Japan has become Asia’s foremost hotbed of fraud, possibly concealing financial deceptions on the scale of the Bernard Madoff ponzi scheme, senior lawyers have warned.
Economic upheaval and a desperation to recover investments are bringing to light a number of financial scams and frauds against foreign companies and funds. Some are said to be on what one government official called a “breathtaking scale” and many have clear links to yakuza organised crime syndicates.
Dominic Roughton, senior partner at Herbert Smith in Tokyo, one of Asia’s leading risk mitigation groups, said that the alarm bells were ringing as the economy deteriorated and investors at home and abroad grew intensely nervous about the “reality” of their portfolios in Japan. Property investments and companies with locally run satellite offices are seen as the weak spots.
Mr Roughton said that most of the frauds emerging now took two to three years to germinate and date from when foreign investment into Japan was high-paced and often under-researched.
“When the economy is awash with money, people do not do as much checking as they should,” he said. “Then, when you have a downturn, like now, somebody turns on the lights and says: ‘Where’s all the money?’” He said that frauds were increasingly interconnected. “In Japan, the vast majority of the people you’re doing business with are good – but when they are bad, they are really, really bad.”
John Kakuni, until recently general counsel at Shinsei Finance, said that Japan’s image as a low-crime country was a significant part of the problem, with foreign companies seeing the safe streets of Japan’s big cities as a reason to drop their guard in a way they would not do elsewhere.
“Foreign companies don’t do their due diligence and are subject to being duped,” he said. “The British and Americans seem to be more careful, but the continental Europeans are particularly susceptible.”
Mr Kakuni highlighted an example last year where Lehman Brothers and a collection of hedge funds were defrauded on a giant scale by conmen using the head office of one of Japan’s most respected trading houses to lend credibility to their $350million scam.
“You can probably see it as the tip of the iceberg,” Mr Kakuni said. “We could see something on the scale of a Madoff-style fraud emerging here, where major firms or major funds were victims.”
Stuart Witchell, the senior vice-president of International Risk, warned investors that fraud was the leading non-operational cause of business failure in Asia and that Japan was where most big fraud occurs.
Especially vulnerable, he said, were foreign companies doing business in Japan that accept advice that the market is so arcane, opaque and complex that they have to rely on locals.
“We have seen a rise in situations where foreign companies have naively relied on Japanese employees, with no proper oversight. They are finding a culture of kickbacks and insider trading and links to organised crime,” Mr Witchell said. And when fraud happens in Japan, it happens on a large scale, he said.
Raising the risk of fraud still further is the relatively more limited level of due diligence performed by Japanese companies on each other – lulling foreign investors into a false sense of security. Blind belief in business partners counts for much in Japan, but may have allowed colossal frauds to fester out of sight.
Jason Daniel, managing partner of Simmons & Simmons, in Tokyo, said: “Much depends on mutual trust – when dealing with someone that ‘deserves’ to be trusted, this can mean a national hesitation in asking too many difficult questions.”
On the domestic front, the increasing emergence of grand-scale fraud has rattled police and financial services authorities. As part of its economic stimulus package, the Government is making £85 cash handouts to all Japanese – an event that it is feared may become a “paradise” for scam-artists and large-scale conmen. http://business.timesonline.co.uk/tol/business/markets/japan/article6261356.ece
