by Charles Duross, James Hough — from JD Supra business Advisorhttp://bit.ly/1oBhYSu
While many people don’t know it, a bribery scandal in Japan in 1976 was part of the motivation for the Foreign Corrupt Practices Act (FCPA), which was signed into law on December 19, 1977.
Almost exactly two decades later, Japan joined the fight against foreign corruption by signing the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (Anti-Bribery Convention) on December 17, 1997, and by joining the Working Group on Bribery (Working Group) of the Organisation for Economic Co-operation and Development (OECD). After signing the Anti-Bribery Convention, Japan enacted implementing legislation outlawing foreign bribery, which came into force on February 15, 1999. But this was just the beginning, not the end.
One of the hallmarks of the OECD Working Group on Bribery is its ongoing monitoring function, which Transparency International has described as the “gold standard.” This oversight function is rigorous, and many countries—including Japan recently—have felt the sting of pointed criticism in the Working Group’s monitoring reports. A recent Working Group report (released in February 2014) suggests Japan is undertaking new measures—and committing additional resources—to combat foreign corruption. As one of the world’s largest economies and as a response to such criticism, Japan may well be poised for a new phase of foreign bribery enforcement.
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Japanese companies should begin preparing now for increased scrutiny by Japanese authorities as well ascontinuing close oversight by U.S. authorities. Such proactive measures should include (1) appropriate and
rigorous risk assessments, (2) compliance program benchmarking, (3) enhanced foreign bribery training for boardmembers, executives, and employees, (4) thorough third-party and transactional due diligence, and (5) a reviewof internal accounting controls. Besides preventing and detecting foreign corruption in the first instance, suchmeasures may also enable a Japanese company to avoid criminal liability in Japan by demonstrating that thecompany acted with due care designed to prevent such violations. These measures will also pay dividends,because, regardless of any enhanced Japanese enforcement, many Japanese companies remain subject to theFCPA, and thus the long reach and rigorous foreign bribery enforcement of U.S. authorities. These measures
may prevent an FCPA violation, or at a minimum, put Japanese companies in a position to seek a more favorableresolution, including a declination to prosecute by U.S. authorities.
OECD WORKING GROUP ON BRIBERY MONITORING PROCESS
Once a country accedes to the Anti-Bribery Convention, it becomes subject to a rigorous review process. This isbecause, pursuant to Article 12 of the Anti-Bribery Convention, there is a program to “monitor and promote the fullimplementation of [the] Convention.” The idea behind this monitoring process is to ensure that countries thathave signed the Anti-Bribery Convention actively enforce their foreign bribery laws to ensure that companies fromall countries are playing by the same rules. To accomplish this goal, the Working Group, which is comprised of
the countries that have signed the Anti-Bribery Convention (currently 40 countries), meets quarterly at the OECDin Paris. The Working Group oversees implementation of the Anti-Bribery Convention through a “peer review”system based on a set of agreed-upon principles and standards.4
This monitoring has occurred in three phasesin which two countries review a third country after which the reviewing countries submit a report to the entireWorking Group for its review and approval:5
• Phase 1 evaluates whether the legal texts through which state parties implement the Anti-BriberyConvention meet the standard set by the convention.
• Phase 2 studies the structures put in place to enforce the laws and rules implementing the Anti-BriberyConvention and to assess their application in practice. Phase 2 broadens the focus of monitoring to
encompass more fully the non-criminal law aspects of the 1997 Revised Recommendation (and now2009 Recommendation). Phase 2 also serves an educational function as participants discuss problemsand different approaches.6
• Phase 3, which for most state parties is the current phase of review, concentrates on the following pillars:
(a) progress made by state parties on weaknesses identified in Phase 2; (b) enforcement efforts andresults;
(c) implementation of the 2009 Recommendation for further Combating Foreign Bribery; and
(d) cross-cutting issues faced by all countries, such as corporate liability and mutual legal assistance.
Each report issued during each phase of the review contains various recommendations for improvements to bemade by the country being reviewed. One year after the report, the reviewed country is expected to provide theWorking Group with an oral follow-up report on the progress it has made in implementing the recommendationscontained in the report. Two years after issuance of the report, the reviewed country is expected to provide a written follow-up report delineating the progress it has made responding to the recommendations contained in thereport, and the Working Group assesses that progress indicating whether a recommendation has been fullyimplemented, partially implemented, or not implemented.
