision is subject to imprisonment of up to five years or a fine of up to JPY10 million, or both (Article 9).

  • Concealing or attempting to conceal facts relating to the acquisition and disposal of the proceeds of a crime, or concealing or attempting to conceal the source of proceeds of a crime. A person who violates the provision is subject to imprisonment of up to five years or a fine of up to JPY3 million, or both (Article 10).

  • Accepting the proceeds of a crime. A person who violates the provision is subject to imprisonment of up to three years or a fine of up to JPY1 million, or both (Article 11).

The public prosecutor must establish in each case that there was intent to commit the offence.

Impersonating another in order to receive, transfer, or solicit a transfer of deposits or savings is punishable under Articles 27 and 28 of the Transfer of Proceeds Act. The public prosecutor must establish that there was intent to commit the offence.

A Japanese citizen who commits any of these acts outside Japan is also subject to the provisions of the Organised Crime Act. A person who violates the provisions is subject to imprisonment of up to one year or a fine of up to JPY1 million, or both (in case the violation has been done as a business, imprisonment of up to three years or a fine of up to JPY5 million, or both).

Terrorist financing

The MOF lists foreign individuals, companies and organisations with which financial transactions are prohibited or restricted. Failure to obtain pre-approval from the MOF is a strict liability offence under the FEFTA. Under the Terrorist Financing Suppression Act, the following acts are punishable:

  • Financial support or attempts to support with intention to facilitate terrorism (Article 2).

  • Raising funds or attempts to raise funds to be used for terrorism by solicitation, request or other means (Article 3).

Financial/trade sanctions

For financial/trade sanctions, the MOF and METI list foreign individuals, companies and organisations with which financial/trade transactions are prohibited or restricted. To prosecute a breach of financial/trade sanctions, the public prosecutor must establish that there was intent to commit the offence. Attempting to trade weapons, nuclear materials, other specific chemicals, materials or devices is also punishable.

Defences

20. What defences, safe harbours or exemptions are available and who can qualify?

Money laundering

There is a defence against the crime of accepting criminal proceeds if either (Article 11, Organised Crime Act):

  • The proceeds are accepted in the performance of a statutory obligation.

  • The proceeds are accepted under a contract and the recipient of the proceeds was unaware at the time of execution of the contract that the contractual obligation in question would be performed using the proceeds of crime.

Terrorist financing

Under the FEFTA, the only available defences are that the permission for the transaction had been granted by the MOF. Under the Terrorist Financing Suppression Act, a voluntary disclosure of financing or collecting funds may result in leniency.

Financial/trade sanctions

The only defence is that permission for the transaction had been granted by the MOF or METI.

Enforcement

21. Which authorities have the powers of prosecution, investigation and enforcement in cases of money laundering? What are these powers and what are the consequences of non-compliance?

Authorities

Money laundering. The JAFIC collects and analyses information about suspicious transactions reported by businesses and provides the police and/or the public prosecutor with this information. The police and/or the public prosecutor can apply to the court for a search warrant to investigate suspected money laundering. In addition, the public prosecutor can apply to the court before trial to freeze property that might later be confiscated under Articles 22 and 23 of the Organised Crime Act.

Terrorist financing. The JAFIC collects and analyses information about suspicious transactions reported by businesses and provides the police and/or the public prosecutor with this information. The MOF can also collect information about a suspect transaction by on-site inspection or questioning. The police and/or the public prosecutor can apply to the court for a search warrant to investigate suspected financing of terrorist activities. In addition, the public prosecutor can apply to the court before trial to freeze property that might later be confiscated under Articles 22 and 23 of the Organised Crime Act.

Prosecution powers

Financial/trade sanctions. For breach of financial/trade sanctions, the police and the public prosecutor can apply to the court for a search warrant to investigate suspected unlawful activity based on the MOF or METI’s report or the police’s or public prosecutor's own information sources.

See also Question 3, Extra-territorial jurisdiction.

Powers of search/to compel disclosure

See Question 3.

