Japan is the world’s third largest economy and home to some of the largest global corporations. Many organisations based outside of Japan have also expanded into the country. Regardless of whether an organisation is from Japan or is a foreign corporation with a presence there, it needs an effective compliance programme to foster ethical conduct by its employees, maintain and uphold its reputation, and comply with applicable laws. Organisations based in Japan or doing business there must adopt a compliance programme that:
- is designed to help mitigate the risks that often arise in the Japanese market
- meets the obligations of conducting business globally
- accounts for the unique challenges presented by operating in or from Japan.
To learn more about these three objectives and what organisations can do to achieve them, we look at building a compliance programme from two perspectives: for foreign organisations expanding business into Japan, and for Japanese corporations expanding their operations abroad.
Using our experience and expertise helping clients navigate Japan’s compliance landscape, we highlight some of the challenges and successes of implementing a global compliance programme in Japan or for a foreign corporation with operations in the country.
Challenges for foreign organisations expanding into Japan
What makes implementing a compliance programme in Japan a challenge for foreign corporations? Is it the fact that Japan is the third largest economy in the world, and is dominated by competitors with years of success and expectations that are matched only by the size of their revenues? Is it the language? Or is it perhaps the unique culture (and, more specifically, the unique business culture) that must be taken into account and respected by any compliance team rolling out a programme there?
While many reputable organisations have done business in Japan throughout the decades, some have been unable to successfully implement a compliance programme that routinely prevents corruption and fosters ethical conduct. As far back as the 1970s, Lockheed Martin paid bribes totalling US$3 million to the then prime minister of Japan and a consultant to earn a contract from All Nippon Airways for the purchase of Lockheed airplanes. In December 2013, a director of Deutsche Bank AG’s Japanese brokerage unit was arrested for allegedly entertaining Mitsui & Co. executives with travel, rounds of golf, wine and meals on about 100 occasions from 2010 to 2012. In late 2018, high profile automobile executives were arrested for false accounting and financial misconduct.
Foreign organisations expanding into Japan face several challenges when implementing a compliance programme in the country. Prime among these challenges are:
- understanding the regulatory environment and risks
- educating local staff on the global anti-corruption laws that may apply to them
- effectively communicating the importance and value of compliance to local staff; and
- monitoring the effectiveness of the compliance programme and reporting on its progress.
We examine these four challenges and the steps foreign organisations can take to meet them.
Understanding the regulatory environment and risks in Japan
While the economic opportunities in Japan may still be robust enough to draw companies there, any foray by a foreign corporation into the country must consider the regulatory environment and compliance risks of doing business there. An anti-corruption framework exists in Japan through a series of different laws, including:
- the Unfair Competition Prevention Act (UCPA), which criminalises bribery of foreign public officials
- the Penal Code, which criminalises bribery of domestic public officials
- the Whistleblower Protection Act, which offers comprehensive protection for whistleblowers.
Some other minor laws also exist covering a variety of situations. The Companies Act punishes the giving or accepting of a bribe by a director or auditor of a company, and the Act on Prevention of Transfer of Criminal Proceeds addresses money laundering.
Even with several laws in place, the effectiveness of the framework has been questioned. The Organisation for Economic Co-operation and Development’s (OECD’s) Working Group on Bribery conducted an evaluation of Japan’s implementation of the OECD Convention on Combating Bribery of Foreign Officials. It noted that Japan does not appear to actively detect, pursue and investigate foreign bribery offences. In fact, in December 2011, only two cases brought under the UCPA had resulted in convictions.
The risks in Japan are somewhat different to those found in other Asian countries. The direct exchange of cash for favours from government officials is extremely uncommon. However, the US Department of State has described a more ‘institutionalised’ corruption existing in the country, by way of close relationships between certain Japanese companies, politicians, government organisations and universities, where contracts, positions and opportunities are awarded to those entities that are a part of this circle.
Another facet of this institutionalised corruption is bid-rigging, which is often led by government officials in public procurements. The Japanese authorities have addressed this problem through several amendments to the Act on Elimination and Prevention of Involvement in Bid Rigging. The practice of “amakudari”, where government officials retire and then enter top management positions in Japanese companies, is also common.
To build a successful compliance programme in Japan, foreign corporations must ensure that they have legal and compliance personnel positioned in the country who possess a clear understanding of the Japanese regulatory environment, including knowledge of the relevant laws. Furthermore, foreign organisations should implement a due diligence programme that is aligned to the unique risks of the Japanese market. Given the practice of former government employees often transitioning into Japanese businesses, this process should review potential new hires to determine their backgrounds and any possible past government positions or connections. Third parties (such as business partners, agents, suppliers and distributors) should also be reviewed to determine any relationship or connection to company employees.