In many instances, after a critical report by the Working Group, countries have responded to Working Grouprecommendations by dedicating more resources to combat foreign bribery, increasing investigations and
prosecutions, and even amending their foreign bribery laws. For example, following severe criticism by theWorking Group, the United Kingdom passed the landmark U.K. Bribery Act and brought a series of high-profile
foreign bribery cases.7 Canada is another example where, after a highly critical Working Group report, it beganinvestigating and prosecuting more foreign corruption cases, and just last year, Canada amended its law toeliminate an exception for facilitating payments and to increase possible prison sentences, among other things.8
JAPAN’S FOREIGN BRIBERY LAW
Since February 1999, Japan has outlawed the bribery of foreign public officials.9 Article 18 of the UnfairCompetition Prevention Law (UCPL) makes it illegal to give (kyoyo), offer (moshikomi), or promise (yakusoku) abribe to a foreign public official (i.e., non-Japanese official):
No person shall give, offer, or promise any pecuniary or other advantage, to a foreign public official, inorder that the official act or refrain from acting in relation to the performance of official duties, or in orderthat the official, using his position, exert upon another foreign official so as to cause him to act or refrainfrom acting in relation to the performance of official duties, in order to obtain or retain [an] improperbusiness advantage in the conduct of international business.10
The UCPL defines a “foreign public official” broadly as:
• Any person who engages in public services for national or local foreign governments;
• Any person who engages in services for an entity constituted under foreign special laws to carry outspecific tasks concerning public interest;
• Any person who engages in services for an enterprise of which the number of stocks with the right to vote or the amount of capital subscription directly owned by one or more of national or local foreign government exceeds one-half of that enterprise’s total issued stocks with the right to vote or total subscribed capital, or of which the number of executives (including directors, statutory auditors, trustees, inspectors, liquidators or other persons who engage in management of its business) appointed or named by one or more national or local foreign government, exceeds one-half of thatenterprise’s executives, and to which special privileges are given by national or local foreign governments to do its business; and such person is defined in the government ordinances as “foreign public officials”;
• Any person who engages in public services for an international organization, which means aninternational organization that is formed either by governments or by an international organizationitself formed by governments; or
• Any person who exercises a public function that falls under the authorized competence of national orlocal foreign governments or an international organization and is delegated by them.11
By comparison, while the FCPA does not contain such a detailed definition of “foreign official,” a number of districtcourts in the United States have found that many co-extensive factors like those contained in Japan’s foreignbribery law can be used by jurors to determine whether a particular entity qualifies as an “agency” or“instrumentality” of a foreign government.12
The UCPL applies to natural and legal persons alike.13 Unlike the United States, under Japanese law, criminalliability of a legal person is based on the principle that the company did not exercise due care in its supervisionand selection, among other things, of an officer or employee to prevent the criminal act.14 The burden rests onthe company to establish that it acted with due care by showing it took proactive and specific steps to prevent violations.15 While in the United States there is no “due care” defense, such proactive steps, like establishing an
effective compliance program, are weighed heavily in favor of companies by the DOJ16 and SEC,17 as well as thecourts.18 As such, under either the Japanese or the U.S. system, establishing an effective compliance programand robust internal accounting controls will help insulate companies from liability or enforcement.
In terms of jurisdictional reach, the UCPL applies to Japanese citizens and Japanese legal persons anywhere inthe world under the “principle of nationality jurisdiction” and applies to non-Japanese nationals and non-Japaneselegal persons (for example, a foreign company or gaikoku gaisha) where an act of the offense, or a result of theoffense, occurs in the territory of Japan under the “principle of territorial jurisdiction.”19
With respect to facilitation payments, Japan’s foreign bribery law contains no exception for such payments.However, Japanese authorities have indicated that “[w]here a small facilitation payment is made in order to
expedite a routine administrative service, this would be considered not to fall under ‘improper businessadvantage.’”20 Other countries, like Germany, have used a similar interpretation to permit a de facto exception forfacilitation payments even though the law makes no explicit exception for them.21 Even though the Japaneseauthorities may not regard facilitation payments as prohibited, the law does not contain an explicit exception forthem, and therefore the safest course for a company is simply not to permit them.
