This article is part of the Lexology Getting The Deal Through comparative guide to Goverment Investigations.
Enforcement agencies and corporate liability
What government agencies are principally responsible for the enforcement of civil and criminal laws and regulations applicable to businesses?
The following government agencies are principally responsible for the enforcement of laws and regulations applicable to businesses:
- Public Prosecutor’s Office (PPO);
- Police Department (the police);
- Japan Fair Trade Commission (JFTC);
- Security and Exchange Surveillance Committee (SESC); and
- National Tax Agency (NTA).
In addition to these five agencies, various other government agencies, such as the Labour Standards Supervision Office and the Consumer Affairs Agency, are responsible for investigations and enforcement of civil penalties. Serious cases are referred to the PPO for criminal sanctions.
Scope of agency authority
What is the scope of each agency’s enforcement authority? Can the agencies pursue actions against corporate employees as well as the company itself? Do they typically do this?
In general, the PPO is responsible for the prosecution and enforcement of criminal charges.
Investigations are usually initiated by the police, and the PPO will request that the police conduct additional investigations if necessary. The PPO may also conduct investigations, particularly in high-profile cases of bribery, serious fraud, etc. The PPO works with other government agencies in the areas of competition law, securities regulation, tax, etc, when the government pursues criminal sanctions. Only the PPO has the authority to determine whether to bring criminal charges.
Although corporate employees may be subject to criminal charges, in practice, criminal charges are usually filed only against the responsible management and the company itself.
In many criminal cases concerning businesses, the police primarily conduct the investigations, and then send the cases to the PPO.
The JFTC has the sole authority to conduct administrative investigations and impose administrative sanctions (such as cease-and-desist orders and surcharge payment orders) on companies for breaches of the Antimonopoly Act (AMA) and other competition laws. In addition, the JFTC has the authority to conduct criminal investigations, but it is unable to impose criminal sanctions (such as fines and imprisonment). If the JFTC believes that the case in question deserves criminal sanctions, it must file an accusation with the Prosecutor General. The PPO alone has the power (at its own discretion) to initiate criminal proceedings against corporate employees and companies. The JFTC has handled most cases under the administrative investigation scheme.
The SESC has the power to conduct investigations and impose regulatory fines for breach of the Financial Instruments and Exchange Act (FIEA) and other financial regulations. Typically, such breaches involve insider trading, accounting fraud, investment fraud, etc. If the investigation reveals serious breaches of law, the SESC will bring the case to the PPO to pursue criminal sanctions.
The NTA has the power to conduct investigations and impose the deficit tax for tax evasion. In serious cases, the NTA will bring the case to the PPO to pursue criminal sanctions.
Can multiple government entities simultaneously investigate the same target business? Must they coordinate their investigations? May they share information obtained from the target and on what terms?
Yes. The investigation of businesses is initiated by the police, but if competition laws, financial regulations or tax avoidance laws are breached, the JFTC, the SESC or the NTA, respectively, will initiate the investigations. The police and other agencies complete the investigations together with the PPO after the cases are brought to the PPO. The PPO may receive information before other agencies initiate the investigations; however, in principle, it only starts investigating after other agencies have brought the case for criminal charges.
In what fora can civil charges be brought? In what fora can criminal charges be brought?
Civil charges can be imposed without the involvement of a court. Government agencies can directly issue orders relating to the civil charges. If the target company is not satisfied with the orders, the companies can appeal them in court.
Criminal charges can be imposed through criminal proceedings in court.
Corporate criminal liability
Is there a legal concept of corporate criminal liability? How does the government prove that a corporation is criminally liable for the acts of its officers, directors or employees?
Corporations are not subject to criminal charges in principle. However, for some specific crimes - such as engaging in a cartel, accounting fraud or insider trading - there are legal exceptions that allow corporations to be the subject of criminal charges if the officers, directors or employees commit the crimes in connection with the corporation’s business activities.
Must the government evaluate any particular factors in deciding whether to bring criminal charges against a corporation?