Educating local staff on global anti-corruption laws that apply to them
The extraterritorial applications of the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act mean that companies based in the US or UK must guide employees in their Japanese offices on complying with these global laws. This endeavour is not unique to Japan; any organisation opening offices in a foreign country must educate its local staff on compliance with global anti-corruption regulations. While it may be natural for a Japanese staff member to see the importance of complying with laws from his or her own country, it may take additional guidance to educate them on the global anti-corruption laws that are applicable to the business.
Many employees working for a foreign company in Japan may see their organisation as a Japanese company simply because the office is in Japan, and they may not realise that they are subject to requirements posed by foreign regulations. There is also the likelihood that local staff may not understand these additional requirements and the circumstances in which they apply. For example, the FCPA prohibits offers or payments to foreign government officials in order to gain a business advantage. A Japanese salesperson dealing with a Japanese government official will need to be able to determine whether this government official qualifies as a ‘foreign’ official. The salesperson may view the government official as a domestic official and may not be aware that the FCPA’s tenets apply in this situation.
Effectively communicating the importance and value of compliance to local staff
Perhaps the most important thing is that foreign organisations must have compliance personnel that can communicate with Japanese members working in their offices and effectively educate them on the importance of compliance. Too often companies open operations abroad only to find that the compliance people they have positioned there are not able to properly communicate with local staff, reducing the effectiveness of training and education.
For a legal and compliance group to build a strong relationship with local staff and open an effective communication channel, foreign companies in Japan should consider the following:
- Communication and training on compliance topics must be available in English and Japanese and must be localised to illustrate the types of situations that Japanese staff members are most likely to face. Training is often too centered on the risks faced by employees based in company headquarters, completely missing the kinds of risks faced by employees in overseas offices.
- Often emphasis is placed on ‘tone at the top’ for pushing the compliance agenda; however, tone at the middle must also be established. Employees work most closely with their line managers. Therefore, for a programme to be effective, these middle managers must set the tone for compliance with their employees and act as a source of guidance and advice.
Monitoring the effectiveness of the compliance programme and reporting on its progress
Foreign companies must establish ways to monitor and report on the success of their compliance programmes. Far too many companies have opened offices abroad and set up compliance programmes only to find out that no metrics were kept, certain responsibilities were never carried out (such as inserting compliance safeguards within contracts) and, overall, data just did not flow.
To ensure proper monitoring and reporting on their compliance programmes, foreign organisations in Japan should consider prioritising the issues that most affect their local offices. These priorities should then be made clear to the relevant staff members. If a hierarchy of issues cannot be established, local compliance teams will not know which issues to concentrate on and monitoring and reporting will be unfocused and more likely to fail. For example, we have seen that there is a practice of former government employees joining businesses in Japan. Local compliance teams should ensure that this issue is prioritised and that the efforts taken to detect its occurrence are measured and reported on. If the business is a manufacturer and must source a variety of component parts to build its products, the issue of supplier integrity and due diligence should be prioritised and the resulting compliance efforts evaluated. Without prioritising issues, it will not be easy to set a clear agenda on the type of tasks that need to be carried out and the metrics and data that need to be kept.
Monitoring should also include risk-based compliance audits. These audits can help an organisation measure the effectiveness of current compliance controls and recognise which areas of the business need greater oversight. Foreign corporations may already have effective risk-based compliance audit programmes being utilised at their head offices or other major locations, but they must also ensure that they follow the same high standards guiding compliance audits across all of their offices. While this may seem obvious, compliance audits are not commonly carried out in Japan, even by professional service firms claiming expertise in this area. Therefore, it is essential that foreign corporations provide training to compliance teams in Japan and give them the necessary tools to carry out these audits so that they meet their organisation’s global standards on this process.
Challenges for Japanese corporations expanding abroad
Japanese companies expanding operations abroad also face unique challenges when implementing an effective anti-corruption compliance programme. In recent years, there have been several cases of corruption involving Japanese companies abroad. For instance, in 2011, Japan-based construction firm JGC Corporation paid a US$218.8 million criminal penalty to resolve FCPA-related charges for its participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction contracts relating to a Bonny Island liquefied natural gas (LNG) project. A year later in 2012, Japanese trading company Marubeni Corporation paid a US$54.6 million criminal penalty for its role in the same Bonny Island matter, in which it paid bribes to lower-level Nigerian government officials to secure contracts to build the LNG facilities. In 2013, a senior executive with Toyota supplier Futaba Industrial was charged with giving US$4,500 in cash, and gifts worth US$1,500, to government officials, in violation of the FCPA, to halt an investigation into potential irregularities at a plant in Dongguan, Guangdong Province, China. Most recently, Marubeni Corporation was again implicated under the FCPA, entering a guilty plea on 19 March 2014 for its participation in a seven-year scheme to pay bribes to members of the Indonesian parliament to secure a contract for provision of power-related services in Indonesia.
