Commentary on Japanese economic, financial, real estate, investment and business and social developments and news
Monday, November 21, 2011
Anti-Yakuza Laws Begin to Bite IV- Uncertainties for foreign business from new laws
A prediction: if Japan ever becomes a police state, it will come about not by national law but municipal ordinances. And the war on organized crime could be the engine that drives the process.
With the coming into force of its Organized Crime Exclusion Ordinance on Oct. 1, Tokyo joined every other prefecture in Japan in having a set of local regulations intended to make life miserable for yakuza and other organized crime groups. With so much international commerce being done through Tokyo, perhaps the foreign business community may start to take note of what these ordinances mean, since they affect businesses of all types. They also grant the police potentially significant powers to interfere in commercial affairs.
As with those of other prefectures, the Tokyo ordinance has the commendable goal of making it harder for mobsters to function in society. Recent revelations about allegedly improper expenditures by Olympus, which some have speculated could be evidence of ties to "antisocial forces" (code for mobsters), have focused a great deal of attention on this policy goal.
As is often the case in Japan, however, the question is whether a top-down approach will work in practice. As written, the Tokyo ordinance seems to be aimed primarily at preventing businesses from using the threat implicit in mob associations to gain commercial advantage, as well as both making it easier for members of crime syndicates to leave and harder for youngsters to be enticed into joining. It also seeks to hinder the ability of criminal groups to engage in any sort of legitimate commercial activities that might benefit their unlawful ones. It is here that the ordinance imposes some potentially significant burdens on businesses of all kinds.
First, the rules prohibit companies from knowingly engaging in business transactions that benefit organized crime groups.
Second, they impose on apparently all businesses in Tokyo an obligation to confirm that the people and companies they enter into contracts with are not mob-related. How an entrepreneur is supposed to do this is not explained ("Say, can everyone in your company use their fingers to count to 10?" "Is that white belt a 'cool biz' thing?" etc.). It would also seem difficult to do given Japan's recent ardor for privacy protection laws.
Third, and perhaps most significantly, all businesses in Tokyo are supposed to endeavor to include in all of their written contracts a clause that allows them to be canceled immediately if it is subsequently discovered that one of the other parties is a mob-related person. Additional rules apply to construction contracts and those for the sale or lease of real estate that might be used as a mob office.
Who exactly is a "mob-related person"? The helpful definition in the ordinance essentially says "someone who has a close relationship with a mobster or a mob group." For more clarity, one could look at other police regulations on organized crime, which include lineal blood relatives of mobsters. If applied to the ordinance, it would mean people could be subject to legally sanctioned discrimination in business merely because of the family into which they were born, a result that would seem unconstitutional. (The Japanese Constitution specifically prohibits discrimination based on family origin, but perhaps anything goes in the War on Crime.)
The ordinance's provisions on contracting seem to have been drafted by people who know very little about business, which is a shame because so much business gets done in Tokyo. While the metropolitan police have not done so yet, the Miyagi police have prepared a helpful set of model contract provisions to use in connection with that prefecture's anti-organized crime ordinance. Their model language fills an entire page, and suggests that contract parties sign an oath confirming they are not mobsters. This may be asking a lot in a country where a contract of six or seven pages may still qualify as "long" and simply the order in which contract parties appear in the contract can involve issues of corporate etiquette.
While the notion of chopping off ties with anyone bearing the yakuza taint may be simplistically pleasing in the abstract to local politicians and police bureaucrats, it adds a potentially significant element of risk allocation to all manner of business dealings — i.e., who gets left holding the bag if it turns out that one of the parties to the deal has a really intricate tattoo? In a complex multiparty transaction where hundreds of millions of yen are at stake, the ability to cancel a contract at any time for any reason may be a tough sell, particularly for foreign parties who are just trying to do business in Japan rather than solve its social problems. Even if all of the parties are comfortable that they are yakuza-free when they sign the contract, they still all have to live with the risk that somebody will later enter into some relationship that, perhaps inadvertently, makes them "mob-related," and renders the contract instantly terminable.