Court orders or injunctions

See Question 3.

22. What are the penalties for participating in money laundering, terrorist financing offences and/or for breaches of financial/trade sanctions?

Civil/administrative proceedings or sanctions

A company found guilty of involvement in money laundering or dealing in or accepting funds generated by terrorist activities can be sanctioned by the FSA or the MOF by:

  • Rescission of a licence or registration.

  • Warning.

  • Notice for lack of adequate internal controls.

The FSA and the MOF can also:

  • Request that a company submit a report or materials about its business operations.

  • Conduct an on-site inspection of the company's offices and documents (for example, accounting records) and question company employees.

The FSA and the MOF can also provide companies with guidance and advice and can, where a company has failed to satisfy relevant regulatory requirements, issue an order to remedy that failure. A company subject to these sanctions must generally file background documents or an improvement report.

Terrorist financing

The MOF can prohibit an individual or a company who fails to obtain MoF pre-approval for an otherwise prohibited transaction or who breaches financial sanctions from engaging in future financial transaction with the sanctioned party.

Financial/trade sanctions

METI can prohibit an individual or a company who breaches a trade sanction from providing related technical services or information and exporting related devices. METI can also issue an order to halt a suspected unlawful shipment in an emergency.

Criminal proceedings

Article 9 and following articles of the Organised Crime Act provide that:

  • A person who becomes a shareholder of a company, or who conducts other acts using criminal proceeds, and who exercises his or her authority as a shareholder for the purpose of controlling the management of the company is subject to up to five years' imprisonment or a fine of up to JPY10 million, or both.

  • A person who conceals facts relating to the acquisition and disposal of the proceeds of crime or conceals or attempts to conceal the source of proceeds of a crime is subject to up to five years' imprisonment or a fine of up to JPY3 million, or both.

  • A person who conceals the proceeds of crime is subject to imprisonment of up to three years or a fine of up to JPY1 million, or both.

Additionally, any criminal proceeds are subject to confiscation or collection of a sum of equivalent value in lieu of confiscation. If a representative or employee of a company commits these acts in connection with the operation of the company's business, the company can be punished by a fine equivalent to that imposed on an individual defendant under Article 9 and following.

A person who impersonates another person in order to receive, transfer, or solicit the transfer of deposits or savings is subject to imprisonment of up to one year or a fine of up to JPY1 million, or both (Article 27 and following, Transfer of Proceeds Act). A person who conducts these acts while doing business can be subject to an aggravated sanction of imprisonment of up to three years or a fine of up to JPY5 million, or both.

Terrorist financing

A person who provides financial support with the intention to facilitate terrorism or who raises funds to be used for terrorism can be punished by imprisonment of up to ten years or a fine of up to JPY10 million (Articles 2 and 3, Terrorist Financing Suppression Act). If a representative or employee of a company commits the breach of the Articles 2 and 3 above in connection with the operation of the company’s business, the company can be punished by a fine of up to JPY10 million (Article 8, Terrorist Financing Suppression Act).

Financial/trade sanctions

A person who breaches a trade sanction on, for example, nuclear materials, chemical weapon agents or bacterial agents can be punished by imprisonment of up to ten years or a fine of up to JPY10 million (otherwise, up to five times the price of the subject item if five times the price of the subject item exceeds JPY10 million), or both (Article 69-6(2), FEFTA). A person who breaches a trade sanction on, for example, weapons or electronics designated under the Cabinet Order can be punished by imprisonment of up to seven years, or a fine of up to JPY7 million (otherwise, up to five times the price of the subject item if five times the price of the subject item exceeds JPY7 million), or both (Article 69-6(1), FEFTA). A person who breaches a financial sanction can be punished by imprisonment of up to three years or a fine of up to JPY1 million (otherwise, up to three times the price of the subject item if three times the price of the subject item exceeds JPY1 million), or both (Article 70, FEFTA). If a representative or employee of a company commits the breach of a financial/trade sanction in connection with the operation of the company’s business, the company can be punished by a fine under each provision of Articles 69-6 and 70 (Article 72, FEFTA).

