25 Mar 2020
Important legal framework and static underpinnings to fraud, asset tracing and recovery schemes
Japanese civil law permits the filing of an action for damages caused by fraud or tort, and provides a mechanism to enforce compulsory execution against the property of the wrongdoer based on a successful final and binding judgment. However, the legal proceedings could take a considerable amount of time, during which the assets of the defendant could be drained before compulsory execution could be carried out upon receipt of a favourable judgment. Therefore, preservation procedures, such as provisional seizure and provisional disposition, exist as a means to preserve the property of the wrongdoer and to prevent the dispersion and dissipation of that property.
Attachment is recognised as a means to maintain the current status of property and to preserve that property for future compulsory execution, and may be allowed on selected appropriate property corresponding to the amount of a monetary claim from among the non-exempt property of the debtor that is the subject of the execution. When money is the subject of a fraud, it can be difficult to determine the location of that money. However, if, for example, the fraudulent act was a request to transfer money to a specific bank account, a claimant may be able to obtain a provisional attachment order and request that the bank account be frozen. Banks generally will not freeze their deposits without an attachment order issued by a court, so the attachment procedure should be followed.
Provisional injunction order
The provisional injunction order procedure is used to maintain the status quo of a specific property when a creditor has a claim against the debtor for that specific property, and when any change in the current physical or legal status of the property is likely to make it impossible or extremely difficult to enforce the claim in the future.
Requirements for preservation procedures
Preservation procedures require a prima facie showing of the existence of a right to be preserved. For example, attachment only applies to a claim for the payment of money. The existence of a claim for the payment of money will be obvious in cases of fraud and other illegal activities seeking recovery of money or property having value. However, a prima facie case of fraud requires a factual showing, for example, that the property invested by a creditor was not actually used for any intended investment or that the investment itself was fictitious. As an example, an individual solicited investments in a medical collections business, MRI International, Inc., but did not use the invested funds for the intended investment purposes. Further, a company, World Ocean Farm, raised funds for the purpose of investing in shrimp farming in the Philippines, but did not undertake any actual investment activity as described in the fundraising plan. In both cases, individuals were found liable for fraud.
In addition, attachment is appropriate when there is a likelihood that compulsory execution will not be possible or when significant difficulties will arise in implementing compulsory execution. The need for preservation will generally occur in cases in which there is a risk that the debtor’s culpable assets could be quantitatively and qualitatively reduced due to destruction, waste, resale, concealment, or expropriation, or where the debtor’s culpable assets would become unsuitable if sold in the form of disposition of real estate, or where it would be difficult to ascertain the debtor’s culpable assets due to the debtor’s escape or relocation.
Protection measures for debtors
In attachment proceedings, a temporary restraining order may be issued against the debtor based on a creditor’s unilateral claim or based on a prima facie showing, which may avoid full confirmation of the claim. The issuance of a temporary restraining order may be a decisive blow to the debtor, so the court may require a security deposit from the creditor to protect against damage that the debtor may incur to preserve the civil claim. The existence of a claim is relatively clear in the case of a loan claim or a receivable arising from a sales contract. However, the existence of a claim is not necessarily clear in the case of a claim for damages arising from a tort, such as fraud. Accordingly, the security deposit for an order of provisional seizure, in which the claim for damages caused by a tort is a secured claim, is often made on the condition that a statutory bond of at least 30% of the claim is deposited with the relevant Legal Affairs Bureau. Thus, the preservation procedure and the subsequent proceedings require a considerable amount of funds.
Compulsory execution procedure after obtaining a judgment in a civil suit
A plaintiff (creditor) who has prevailed on a fraud claim in a civil suit may seize the real estate, personal property, bank deposits, and other monetary assets held by the defendant (debtor). In the case of a monetary claim for fraud, a declaration of provisional execution is usually attached to the judgment of the first instance, and therefore, it is possible to seize the defendant’s property even before the judgment becomes final and binding. In those circumstances, if a provisional seizure order is obtained and placed on the defendant’s property at an early stage, effective compulsory execution is possible because the property will be preserved. In the case of a tort claim, it is usually difficult to apply for compulsory execution against the defendant’s property after obtaining a judgment.