For Japanese companies, difficulties in compliance may arise due to their hierarchical structure and cultural, with company head offices expecting regional offices to accept their vision and approach to compliance without considering the perspectives and regulatory environments of the branch offices. Japanese companies also face the challenge of meeting global anti-corruption regulations applicable to their international offices, and training and educating local staff on how to comply. To successfully meet these challenges, Japanese companies with a presence abroad must ensure that:
- company headquarters provide regional offices with autonomy to prioritise and develop their compliance programmes based on relevant risks and obligations
- staff at branch offices are educated on the specific laws and policies that apply in the countries in which they operate.
We take a closer look at how Japanese companies expanding abroad can meet the challenges of implementing a compliance programme.
Headquarters must provide regional offices with sufficient autonomy to develop compliance programmes tailored to relevant risks and obligations
Japanese companies tend to have a hierarchical structure, with headquarters possessing a dominant position in prioritising all facets of the business. In terms of compliance in Japan, this often leads to headquarters having little concern for compliance as a function and emphasising growth of the business over all else. While growth of the business will always be the driver of any company, regional offices may need to prioritise compliance more urgently based on the relevant risks where they operate and the compliance obligations applicable to them. A head office’s priority for compliance (or lack thereof) should not stymy the ability of a regional office to invest in and develop its compliance programme.
Success at the regional level depends on each branch office having the necessary wherewithal to prioritise risks and tailor its compliance programme to address, without limitation, the local regulatory environment, employee base and other location-specific risks. For example, a regional office in Southeast Asia may wish to invest more heavily in customising its local anti-corruption programme to account for donations to charity, political contributions, and the giving of gifts for cultural holidays (such as Chinese New Year in Singapore and Malaysia) that are prevalent in the region.
As regional offices continue to drive and push the standards of compliance, headquarters can synthesise the most prevalent aspects of these offices’ programmes and create an underlying minimum standard that the business as a whole must follow.
Educating local staff on the relevant risks and laws
Training and educating local staff on relevant laws and obligations can be a difficult endeavour. In September 2011, Tokyo-based manufacturer of marine hose and other industrial products Bridgestone Corporation pled guilty and paid a US$28 million criminal fine for conspiring to rig bids and making corrupt payments to government officials in Latin America. Bridgestone was implicated under US antitrust regulation, the Sherman Antitrust Act, for allocating shares of the marine-hose market with competitors and using a price list to carry out the conspiracy. The company was also implicated under the FCPA for making corrupt payments in Latin America to secure the sales of marine hose. Bridgestone’s sales agents in Latin America paid employees of state-owned customers a percentage of the total value of the proposed sale of the marine hose. This case demonstrates the extraterritoriality of global regulations: Bridgestone was subject to US antitrust and anti-corruption laws even though it is based in Tokyo and was conducting sales in Latin America. Bridgestone needed to educate its employees and make aware of penalties if not followed in Japan, Latin America and the US about the laws that governed their business operations.
To prepare for a smooth experience abroad, Japanese companies must hire experienced regional compliance personnel who can train and educate local staff on the laws that apply to their operations. Furthermore, an effective communication channel must exist between all major business units to give compliance teams a broader view of the business groups operating on a particular transaction and the resulting laws that apply.
Another challenge to providing effective compliance training at international branches is the fact that Japanese companies have significant rotational movements globally, leading to new employees working in foreign offices on temporary assignments. Educating these employees is a challenge because they will likely be motivated to meet business demands in a short time (given the temporary nature of their assignment) and consequently may be less concerned with learning about local risks and obligations. Furthermore, if these employees do engage in corrupt activities, they may have already moved to a different department or company branch by the time the activity is uncovered or investigated, making it more difficult for compliance personnel to remediate these actions and prevent further damage.
Accordingly, compliance personnel heading up regional offices must be able to inculcate foreign employees on assignment at their offices in a short amount of time. Compliance training for these employees must be brief, in their native language (if possible) and context driven (making sure that it is directly related to the assignment they are working on and the risks present in such work).
While doing business in Japan poses unique challenges, increasingly stringent enforcement trends show that organisations can no longer use cultural differences, language barriers or geographical distance as an excuse for compliance failures.
Companies entering Japan and Japanese organisations expanding abroad must complement the drive to grow their business with enough attention on compliance. By balancing these two interests, companies greatly increase their chances of succeeding in the challenging but rewarding Japanese business environment.