 

Financial record keeping

23. What are the general requirements for financial record keeping and disclosure?

Accounts must be prepared in a timely and accurate manner (Article 432, Companies Act). Financial statements attached to disclosure documents required by the Financial Instruments and Exchange Act (FIEA) must give a true and accurate account of the financial condition and business results of the company (Article 5, Ordinance on Terminology, Forms, and Preparation Methods of Financial Statements).

The Companies Act and the FIEA prohibit off-balance-sheet accounting, the preparation of fraudulent financial statements and securities registration statements containing fictitious expenditures.

 
24. What are the sanctions for failure to keep or disclose accurate financial records?

Criminal sanctions

A person who knowingly files a securities report which contains a false statement on any matter material to investors, is subject to imprisonment of up to ten years or a fine of up to JPY10 million, or both (Article 197, Financial Instruments and Exchange Act (FIEA)). Where a representative or employee of a company commits such an act, the company can also be subject to criminal fines of up to JPY700 million (Article 207, FIEA).

Administrative sanctions

Where accounting books are found to contain false statements, the officers, directors and auditors of the company can be subject to an administrative penalty of up to JPY1 million (Article 976(vii), Companies Act). A person or officer who is found by the FSA and/or the Securities and Exchange Surveillance Commission (SESC) to have made a false statement in a securities report can be ordered by the Commissioner of the FSA to pay a surcharge under Article 172-2 and following of the FIEA and liable to pay damages to compensate investors for losses suffered as a result of fraudulent financial statements. The partially amended FIEA was passed in the Diet in September 2012 and became effective on 12 September 2013. It provides that a person who has aided or abetted the filing of false statements in securities reports can also be ordered by the Commissioner of the FSA to pay a surcharge.

 
25. Are the financial record keeping rules used to prosecute white-collar crimes?

The SESC has the authority to conduct compulsory investigations of violations of financial record keeping rules under the Financial Instruments and Exchange Act (FIEA). The SESC can file a complaint with the police or a public prosecutor based on what it learns during an investigation. The MOJ has authority to conduct voluntary investigations with respect to violations of financial record keeping rules under the Companies Act.

 

Due diligence

26. What are the general due diligence requirements and procedures in relation to corruption, fraud or money laundering when contracting with external parties?

There are no specific due diligence requirements under Japanese law. Companies are advised to use global best practice in conducting necessary due diligence, which often includes:

  • The completion of a due diligence questionnaire by the external party.

  • Media searches.

  • Verification of in-country presence, industry experience, and capacity to perform legitimate services.

  • Gathering client lists and references, as necessary.

It is also common to check that the external party has not been subject to any criminal investigation or prosecution or prior administrative guidance or sanction. In certain cases, it is advisable to conduct interviews of the relevant management team to identify corruption, fraud, or money laundering risks. Contractual provisions prohibiting the external party from engaging in corruption, fraud, and/or money laundering, granting audit rights to monitor compliance and permitting immediate termination of the contract for violation of these prohibitions should also be considered.

 

Corporate liability

27. Under what circumstances can a corporate body itself be subject to criminal liability?

The Financial Instruments and Exchange Act (FIEA), the UCPA and the Organised Crime Act provide for criminal liability of both individuals and corporations, as described in Questions11, 17, 22 and 24.

The extent to which a company can be held liable for the acts of individuals depends on the provisions of the specific statute regulating the company's business.

 

Cartels

28. Are cartels prohibited in your jurisdiction? How are cartel offences defined? Under what circumstances can a corporate body be subject to criminal liability for cartel offences?

Cartels are prohibited as unfair restrictions on transactions under Article 3 of the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No. 54 of 14 April 1947) (Anti-Monopoly Law). The regulatory and enforcement authority is the Japan Fair Trade Commission (JFTC). The JFTC has authority to conduct primary investigations and issue fines and cease and desist orders. The Anti-Monopoly Law was revised in 2015, and appeal board authority has been transferred from the JFTC to the Tokyo District Court. A leniency program was introduced in Japan in 2006 and a certain percentage of the potential fines may be exempted according to the order of the JFTC (Article 7-2, Antitrust Law).