Property disclosure order
The Civil Execution Law provides for an order requiring a debtor to disclose his/her assets. If the debtor violates the property disclosure order, he/she is subject to a fine. In practical terms, a property disclosure order is aimed at collecting claims using the pressure of the imposition of fines. Requirements for an order for the disclosure of property are as follows.
A creditor of a monetary claim who has an enforceable authenticated copy of a title of obligation may file a petition for an order requiring the debtor to disclose property when the creditor has made a prima facie showing that the debtor has been unable to receive full performance under the monetary claim or when the creditor has made a prima facie showing that he/she is unable to obtain full performance under the monetary claim even by implementing compulsory execution against known property (Article 197 of the Civil Execution Law). Courts may prescribe a deadline for disclosure of information and impose an obligation on the debtor to make statements concerning his/her property (Article 197 of the Act). Failure to comply with a disclosure order by the court-imposed deadline without a reasonable basis to do so or without a sworn statement, or provision of a false statement in a sworn disclosure is punishable by imprisonment with work for not more than six months or a fine of not more than 500,000 yen (Article 213 of the Act). In practice, effective collection of monetary claims is often made by stressing the possibility of a petition for a property disclosure order and criminal sanctions.
If a debtor does not make any payment toward a final and binding judgment, a judgment creditor may file a petition for the adjudication of bankruptcy against the debtor based on the creditor’s claim. Upon rendering an adjudication order, a court-appointed trustee will have the power to investigate the debtor’s property. If a debtor makes a false statement in connection with the investigation, the debtor would be in violation of bankruptcy law and would be subject to criminal punishment, which could be a powerful tool for collecting claims.
Case triage: main stage of fraud, assets tracing and recovery cases
As described above, if a plaintiff obtains a favourable judgment in a civil suit, the defendant’s deposit account or other property may be subject to compulsory execution, and property may be seized. However, the location of a defendant’s property may be impossible to ascertain, so it is important to initiate attachment or provisional injunction procedures against known property before filing a lawsuit.
Filing of a criminal complaint
A creditor must bear the legal costs incurred in bringing an action and obtaining judgment and compulsory execution. Therefore, in order to clarify the actual situation through investigation by the authorities, a creditor may commonly file a criminal complaint with the police to urge the authorities to investigate and to recover damages by having the police or the public prosecutor confiscate the property during the criminal procedure process.
If an investigation reveals fraud has been committed committed in violation of the Law on Punishment of Organized Crime, the investigating authorities may seize and confiscate funds collected by the criminal offender. Investigative bodies, such as the police and prosecutors, have the authority to compulsorily collect deposit information and other information from banks and other financial institutions, and thus, can arrest and prosecute criminal offenders, and confiscate property, when the evidence of fraud is clear.
In particular, the Law on Punishment of Organized Crime provides for the confiscation and collection of property derived from organised crime. Organised crime pursuant to this law includes not only illegal transactions, such as the sale of narcotics, but also organised fraud, such as solicitation and execution of fictitious investments, either inside or outside of Japan. Thus, in addition to seeking criminal prosecution of the offender who engaged in fraudulent solicitation, the investigative authorities may confiscate the proceeds from illegal acts. In addition, the investigating authorities may be required to distribute the proceeds based on the victim recovery benefit system.
Accordingly, recovery of overseas assets is difficult without the involvement of the law enforcement institutions. Therefore, if the whereabouts of foreign assets are known, it is important to prevent leakage of those assets by irst executing the procedures for attachment and provisional disposition of foreign assets in collaboration with overseas lawyers at an early stage. Therefore, building an international network of lawyers is recommended.