The PPO has the sole discretion and authority to determine whether to bring criminal charges against a person, whether a natural person or a corporation. There is no codified guideline or standard governing how the PPO exercises such discretion. However, in practice, various factors, such as the gravity of the crime and the social impact of the wrongdoing, are considered by the PPO.
As explained in question 2, the PPO can initiate criminal proceedings with respect to certain AMA violations (such as engaging in a cartel or bid rigging) upon an accusation filed by the JFTC. The JFTC’s published policy is that it actively files an accusation with the Prosecutor General for (i) malicious and serious cases that are considered to have a pervasive impact on people’s lives or (ii) cases of repeat offenders or industries in which violations are repeated and where the JFTC believes that it is unable to achieve the purposes of the AMA through administrative sanctions alone.
Initiation of an investigation
What requirements must be met before a government entity can commence a civil or criminal investigation?
A government entity can commence a civil investigation without satisfying any requirements. The JFTC, the SESC and the NTA also have the authority to conduct quasi-criminal investigations in certain cases - such as those involving cartels, insider trading or aggravated tax evasion - that lead to a criminal investigation by the PPO. The PPO can commence a criminal investigation after it receives an official criminal accusation from the government entity that regulates the violation.
What events commonly trigger a government investigation? Do different enforcement entities have different triggering events?
Information from the tax authorities, which may indicate bid rigging, insider trading, bribery or other violations, and reports from the media are common triggers of a government investigation. There are also a few economic magazines that occasionally publish high-profile stories. In addition, leniency applications from competitors (see question 21) often lead to cartel investigations. The SESC also watches for unreasonable market trends and transactions.
What protections are whistle-blowers entitled to?
Businesses are prohibited from terminating employment contracts because of whistle-blowing. Terminations on that basis are considered to be null and void. In addition, businesses are prohibited from imposing disadvantageous treatment on whistle-blowing employees, including demotions, salary reductions or discrimination in promotions. Nonetheless, there is no criminal or administrative penalty for a violation of such prohibition.
At what stage will a government entity typically publicly acknowledge an investigation? How may a business under investigation seek anonymity or otherwise protect its reputation?
An investigation is usually disclosed when a government entity conducts a search and seizure. Sometimes, the agency leaks information about the search and seizure to the media beforehand, and the event is widely broadcast. In such a case, there is very little opportunity for anonymity because the freedom of the press will prevail over the economic interests of the business.
Evidence gathering and investigative techniques
Is there a covert phase of the investigation, before the target business is approached by the government? Approximately how long does that phase last?
In many cases, the government conducts a covert investigation before it approaches the target business. The length of the covert phase depends on the complexity and scale of the case. The government usually spends several months conducting the covert investigation, but this may take more than a year if the case is complex and serious.
What investigative techniques are used during the covert phase?
During the covert phase of investigation, the government often interviews cooperative employees of the target business (including whistle-blowers) and collects relevant objective evidence such as bank statements, call histories and corporate registrations.
After a target business becomes aware of the government’s investigation, what steps should it take to develop its own understanding of the facts?
After a target business becomes aware of the government investigation, it should conduct an internal investigation and develop an understanding of the misconduct that occurred in the company as soon as possible. In many cases, target businesses retain outside investigation experts such as lawyers, certified public accountants or digital forensic companies. In order for the target business to avoid the risk of appearing to conceal or destroy evidence, it is better for the business to notify the investigative authorities through its lawyers that it is or will be conducting its own internal investigation properly and appropriately.
The way in which a target business responds to the government investigation should be decided on a case-by-case basis. In many cases, however, it is preferable for the target business to act cooperatively with the government; otherwise it will face an increased risk that the government will take tougher measures, such as searches and seizures, and arrests. If the target business is cooperative and its lawyers communicate well with the government, it has more opportunities to obtain information about the investigation from the government.
Evidence and materials
Must the target business preserve documents, recorded communications and any other materials in connection with a government investigation? At what stage of the investigation does that duty arise?