 

Immunity and leniency

29. In what circumstances it possible to obtain immunity/leniency for co-operation with the authorities?

If a company reports insider trading to the SESC before the commencement of an inspection or request for a report by the SESC or the FSA, the surcharge can be reduced (see Question 15, Reduction or exemption of surcharges).

When a company involved in a cartel reports the cartel to the Fair Trade Commission (FTC), the surcharge can be reduced or waived under Article 7-2 of the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No. 54 of 14 April 1947) and the Rules on Reporting and Submission of Materials Regarding Immunity From or Reduction of Administrative Fines.

For terrorist financing, if a person who attempts to support with intention to facilitate terrorism (Article 2), or who attempts to raise funds to be used for terrorism by solicitation, request or other means (Article 3), voluntarily reports the attempt to violate the Terrorist Financing Suppression Act to investigative authorities before the authorities commence a voluntary investigation, the sanction of imprisonment will be reduced or waived (Article 6, Terrorist Financing Suppression Act).

Other than as mentioned above, a company can make submissions in court, or to a regulatory agency, that it has co-operated with any investigation in order to receive a lesser sanction. However, leniency is at the discretion of the court or relevant investigative authority and there are no specific public guidelines governing the procedure.

 

Cross-border co-operation

30. What international agreements and legal instruments are available for local authorities?

Obtaining evidence

Evidence in criminal cases can be obtained from countries that have entered into a treaty or agreement with Japan regarding mutual assistance in criminal cases (for example China, the EU, Hong Kong, Russia, South Korea, and the US).

Seizing assets

Where a final and binding decision is made in a criminal court of an overseas jurisdiction for the confiscation of property located in Japan (or the collection of a sum of money in lieu of confiscation), the public prosecutor can apply to the court for recognition of the decision and co-operation in the execution of the sanction. The public prosecutor can also apply for the recognition of freezing and interim orders for the preservation of property in Japan.

Sharing information

If Japanese authorities suspect a violation of Japan's anti-corruption laws, the police and the public prosecutor’s office can request that foreign authorities conduct an investigation and arrest the suspect through diplomatic channels or, more frequently, through INTERPOL. For an actual or suspected violation of financial regulations, the SESC co-operates closely with foreign securities regulators, such as US Securities and Exchange Commission (SEC).

 
31. In what circumstances will domestic criminal courts assert extra-territorial jurisdiction?

The Penal Code defines five categories of crime over which Japan will exercise extra-territorial jurisdiction if committed by an individual (either a Japanese national or non-Japanese national) outside Japan:

  • Crimes listed in Article 2 of the Penal Code, such as counterfeiting of currency and circulating counterfeit currency.

  • Crimes listed in Article 3 of the Penal Code, such as murder, defamation, kidnapping, fraud or misappropriation (embezzlement), only if committed by a Japanese national.

  • Crimes listed in Article 3.2 of the Penal Code, such as murder, kidnapping or robbery, only if committed by a non-Japanese national against a Japanese national.

  • Crimes listed in Article 4 of the Penal Code, such as making false official documents or accepting bribes, only if committed by a Japanese public official.

  • Crimes under Article 4.2 of the Penal Code, covering acts that are unlawful pursuant to certain treaty obligations.

In addition, certain laws with penal provisions, such as the Unfair Competition Prevention Law, can be applied extraterritorially and prohibit:

  • The use or disclosure of a trade secret, controlled in Japan, that was obtained through deceptive action.

  • The use or disclosure of a trade secret, controlled in Japan, with malicious intent (for example, if a trade secret holder has entered into a non-disclosure agreement but intentionally discloses the trade secret to a third party with intent to harm its rightful owner).

