Japan: cross border corruption

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Japan: cross border corruption

The Universal case The Tokyo headquarters of Universal Entertainment Corporation has been rocked by allegations of corruption and FCPA violations both in Japan and the Philippines. It started off quite simply in February 2012 when its business partner disclosed information that confirmed suspicions. Universal is the leading manufacturing company of “pachisuro” (slot machines) in Japan and it was established by Kazuo Okada in 1969. Okada began his business by reselling jukeboxes, before he became involved in the production of gaming machines. The new products he invented took the market by storm and he became the nation’s top individual taxpayer in 1999. Almost everybody knew the name of “Aruze”, Universal’s former name. After its success story in Japan, Universal decided to try its luck overseas and started co-operating with Wynn Resorts led by Steve Wynn. Initially, the partnership worked well; it successfully launched and operated big casinos not only in Las Vegas but also in Macau. However, the honeymoon period was brought to an abrupt end when Universal started planning another casino resort in Manila, in the Philippines – a potential rival to the Macau casino market. In 2011, Universal requested access to Wynn Resorts’ confidential business records shortly after it made a large donation to the University of Macau – at a time when Wynn was seeking a concession from the Macau government for a new casino. Wynn Resorts rejected the request, and removed Okada from his position as vice chairman of Wynn Resorts. In the immediate aftermath, Wynn Resorts’ compliance committee instructed Louis J. Freeh, a former director of the FBI, to conduct a full internal investigation into Okada, and accused him of making improper payments to gambling regulators in the Philippines. One year later, in February 2012, the investigation report was submitted to the committee detailing “numerous apparent violations of US anti-corruption laws”, such as multiple payments to the state regulator Philippines Amusement and Gaming Corporation’s (“PAGCOR”) of more than $110,000 since 2008, an illegal land acquisition using a front company in Manila. The Freeh Report was shocking, but it was just the beginning. On 16 November, 2012, Reuters reported $40 million worth of transfers made by Universal’s US affiliate, Aruze USA. The report stated that Aruze USA sent a remittance through an investment vehicle in Hong Kong to companies connected to a consultant at PAGCOR. Furthermore, $10 million was returned to Universal apparently just before the company was to release its financial statements, therefore suggesting it tried to inflate its balance sheet. Universal was quick to issue a statement explaining that the money transfers were executed without authorisation and sued its ex-employees in the Tokyo District Court claiming the payments were made without their authorisation. Japan’s approach to these issues The reaction in Japan to the Reuters report was luke warm at first. There is a strict anti-bribery law, the Unfair Competition Prevention Act (UCPA), which forbids payments to foreign public officials to gain commercial advantage. The punishment is imprisonment with labour of up to five years or a fine of up to five million yen, or both. This criminal regulation was adopted into Japan in 1998 in response to the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. In the 15 years since then, only two cases have been prosecuted; the Kyudenko case in 2007 and the PCI case in 2008. It is not that the Japanese government has shied away from investigating and prosecuting these offences. Unusually, the Intellectual Property Policy Office of the Ministry of Economy, Trade and Industry (METI), is responsible for preventing offences under UCPA, because UCPA regulates “unfair competition” in not only domestic but also international business transactions, rather than the Ministry of Justice and the Public Prosecutor’s Office, which have much better resources for these types of investigations. The team in charge of anti-bribery investigations in METI is small: there are just three officers, including the head of the office and an officer from the Ministry of Education. As the peer review report by the OECD Working Group on Bribery has pointed out, Japan appears prima facie to be inactive in enforcing the law in spite of the fact that one of the triggers for the FCPA’s creation was the 1970s Lockheed scandal in which the then-prime minister, Kakuei Tanaka, was arrested. Something is changing The situation has changed since the end of last year because Asahi Shimbun, one of the most respected newspapers in Japan, began to report extensively on the Universal case. Asahi Shimbun followed up the Reuters articles by verifying information in the Philippines. Universal immediately and openly objected to Asahi Shimbun’s coverage, but the newspaper published another story unexpectedly highlighting the close relationship between Universal and a well-known political family, the Ishiharas. The father of the family is the former governor of Tokyo and now the joint representative of the Japan Restoration Party which gained a lot of ground at the general election last winter; the oldest son is the minister of environment; the third son is now a member of the House of Representatives. According to the Asahi Shimbun reports, Universal’s support for the third son’s election may have been illegal. The Universal case has changed from a cross border corruption scandal to a domestic issue affecting one of the best known and most revered families in Japan. That is the reason why weekly magazines and newspapers in Japan have started covering the Universal case recently. And now many authorities, including the Ministry of Justice, the Tokyo District Public Prosecutor’s Office and the Securities and Exchange Surveillance Commission are reported to have interest in the case. Universal has commissioned independent research to try to clear its name. The first report by the commission was submitted on 21 July; the research is to continue. What is notable is that many Japanese business people, especially those in charge of risk management or compliance in companies, have been watching the case closely. They believe they are witnessing the growing global trend of anti-corruption activity reach their shores. In that context, the Universal case is making a considerable impact on the approach of Japanese business people to anti-corruption compliance. Whether the allegations against Universal will be proven or not is unclear, but what is clear is that now, few Japanese business people would regard cross-border corruption as having nothing to do with them. By Jun Kitajima Senior researcher, BERC (Business Ethics Research Centre), Tokyo  
Published: 19th June 2013