There is no express legal obligation for the target business to preserve documents, recorded communications or any other materials in connection with a government investigation. However, if employees of the target business intentionally conceal or destroy evidence in order to avoid liability, such actions may constitute the destruction of evidence (article 104 of the Penal Code), which is a crime, or the obstruction of an inspection (eg, articles 63 and 64 of the Bank Act). Thus, it is recommended that the target business preserve documents, recorded communications and any other materials if the government starts to conduct an investigation.
Leniency applicants under the AMA (see question 21) may be required by the JFTC to make additional submissions, and if they do not satisfy this requirement, their leniency position may be disqualified. Therefore, a company that intends to apply for leniency under the AMA must bear in mind that destruction or disposal of documents may lead to the disqualification of its leniency application.
During the course of an investigation, what materials - for example, documents, records, recorded communications - can the government entity require the target business to provide? What limitations do data protection and privacy laws impose and how are those limitations addressed?
During the course of an investigation, the government (administrative agencies, the police and public prosecutors) can require that the target business provide any kind of evidence if necessary.
There is no data protection and privacy law in Japan that imposes limitations on the government’s investigation. The Act on the Protection of Personal Information prohibits business operators from providing personal data to a third party without obtaining the data subject’s consent, but there is an exception to this restriction. No consent is needed if the business operator must cooperate with a government organisation performing duties prescribed by the law and regulations and there is a possibility that obtaining the person’s consent would interfere with the performance of those duties (article 23 of the Act on the Protection of Personal Information).
On what legal grounds can the target business oppose the government’s demand for materials? Can corporate documents be privileged? Can advice from an in-house attorney be privileged?
Investigations are often initiated by a request for the voluntary production of materials, and the target business can negotiate the scope of the materials that it provides. However, if the government makes compliance with its production demands mandatory, there is no legal ground on which to oppose the government’s demand for materials. If the target business opposes the administrative agency’s order to provide evidence, it may be criminally liable for violation of the order demanding materials.
Corporate documents cannot be privileged because there is no legal professional privilege in Japan. Therefore, the investigative authorities can search and seize, or order the production of, any evidence related to communications between the target business and its attorneys.
May the government compel testimony of employees of the target business? What rights against incrimination, if any, do employees have? If testimony cannot be compelled, what other means does the government typically use to obtain information from corporate employees?
The government (administrative agencies, police and public prosecutors) may request that employees of the target business cooperate in interviews and give their statements voluntarily. The government may not compel statements of employees during a voluntary interview.
However, if police and public prosecutors arrest and detain the employees of the target business, they can compel those employees to submit to interrogation (article 198 of the Code of Criminal Procedure). In such a case, however, the employees may refuse to give incriminating statements because they have the right as suspects to remain silent.
If the employees do not cooperate during the interrogation, public prosecutors can request that a judge examine them as witnesses in court (article 226 of the Code of Criminal Procedure). In practice, however, it is quite rare for public prosecutors to use this procedure. The employees may refuse to give incriminating testimony if this may result in criminal prosecution or conviction (article 147 of the Code of Criminal Procedure).
As noted in question 21, the Code of Criminal Procedure has been amended to introduce a new ‘prosecutorial bargaining’ system. This system may encourage corporate employees to disclose information about crimes committed in the target business.
In 2016, the amended Code of Criminal Procedure also introduced a new ‘immunity’ system, which allows a public prosecutor to request that a judge conduct a witness examination on the condition that the statements of the witness and evidence derived therefrom cannot be used as evidence incriminating the witness being examined (article 157(2) of the Code of Criminal Procedure). This new immunity system may also encourage corporate employees to give testimony regarding crimes committed in the target business at trial.
Under what circumstances should employees obtain their own legal counsel? Under what circumstances can they be represented by counsel for the target business?
If employees become the target of an investigation, there is usually a conflict of interest between the target business and the targeted employees. Under such circumstances, the targeted employees should obtain their own legal counsel.
Where the government is investigating multiple target businesses, may the targets share information to assist in their defence? Can shared materials remain privileged? What are the potential negative consequences of sharing information?