  • The giving, offering to give, or promise of, money or other benefits to a foreign government official, or an official working for an international institution such as the United Nations, by a Japanese national, with the intent to obtain unfair or illegal benefits from that official.

 
32. Does your jurisdiction have any statutes aimed at blocking the assertion of foreign jurisdictions within your territory? Are there statutes aimed at blocking the assertion of foreign jurisdictions within their territory?

There is no statute aimed at blocking the assertion of foreign jurisdictions within Japan.

Japan is not a party to the Hague Convention on the Taking of Evidence Abroad in Civil and Commercial Matters. Requests to obtain evidence for use in civil and commercial matters outside Japan must be made in compliance with:

  • The Vienna Convention on Consular Relations.

  • Any applicable bilateral conventions or treaties.

  • Customary international law.

  • The law of the party seeking the evidence.

  • Japanese law and practice.

Voluntary depositions of third party witnesses for use in civil or commercial matters can be taken in Japan under very limited circumstances. Parties seeking such a deposition must comply with the US-Japan Consular Convention and Japanese law and practice.

 

Whistleblowing

33. Are whistleblowers given statutory protection?

Employees who report suspected violations of certain laws such as the Penal Code, the Food Sanitation Law, the Financial Instruments and Exchange Act (FIEA), the Protection of Personal Information Law and other laws that protect individual health, safety and property, consumer interests, fair competition, and the environment, as designated by cabinet order, are protected from retaliation under the Whistleblower Protection Act (Act No. 122 of 18 June 2004).

 

Reform

34. Are there any impending developments or proposals for reform?

There are no regulatory developments planned as a result of the economic downturn.

 

Market practice

35. What are the main steps foreign and local companies are taking to manage their exposure to corruption/corporate crime?

Leading foreign and local companies manage their risk by applying global best practices in compliance. These measures include:

  • Setting an appropriate "tone from the top" that compliance is a company priority.

  • Thoroughly investigating suspected wrongdoing.

  • Conducting due diligence into external parties and other business partners.

  • Training employees and external parties on relevant compliance policies and procedures.

  • Maintaining a robust audit function.

  • Conducting periodic risk assessments to determine if current policies and procedures are adequate and where gaps are found implementing appropriate remedial measures.

Companies should also review relevant administrative guidance to ensure that they meet the expectations of regulators in conducting their compliance activities.

*The authors would like to acknowledge the contributions of their colleagues who assisted with this Q&A chapter: Tomoki Kodama and Kyoko Sato.

 

The regulatory authorities

Public prosecutor's office

W www.kensatsu.go.jp

Status. The public prosecutor's office is a governmental organisation.

Principal responsibilities. The police and the public prosecutor's office have principal responsibility for investigating criminal matters in general.

Ministry of Justice (MOJ)

W www.moj.go.jp/ENGLISH/index.html

Status. The MOJ is part of the government.

Principal responsibilities. The MOJ has supervisory responsibility for matters regulated by the Companies Act.

Financial Services Agency (FSA)/Securities and Exchange Surveillance Commission (SESC)

W www.fsa.go.jp/en/index.html (FSA) www.fsa.go.jp/sesc/english/index.htm (SESC)

Status. The FSA and the SESC are governmental organisations.

Principal responsibilities. The SESC is part of the FSA. The FSA and the SESC have principal responsibility for violations of the FIEA.

Ministry of Economy, Trade and Industry (METI)

W www.meti.go.jp/english/index.html

Status. METI is part of the government.

Principal responsibilities. METI has supervisory responsibility for matters regulated by the UCPA.

Tokyo Stock Exchange (TSE)

W www.tse.or.jp/english/index.html

Status. The TSE is a private organisation.

Principal responsibilities. The TSE has issued guidelines on the prevention of insider trading.

Japanese Bankers Association (JBA)

W www.zenginkyo.or.jp/en/

Status. The JBA is an industry body.

Principal responsibilities. The JBA has issued guidelines on the prevention of insider trading.