The World Ocean Farm case presents an example of international investment fraud. The wrongdoers stated that they ran a shrimp farm in the Philippines, the size of which was 450 times the width of Tokyo Dome. Potential investors were told that investments in the business would double in one year. Distribution of the investment funds was accomplished in the name of a limited liability partnership. The wrongdoers collected approximately 85 billion yen from about 35,000 people. The investment turned out to be a large-scale Ponzi scheme. More than 10 company executives involved in the fraud were arrested and indicted, and the former chairman was sentenced to 14 years in prison on fraud charges. Although the victims suffered considerable damages, the Ponzi scheme left no significant property in Japan, and $40 million that had been concealed in United States financial institutions for money laundering was seized by the FBI. The Japanese and United States authorities negotiated the return of the seized funds, and a fund of $40,269,890 was returned to the victims.
For proceeds of organised crime, a framework of procedures, such as confiscation and return, within the international legal framework, such as the International Criminal Proceeds Transfer Prevention Act, is indispensable for recovery.
Parallel proceedings: a combined civil and criminal approach
In Japan, a combined civil and criminal approach is not often seen in practice, and there are few cases in which criminal and civil procedures are used concurrently to recover damages caused by fraud. Notably, there are no discovery procedures in civil proceedings in Japan. Thus, every plaintiff must individually collect evidence to prove fraud, and it is generally difficult to collect sufficient evidence to obtain a favourable civil judgement. Therefore, in many cases, a victim will file a complaint with law enforcement authorities before initiating a civil lawsuit, expecting that the whole picture of fraud will be revealed by the investigation by the authorities. In the meantime, a wrongdoer often reaches a settlement with the victim(s), and the damages caused by fraud are recovered through the wrongdoer’s performance of obligations contained in the settlement.
In the case of corporate insider fraud, such as embezzlement of corporate assets by an officer or employee of a company, the company may be able to collect a considerable amount of evidence successfully by conducting an internal or independent fraud investigation. Even in such case, however, the company will often negotiate with the wrongdoer in an effort to recover the damages before filing a complaint with law enforcement authorities, and will determine whether to file a complaint with law enforcement authorities taking into account the status of voluntary damage recovery by the wrongdoer. If the public prosecutor or the police have already received a criminal complaint and commenced an investigation, the public prosecutor may drop the case if the criminal suspect and the victim(s) reach a settlement. Even after an investigation and an indictment, the public prosecutor may request a less severe penalty from the court if the defendant and the victim(s) reach a settlement.
A wrongdoer may be able to avoid criminal charges or a severe criminal penalty by reaching a settlement with victim(s). As such, it is often seen in practice that victim(s) recover considerable damages through out-of-court settlements in criminal proceedings.
Restitution court order
A restitution court order provides an approach similar to parallel criminal and civil proceedings in accordance with Chapter 7 of the Act on Measures Incidental to Criminal Procedures for Protecting Rights and Interests of Crime Victims. In this approach, a criminal court that has found a defendant guilty in a criminal trial continues to hear a claim for damages from victim(s), and may order the defendant to compensate the victim(s) for the damages. This proceeding resolves the issue of damages recovery summarily and promptly. However, a restitution court order is available only in a criminal case in which a person is killed or injured by an intentional criminal act, such as murder, so it cannot be used to recover damages caused by property offences, such as fraud.
Remission payments using stolen and misappropriated property
A remission payment under the Act on Issuance of Remission Payments Using Stolen and Misappropriated Property can be used as a tool to recover damages caused by property offences, such as fraud. In particular, assets that have been confiscated (or property equivalent to the forcibly-collected value of stolen and misappropriated property) in criminal trials of certain crimes, such as organised crimes or black-market lending cases, are stored in monetary form, and remission payments are made to victims. In this process, the criminal proceedings precede the administrative procedures in which the public prosecutors carry out remission payments. Therefore, this is not a true combined civil and criminal approach, but it has the similar effect of quick damage recovery.