Under the UCPL, the punishment for bribery of a foreign public official is a maximum of five years in prison or afive million yen fine (approximately US$50,000) for natural persons, or both, and a maximum 300 million yen
(approximately US$3 million) fine for legal persons.22
While the principal regulatory authority overseeing Article 18 of the UCPL is the Ministry of Economy, Trade andIndustry (METI), the National Police Agency, Ministry of Justice, and public prosecutors’ offices are substantiallyinvolved in the investigation and prosecution of violations under the UCPL. To date, Japan has brought threeprosecutions under its foreign bribery law, with its most recent prosecution occurring in September 2013.23
JAPAN RESPONDS TO OECD CRITICISM WITH INCREASED RESOURCES AND NEW RESOLVE
The Phase 1 report for Japan was issued in May 200224 and an initial Phase 2 report followed thereafter in March2005.25 The Phase 2 report was highly critical of Japan for its lack of effort to enforce its foreign bribery. In fact, it was so critical of Japan that the Working Group ordered that Japan undergo a second review, also known as abis, to subject Japan to even more detailed scrutiny.26 As a result, an additional on-site visit took place inFebruary 2006 and a subsequent Phase 2 bis report was then issued in June 2006 finding that “Japanese lawenforcement authorities have still not made adequate efforts to investigate and prosecute foreign briberycases.” 27
As with other member states, Japan underwent a Phase 3 review, and a report was issued in December 2011. 28This report contained strongly worded criticism of Japan’s lack of enforcement effort and provided a lengthy list ofrecommendations for Japan to address in future follow-up reports.
In response to the pointed criticism contained in its December 2011 Phase 3 report, Japan submitted a writtenfollow-up report in advance of the December 2013 plenary of the Working Group. This written follow-up reportwas required by the Working Group’s procedures. Japan’s two-year written follow-up report (and the WorkingGroup’s assessment of that report) was released publicly by the Working Group in February 2014.29 That reportprovides an important and rare insight into the inner workings of Japanese enforcement authorities, and it alsoprovides a glimpse into the mounting pressure on Japan to increase its foreign bribery enforcement.
In the lengthy report, Japan disclosed certain enhancements, increased resources, and additional steps it wastaking to investigate and prosecute foreign bribery more effectively. What follows are some of the highlights ofthat report:
• Stressing the Importance of Foreign Bribery Enforcement. Japan reported that it took severalmeasures to raise the profile of its foreign bribery law, including “announcing the importance ofenforcement of the foreign bribery offence in the UCPL in the assembly of law enforcement authorities.”30Moreover, Japan sent prosecutors and police to a foreign bribery training in Washington, D.C.31 Japanindicated that it was optimistic that its enforcement authorities, armed with this additional internationaltraining, would “more actively detect leads of foreign bribery cases.”32 Indeed, Japan highlighted thatfollowing that international training, the Aichi Prefectural Police in September 2013 arrested a former
senior executive of a major car parts manufacturer, who was convicted of foreign bribery in China.33
• Strengthening Coordination Among Japanese Law Enforcement Authorities. Japan reported thatMETI “has strengthened the coordination with law enforcement authorities.”34 Japan noted METI’sestablishment of “clear guidelines” for processing allegations of bribery and METI’s efforts to provide“quick responses” to questions from law enforcement about how the UCPL should be interpreted.35 Inparticular, Japan highlighted a “framework” for coordination among the “specialinvestigative divisions indistrict prosecutors[’] offices and relevant agencies, including Police, the National Tax Agency (NTA) and
the Securities and Exchange Surveillance Commission (SESC).”36 Japan stated that it has strengthenedthis “framework” by “stressing the importance of close cooperation” and sending law enforcement to the
foreign bribery conference in Washington, D.C., where inter-agency coordination was “one of the mainthemes.”37 As an example of its success in strengthening coordination among law enforcement agencies,
Japan cited the Futaba case, in which police officers “coordinated closely with relevant authorities toovercome the legal and fact finding issues.”38
• Enhancing Use of Mutual Legal Assistance Requests. Japan stressed that it has used Mutual LegalAssistance requests when law enforcement “became aware of allegations” of foreign bribery.39 Further,
Japan highlighted that in 2011, the Ministry of Justice established a “Special Subcommittee on a CriminalJustice System for a New Era,” which consisted of legal scholars, legal professionals, and others. After
meeting regularly for two years, the Special Subcommittee announced its findings in January 2013.40Among its findings, the Special Subcommittee recommended using “new investigative techniques,”including “mitigation/remission, [and] prosecutorial agreement and immunity for cooperativewitness[es].”41 But Japan cautioned that the Subcommittee’s work is ongoing and that its work is a partof “greater and ongoing discussions on a new criminal justice system.”42
• Including Foreign Bribery Enforcement Explicitly Within the Duties of Economic and FinancialCrimes Prosecutors. Japan emphasized that the Ministry of Justice amended regulations “so as toexpressly include the detection, investigation and prosecution of foreign bribery cases within the scope of[prosecutors’] duties.”43 These regulations took effect on June 1, 2012.44