Some Japanese businesses are reportedly already feeling stymied by the new regulations. According to a recent article in the Tokyo Shinbun, the police have been providing helpful advice like "having the occasional drink with a childhood friend who ended up in a criminal group will not make you 'mob-related' "; "preparing a small funeral service for a mob boss and his immediate family is OK, but a huge memorial service attended by the whole syndicate is not"; and, "delivering a few bento boxes to a mob group for lunch is OK, but catering to a bigger meeting is not permitted."
While these examples are doubtless intended to reassure entrepreneurs, the mere fact that the ordinance seems to grant the police such sweeping powers to make almost completely subjective interpretations about the legality of commercial decisions seems disturbing.
Similarly, while these examples of guidance illustrate that the intended focus of the ordinance is to make it even more difficult for crime syndicates to eat, drink or work openly on a local level, the rules themselves contain no clear parameters as to their scope. Thus, as written the ordinance applies to all businesses equally, whether it is the neighborhood funeral parlor or a foreign multinational trying to buy a Japanese company headquartered in Tokyo.
If a private equity fund launches a tender offer for a major Japanese company, does it have to get all the shareholders to swear they are not mobsters and cancel the whole transaction if it turns out one of them is? Can "clean" shareholders who oppose the bid use an unsupported claim that other shareholders are mob-tainted to argue that an investment fund should go away? Indeed, how can businesses get rid of yakuza shareholders or partners if they can't even buy them out using arms-length, commercially reasonable contracts? One wonders what sort of advice the metropolitan police would give on these types of questions.
Even if the contract provisions function as expected, one has to question the wisdom of requiring businesses to terminate commercial contracts that are otherwise legitimate because of suspected mob connections. Aggressively asserting legitimate legal rights for extortionate purposes, whether as shareholders, tenants or otherwise, has long been a line of business for some mob groups. Since Japanese law has the concept of "abuse of rights," even if the contract provides a right of termination, the other party can claim that it was abused. Thus, a system that could give mobsters a steady stream of breach of contract claims might actually prove counterproductive.
What is a business to do about this new ordinance? Ignoring it may prove to be a viable strategy (not one that I am recommending, mind you). The rules only require businesses to "endeavor" to have contracts with the required language, and there are no direct penalties for failing to do so. Thus, the regulation could become one of the many Japanese laws and regulations everybody ignores until the police want to arrest someone or the media needs a shame story.
However, the strategy of ignoring the rules may not work for all companies, such as those that place a heavy focus on corporate social responsibility, or are subject to constitutional or contractual mandates that they conduct their businesses in accordance with applicable laws and regulations.
Even without penalties, the ordinance could have ramifications for corporate governance. Corporate directors have an obligation to ensure their companies are not fostering criminal conduct. Does failure to have the "suggested" language in all of their contracts constitute a breach of duty? What if they have the contract language but fail to terminate a major contract with a strategic partner based on a media report suggesting that the partner might have connections to someone who might be mob-related?
Ignoring the new regulations may not also work for the police, who are apparently now empowered by the ordinance to conduct warrantless "inspections" of all business premises and demand documents and other information. This power to engage in what would seem to be potentially wide-ranging infringements of basic civil liberties (not to mention interference with business) is softened by a requirement that the police officer conducting the inquiries show ID (er, don't they have already have to do that anyway?) and a provision stating that the process should not be considered a criminal investigation — very comforting indeed!
Companies might try to refuse on principle, but noncooperative businesses would apparently risk having their names publicized on a police-administered list of mobsters, mob affiliates and mob sympathizers. Will appearing on such a list make your business "mob-related" according to the new ordinance, and all your contracts thus terminable? The rules are not clear, but a lot of your customers and vendors may not want to take chances.
That the ordinance was not drafted with much consideration for the potential burdens it may place on business in a metropolis that aspires to be a global financial center is obvious. As for its effect on organized crime, it may just drive the mobsters deeper underground, a questionable result, particularly if it leaves the police as the only readily identifiable organized crime-related group making unreasonable demands on businesses.