The Act on Damage Recovery Benefit Distributed from Fund in Bank Accounts Used for Crimes provides procedures for distribution of recovered damages from bank accounts used in cases of bank transfer or similar fraud. In order to achieve damage recovery for victims of these types of fraud, the procedures enable a financial institution to distribute damage recovery benefits from funds that are deposited in a bank account of the financial institution used for the fraud. Thus, a financial institution, upon notification by a victim(s), may take certain measures, including suspension of transactions in the bank accounts. Claims on the bank account will be extinguished after a public notice by the Deposit Insurance Corporation, and the remaining funds in the deposit amount will be distributed to the victim(s) as damage recovery benefits. No civil action will be required except for certain cases in which a party makes a claim to the deposit account. In addition, criminal procedures will not be required in this process.
As mentioned above, under the current legal system in Japan, the most effective way to determine the whole picture of fraud is to influence law enforcement authorities, such as the public prosecutor, the police, or the Securities and Exchange Surveillance Commission, to commence governmental investigations. In practice, however, law enforcement officers will not officially accept a complaint from a victim unless the victim presents strong evidence to support the fraud allegations. Therefore, in the case of corporate insider fraud, such as those involving a company officer or employee, the company should conduct its own fraud investigation and collect strong evidence through in-depth investigative procedures, such as electronic data review, utilising digital forensics, in order to present evidence to law enforcement authorities.
In Japan, fraud investigations conducted by so-called “third-party committees” that are independent from a company have become common practice in corporate crisis management. However, in order to maintain the strict independence of third-party committees, the Japan Federation of Bar Associations has issued guidelines for practitioners of these committees that restrict the committee’s ability to share its evidence with the company. Thus, even if a third-party committee obtains strong evidence to prove fraudulent acts, it will generally be difficult for the company to use that evidence in its other crisis management actions, such as taking disciplinary action or seeking compensation for damages against a wrongdoer. The key challenge for companies is to conduct an objective and independent fact-finding exercise while establishing appropriate investigative structures that enable the company to continue effective corporate crisis management activities.
Cross-jurisdictional mechanisms: issues and solutions in recent times
In Japan, it is generally difficult in practice to recover assets concealed outside the territory of Japan without the involvement of governmental authorities.
The Act on Issuance of Remission Payments Using Stolen and Misappropriated Property sets out procedures for restoration payments using property transferred from abroad. Under those procedures, the Japanese government, under certain conditions, will restore the property subject to confiscation (or a collection of property of equivalent value) by a court or similar proceedings under the laws and regulations of a foreign country, and issue the restoration payments to a victim(s) using the property. In a famous black-market financing case by the Goryokai criminal organisation, the Japanese government restored property worth about 2.9 billion yen transferred from Switzerland where the state government confiscated the wrongdoer’s property. Then, the amount of money corresponding to the amount of damage suffered by the victims was paid as restoration payments.
In a cross-border Ponzi scheme investment fraud by a United States-based asset manager, MRI International, the Financial Services Agency issued an administrative action, but Japanese law enforcement authorities did not launch a criminal investigation. Some of the victims filed a civil suit against MRI seeking payment of a maturity reimbursement. In 2014, the Tokyo District Court ruled that the provision in the contract establishing exclusive jurisdiction in the State of Nevada was valid. However, the appellate court ruled in 2014 that the exclusive jurisdiction clause was invalid, and the Supreme Court dismissed and rejected MRI’s appeal in 2015, thus clearing the way for the victims to hold MRI responsible in a Japanese court. In the meantime, victims conducted concurrent class actions in the United States for recovery of damages.
Technological advances and their influences on fraud, asset tracing and recovery
In Japan, there have recently been two major incidents in the virtual currency (cryptographic asset) industry.