Japan Securities Dealers Association (JSDA)

W www.jsda.or.jp/en/index.html

Status. The JSDA is an industry body.

Principal responsibilities. The JSDA has issued guidelines on the prevention of insider trading.

Japan Financial Intelligence Centre (JAFIC)

W www.npa.go.jp/english/index.htm (National Police Agency) www.npa.go.jp/sosikihanzai/jafic/index.htm (JAFIC)

Status. The JAFIC is a governmental organisation.

Principal responsibilities. The JAFIC is an authority within the National Police Agency that has principal responsibility for co-ordinating the investigation of money laundering and terrorism.

Ministry of Finance (MOF)

W www.mof.go.jp/english/

Status. The MOF is part of the government.

Principal responsibilities. The MOF has supervisory responsibility for matters regulated by the Foreign Exchange and Foreign Trade Act.



Contributor profiles

James E Hough

Morrison & Foerster LLP ( Registered associated offices of Ito & Mitomi)

T +81 3 3214 6522
F +81 3 3214 6512
E JHough@mofo.com
W www.mofo.com

Professional qualifications. New York, US: Japan, Registered Foreign Lawyer (Gaikokuho-Jimu-Bengoshi)

Areas of practice. Commercial litigation; compliance; investigations and anti-corruption; intellectual property litigation.

Recent transactions

  • Investigation of Japanese subsidiary of global pharmaceutical company regarding allegations of employee involvement with independent post-marketing clinical studies.

  • Represented a Japanese chemical company in investigation requested by the board of directors triggered by receipt of grand jury subpoena regarding possible antitrust violations. The investigation included EU and US subsidiaries.

  • Represented a US software company in investigation of Japanese subsidiary requested by audit committee after receipt of whistleblower complaint about revenue manipulation.

  • Represented a Japanese investor in a Japanese joint venture with an American software company in International Centre for Dispute Resolution (ICDR) arbitration in San Francisco.

  • Represented a Japanese company in ICDR arbitration in New York against an American customer.

Daniel P Levison

Morrison & Foerster LLP

T +65 6922 2041
F +65 6922 2008
E dlevison@mofo.com
W www.mofo.com

Professional qualifications. New York, US; Pennsylvania, US; New Jersey, US

Areas of practice. Commercial litigation; compliance; investigations and anti-corruption; international arbitration.

Recent transactions

  • Investigation of Japanese subsidiary of global pharmaceutical company regarding allegations of employee involvement with independent post-marketing clinical studies.
  • Investigation of Japanese subsidiary of publicly traded company into possible misconduct relating to public procurement.
  • Assisted a publicly traded company with an investigation into possible employee misconduct relating to investment practices, revenue recognition, and accounting issues in Japan.
  • Represented the Japanese subsidiary of a multinational corporation in litigation involving allegations that the company's employees engaged in fraudulent transactions, revenue recognition and accounting practices.
  • Conducted an internal investigation into the conduct of certain employees and directors of a Japanese subsidiary of a multinational media corporation relating to potentially improper revenue recognition practices.
  • Represented a Japanese company with respect to sales of controlled products and services to restricted countries. The investigation and compliance review successfully concluded with lifting of sanctions that had been imposed.

Yukihiro Terazawa

Morrison & Foerster LLP (Registered associated offices of Ito & Mitomi)

T +81 3 3214 6522
F +81 3 3214 6512
E yterazawa@mofo.com
W www.mofo.com

Professional qualifications. Japan; New York, US; Japan Patent Attorneys Association

Areas of practice. Commercial litigation; compliance; investigations and anti-corruption; intellectual property litigation.

Recent transactions

  • Representing the Japanese subsidiary of a multinational corporation in litigation involving allegations that the company's employees engaged in fraudulent transactions.
  • Advised a multinational corporation regarding investigation into government contracts irregularities involving a distributor.
  • Advised a Japanese corporation regarding government investigation into allegations of consumer fraud.
  • Assisted Japanese subsidiaries of multinational companies with investigations into data protection and internal controls issues.

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