Multiple target businesses may share information to assist in their defence. No privilege is conferred on the shared materials. If the targets share information, there is a risk that the government may think that they are trying to conspire to make the same false statements and conceal and destroy evidence.
At what stage must the target notify investors about the investigation? What should be considered in developing the content of those disclosures?
A company listed on the stock exchanges in Japan is required to immediately disclose the details of certain matters that occur with respect to it or its subsidiaries. Those matters are stipulated in the Securities Listing Regulations established by each of the stock exchanges. Although investigations conducted by government authorities are not clearly described in the Securities Listing Regulations, there is a catch-all item (ie, material matters that are related to the operation, business or assets of the listed company or to listed securities and that have a notable effect on the investment decisions of investors) that is considered to include such investigations (see article 402(2)(x) of the Securities Listing Regulations of the Tokyo Stock Exchange). Therefore, a listed company must disclose the details of an investigation immediately after the investigation is initiated against the listed company or its subsidiary if the investigation is material to the operation, business or assets of the listed company or to listed securities issued by the listed company (in cases where the investigation is against the listed company’s subsidiary, materiality is assessed in connection with the subsidiary) and the investigation has a notable impact on the investment decisions of investors.
In addition, unless a de minimis exemption is applied, the Securities Listing Regulations require the disclosure of the cancellation of a licence, the suspension of a business, or the imposition of any other disciplinary action by an administrative authority or an accusation of a violation of the law or regulations by an administrative authority (see article 402(2)(f)of the Securities Listing Regulations of the Tokyo Stock Exchange). Therefore, disclosure is required of a listed company not only when an investigation is initiated, but also immediately following the issuance of a final decision by an administrative authority relating to the investigation.
When disclosure is required, a listed company must disclose the background of the occurrence, a summary, the future prospects and any other matters that the stock exchanges consider to be material to investment decisions in relation to the investigation. However, as a general practice, listed companies refrain from disclosing details (in particular, future prospects) when an investigation is initiated in order to avoid making misstatements.
Non-listed companies are not subject to such disclosure requirements. Accordingly, they can determine whether and to what extent they disclose. As a general practice, there is voluntary disclosure when the facts of the investigation are broadly announced by the media.
Notification before investigation
Is there a mechanism by which a target business can cooperate with the investigation? Can a target notify the government of potential wrongdoing before a government investigation has started?
Some laws provide a legal framework by which a company can benefit from cooperating with the investigation or voluntarily reporting its misconduct to a government authority. For instance, the AMA provides a leniency programme by which an applicant can obtain full immunity or a reduction of the administrative fines imposed by the JFTC. Under this leniency programme, an application can be made not only prior to the initiation of the investigation, but also following the initiation of the investigation under certain circumstances. Leniency applicants are obliged to submit reports on the facts of their misconduct along with evidentiary materials (eg, emails, notebooks and meeting minutes).
Other than the AMA, benefits can be obtained from voluntarily reporting to the relevant authorities under the Act against Unjustifiable Premiums and Misleading Representations (UPMR) and the FIEA. Typically, such voluntary reports must be made prior to the initiation of the investigation.
More generally, the Code of Criminal Procedure was amended on 1 June 2018 to introduce a legal system by which a prosecutor on the one hand, and a suspect or defendant and his or her attorney on the other, can negotiate an agreement pursuant to which the prosecutor will drop the criminal case or make a request to the court for lenient criminal sanctions in exchange for the suspect or defendant disclosing criminal offences committed by others.
Voluntary disclosure programmes
Do the principal government enforcement entities have formal voluntary disclosure programmes that can qualify a business for amnesty or reduced sanctions?
As explained in question 21, some laws provide for a formal voluntary disclosure programme that can qualify a business for full immunity or reduced sanctions.