In the Mt. Gox incident, bitcoin worth about 48 billion yen was lost in February 2014. In the same month, Mt. Gox filed for bankruptcy. The company’s president was later arrested and charged with embezzling customers’ accounts. He was not found guilty of embezzlement, but he was sentenced to two years and six months in prison, which was suspended for four years, for creating and using false private electronic records. With regard to recovery of damages, the subsequent steep rise in bitcoin prices created an extremely unusual situation in which the bankruptcy proceedings of Mt. Gox were moved to civil rehabilitation proceedings. Victims (creditors) could recover damages in the form of dividends in civil rehabilitation proceedings. In the wake of the Mt. Gox scandal, the Financial Services Agency revised the law to introduce a registration system for virtual currency exchange operators, putting them under the supervision of the authorities for the first time anywhere in the world.
In the Coincheck incident, about 58 billion yen worth of virtual currency NEM was leaked in January 2018. Coincheck put the “private key” used for transactions, such as remittance of virtual currency, in a so-called hot wallet connected to the Internet. (Note: A wallet disconnected from the net is called a cold wallet.) The private key was allegedly stolen by an outside hacker through the Internet, and a large number of NEMs were stolen. The NEM Foundation, in cooperation with engineers, placed tracking mosaics on the stolen NEM wallets, keeping them under constant surveillance to prevent perpetrators from converting the stolen NEM into other currencies. However, even with this tracking method, if the perpetrator exchanged the NEM for another currency in the highly anonymous network called the Dark Web, identification of the perpetrator who stole the NEM would be extremely difficult. Because hacking from overseas was also raised as a possibility, administrative supervision and legislation in Japan alone could not adequately deal with the incident. The Financial Stability Board, which comprises financial supervisory authorities in major countries, started creating a “contact list” to help local authorities in charge of virtual currency administration in each country understand their responsibilities. In addition, in the event that any cybercrime actually occurs, a system must be established to identify the culprit through international cooperation among investigative authorities and engineers in each country, and to investigate and recover assets outside Japan.
Recent developments and other impacting factors
In Japan, with the revision of the Code of Criminal Procedure in May 2016, a Japanese version of plea bargaining was introduced in June 2018. Plea bargaining made it possible for Japanese public prosecutors to agree with suspects and defendants on measures favourable to them, such as suspension of prosecution, prosecution for lighter offences, and a request for a summary order, in exchange for cooperation in criminal investigations (Article 350 (2) of the Code of Criminal Procedure).
Applicable crimes include not only organised crimes related to drugs and weapons, but also a wide range of economic crimes, such as fraud, embezzlement, bribery and cartels.
The Japanese version of plea bargaining is characterised not by self-incrimination, but by cooperation in investigations relating to “crimes committed by others”. Even a declaration by a person or a corporation of his/her/its own crime does not, by itself, satisfy the requirements of plea bargaining under the law. Plea bargaining requires cooperation in an investigation, such as testifying about, and/or submitting evidence of, “crimes committed by others”.
Plea bargaining has been used in three cases in Japan. The first case involved bribery of a foreign public official in connection with the construction of a power plant in Thailand (Violation of the Unfair Competition Prevention Act). The parties reached a plea agreement in July 2018, and as a result of cooperating in an investigation into a crime committed by a former executive, the company and local employees escaped prosecution.
The second case involved Nissan President Carlos Ghosn’s fabrication of financial statements (Violations of the Financial Securities and Exchange Law) (judicial transaction closed around November 2018). Certain executives cooperated in the investigation of Ghosn’s crime, and were exempted from prosecution while Carlos Ghosn and Nissan were prosecuted.
The third case involved embezzlement of company funds by a representative director of an apparel company. In November 2019, a special investigation squad of the Tokyo District Public Prosecutors Office reached a plea deal with an employee who was ordered to commit fraud.
By Hiroyuki Kanae, Hidetaka Miyake and Atsushi Nishitani, Anderson Mōri & Tomotsune
This article originally appeared in Essential Intelligence: Fraud, Asset Tracing & Recovery, Spring 2020
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