A leniency application for a cartel or bid-rigging charge is allowed under the AMA. If a leniency application is made prior to the JFTC’s initiation of the investigation (normally dawn raids), full immunity is granted to the first applicant, a 50 per cent reduction of the administrative fines imposed by the JFTC is granted to the second applicant and a 30 per cent reduction of the imposed administrative fines is granted to the third, fourth and fifth applicants. The fourth and fifth applicants must report new facts that are unknown to the JFTC at the time of their respective applications in order to qualify for the 30 per cent reduction. For the first applicant, in addition to full immunity from administrative fines, the JFTC does not, in practice, file an accusation with the Prosecutor General, which precludes a prosecutor from bringing a case based on charges of cartel or bid rigging. The first applicant, therefore, can avoid criminal sanctions. If a leniency application is made following the initiation of the investigation, a 30 per cent reduction of the imposed administrative fines is granted to the first three applicants if they submit reports with new facts that are unknown to the JFTC at the time of the application. The maximum number of applicants that can qualify for leniency, including those who made their applications prior to the initiation of the investigation, is five.
Under the UPMR, a 50 per cent reduction of administrative fines is granted if a voluntary report is made to the relevant authority prior to the initiation of an investigation of certain advertisements that would mislead or confuse consumers.
Similarly, under the FIEA, a company can voluntarily notify the relevant authority of its violations prior to the initiation of the investigation and be granted a 50 per cent reduction of administrative fines. This is limited to certain conduct such as insider trading of a company’s own shares, failing to make mandatory reports or making false statements in mandatory reports.
Timing of cooperation
Can a target business commence cooperation at any stage of the investigation?
Yes, a company can commence cooperation at any stage of the investigation at its sole discretion. However, as explained in question 22, the benefits of such cooperation vary depending on whether it is offered prior to the initiation of the investigation or after.
What is a target business generally required to do to fulfil its obligation to cooperate?
In general, a company that applies for leniency or voluntarily reports its misconduct is required to submit the facts about its misconduct along with certain evidentiary materials (if necessary). Unlike the EU system, once a leniency applicant under the AMA secures its application position, continuous cooperation is not legally required. However, companies normally continue to cooperate voluntarily with the JFTC because they may have opportunities to engage in informal negotiations with the JFTC, through which they may narrow, as much as possible, the scope of misconduct that is ultimately found.
When a target business is cooperating, what can it require of its employees? Can it pay attorneys’ fees for its employees? Can the government entity consider whether a business is paying employees’ (or former employees’) attorneys’ fees in evaluating a target’s cooperation?
As part of an employee’s duties, a company can require that he or she be interviewed by the company or its legal counsel, search for and submit documents to the company and cooperate with government authorities (eg, submit to interviews by the authorities). In an administrative case, it is rare for an employee who was involved in the misconduct in question to retain his or her own attorney in Japan.
In contrast, if the misconduct in question is expected to be handled as a criminal case, there will be a conflict between the company and its employees. The company will consider such conflict when requesting cooperation. However, most companies pay the attorneys’ fees of their employees, and such payment is normally evaluated neutrally by government authorities.
What considerations are relevant to an individual employee’s decision whether to cooperate with a government investigation in this context? What legal protections, if any, does an employee have?
In a criminal case (or a case expected to be so treated by government authorities), an individual employee generally determines whether and to what extent he or she will cooperate with the government authority based on his or her culpability and the risk of being charged. The employee’s decision to cooperate with government authorities may also be based on the possibility that cooperation will allow him or her to remain employed by the company. If the employee decides not to cooperate with government authorities, the company will face difficulty in obtaining his or her cooperation. It is also difficult for the company to discipline the employee for non-cooperation because, under Japanese labour law, enforcing cooperation conflicts with the employee’s right not to incriminate himself or herself (disciplinary action may be taken for misconduct after the authorities’ decision is made or becomes final and binding). In a cartel or bid-rigging case, as explained in question 22, the first leniency applicant receives the benefit of no criminal sanctions. This also applies to employees of the first applicant. Consequently, the company’s leniency position may also be considered by an individual employee in deciding whether to cooperate.
In an administrative case, because an individual employee will not be punished by the government authority, the greatest concern of the employee is whether the company will grant immunity or leniency for his or her cooperation with the company (and ultimately with the government authorities). If the company implements an internal leniency programme, the employee can cooperate with the company and the government authorities without undue concern. As explained in question 25, a company can require that its employees be interviewed by the company or its legal counsel, search for and submit documents to the company, and cooperate with government authorities. However, it is difficult for the company to terminate the contract of an employee who refuses to cooperate with the company (and government authorities), as termination of employment is strictly limited under Japanese labour law. In practice, non-cooperation is not evaluated negatively in making disciplinary decisions, but cooperation is evaluated positively as a mitigating factor.
How does cooperation affect the target business’s ability to assert that certain documents and communications are privileged in other contexts, such as related civil litigation?
There is no concept of legal privilege under Japanese law. Documents provided to government authorities may be subject to disclosure in related civil litigation upon a request to the court from a counterparty. The JFTC has a rule concerning the disclosure of documents that it possesses in relation to its investigation. Business secrets are kept confidential, but the JFTC does not consider legal privilege or attorney work product in determining whether to disclose such documents to the court.
What mechanisms are available to resolve a government investigation?
As discussed in question 21, a new prosecutorial bargaining system came into force on 1 June 2018. Under the new system, the prosecutor may drop criminal charges when the suspect provides information regarding another person’s criminal offences. However, the new system is primarily applicable to criminal charges against a natural person. It is not clear how the PPO handles criminal charges against corporations when their directors or employees provide information regarding another person’s criminal offences.
Admission of wrongdoing
Is an admission of wrongdoing by the target business required? Can that admission be used against the target in other contexts, such as related civil litigation?
The PPO is not required to obtain an admission of wrongdoing in order to bring criminal charges against a person. However, an admission is critical evidence, and it can be used in the related civil litigation after the trial of the criminal case has been commenced and the admission becomes public.
What civil penalties can be imposed on businesses?
Administrative monetary penalties can be imposed by various government agencies on businesses as civil penalties. Typically, the civil penalties can be imposed for breach of the competition laws, securities regulations, etc.
What criminal penalties can be imposed on businesses?
Monetary fines can be imposed on businesses as criminal penalties based on the court’s judgment. Directors, officers and employees can also be charged with prison terms.
What is the applicable sentencing regime for businesses?
The judge has the power to determine sentences within the range provided under the law. The prosecutor recommends a sentence in the closing argument at trial, but such recommendation does not bind the judge’s decision. The range of the sentence is generally broad (for example, one month to 10 years for aggravated breach of trust). There is no guideline for sentencing, but the prosecutors recommend the sentence and the judges determine the sentence by looking at precedents and exercising their discretion. Unreasonable sentences can be the basis of an appeal, even if the sentence is within the range provided under the law.
What does an admission of wrongdoing mean for the business’s future participation in particular ventures or industries?
An admission of wrongdoing does not affect the business’s future participation in a particular venture or industry. However, legal violations can result in the cancellation of a business licence and approvals in some industries. Furthermore, regulators can find a legal violation based on an admission.
UPDATES & TRENDS
Updates & Trends
Updates and trends
As discussed in question 21, an amendment to the Code of Criminal Procedure in May 2016 introduced a new plea-bargaining system in Japan, which came into effect in June 2018. Under this new system, a public prosecutor may conclude an agreement with a suspect or defendant that obligates the public prosecutor to take specified lenient measures (such as refraining from prosecution, charging the suspect with a less serious crime, requesting a summary order and suggesting a lenient sentence to the court). In consideration for the specified lenient measures, the suspect or defendant must cooperate with the public prosecutor (such as voluntarily disclosing the truth during interrogation, voluntarily giving truthful testimony as a witness at trial and providing other evidence) to establish another person’s crime. The new plea-bargaining system is applicable not only to drug and firearm crimes committed by organised crime groups, but also to white-collar crimes such as fraud, embezzlement, bribery, tax evasion and cartels.
Companies with poor compliance and internal regulation systems are at great risk that their employees will voluntarily provide information on corporate crimes to public prosecutors in order to avoid their own criminal responsibility. Consequently, under the new system, it is increasingly important for companies to enhance their compliance systems (including a whistle-blowing system), and promptly and appropriately respond when any malfeasance is detected.