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J. Ralph Byington and Jo Ann McGee

INTRODUCTION

On March 11,

2011, Japan was hitby an 8.9 earthquake,which was followed bya 30-foot tsunami andwhich precipitated aterrifying nuclear reac-tor meltdown. Shortlybefore these eventsoccurred, Japan wasnamed by the MerrillLynch survey on fundmanagement as thesecond-most favoredequity market to invest in, withthe United States being first(Webb, 2011). Immediately fol-lowing these events, the Nikkei,the index of stock market activ-ity most frequently watched inJapan, fell 17 percent (Finfacts,2005). However, by May 2,2011, the Nikkei had recoveredand topped the key 10,000 level(Nikkei Closes at Post-QuakeHigh, 2011). The Nikkeis

recovery will lead to increasedconfidence in the market forinvestors, and according to EricChaney, the chief economist atAXA Group, as Japan endeavorsto rebuild, there are across-the-board opportunities for invest-ment in Japanese companies(Kelly, 2011). These opportuni-ties will involve the usual risks

associated with investments.In 2009, Japan was labeled theforemost hotbed of fraud in Asia(Lewis, 2009). Therefore, a partof this risk is associated with theexistence of white-collar crime(WCC) in Japan. The purpose ofthis article is to make corporatemanagement aware of the extentand magnitude of white-collarcrime in Japan and the need toexercise caution while conduct-

ing due diligence during invest-ment pursuits in Japan.

WHITE-COLLAR CRIMEOVERVIEW

The term white-collar crimewas coined in 1939 by EdwinSutherland during a speech to theAmerican Sociological Society.

At that time, he wasattempting to distin-guish between crime

in the streets and thesort of crime commit-ted by a respectableperson with a highsocial status duringthe course of his work(White Collar Crime,2007). It did not how-ever become a majorarea of concern forbusiness until the lastquarter of the twentiethcentury. In 1976, Kel-

ley defined white-collar crimeas illegal acts characterized bydeceit, concealment, violation oftrust, and not dependent upon theapplication of threat of physicalforce or violence (p. 35). Morerecently, the Association of Cer-tified Fraud Examiners (ACFE)referred to this type of crime asoccupational fraud and abuse(OFA), and defined it as theusing of ones occupation to per-

sonally enrich ones life by thedeliberate misuse or misapplica-tion of an employers resourcesor assets (ACFE, 2008). Thistype of crime has also beenreferred to as economic crime(EC) (PricewaterhouseCoopers,2007). Whether this type ofoffense is called WCC, OFA, orEC, from the time that it first

Following the devastating earthquake, tsunami, and

reactor meltdown in Japan in March 2011, there

will be many opportunities for US corporations toinvest in Japanese entities. But these investments

will not be without risk. Indeed, in 2009 Japan was

labeled the foremost hotbed of fraud in Asia. So

the authors wrote this article to make corporate

management aware that white-collar crime (WCC)

is one of the risks they will encounterand that

there is a need to exercise caution while conducting

due diligence during investment pursuits in Japan.

2011 Wiley Periodicals, Inc.

White-Collar Crime in Japan


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DOI 10.1002/jcaf 2011 Wiley Periodicals, Inc.

that the CFO and other manage-ment understand the magnitudeand extent of WCC and thepotential impact of WCC fromJapanese sources.

PARALLELS IN WCC HISTORYIN THE UNITED STATES ANDJAPAN

The history of WCC inJapan strongly parallels thehistory of WCC in the UnitedStates. Some of the similaritiesinclude (1) when WCC cameto the attention of the public,(2) the correlation between eco-nomic growth and WCC growth,(3) the maf ias participation in

WCC, and (4) the numerous cor-porate financial statement frauds

in both countries. WCCfirst came to the attentionof the US public early inthe 1970s when it becameapparent that certain politi-cians had been acceptingbribes and illegal politicalcontributions. Obviously,these activities had beenoccurring for some timedespite the fact that they

were illegal and consideredto be an unacceptable way

of doing business in the UnitedStates. At approximately thesame time, one source reportsthat WCC had been in existencein Japan for decades. Unlikein the United States, however,WCC was considered to be anacceptable way of doing busi-ness, albeit illegal (Ferreti,1975).

In general, analysts haverecognized that WCC increasesin a rapidly developing econ-omy. This pattern has alreadybeen documented in developedcountries like the United Statesand Japan. Basically, what hap-pens is that economic growthoutpaces governments abilityto prevent WCC through legal

fixing, counterfeiting, embezzle-ment, insider trading, securitiesfraud, forgery, money launder-ing, kickbacks, payroll fraud,and tax evasion. The computerage, however, has expanded

WCC to include identity theft,computer and Internet crime(sometimes known as cyber-crime), credit card fraud, phoneand telemarketing fraud, bank-ruptcy fraud, healthcare fraud,environmental law violations,insurance fraud, economic espio-nage and trade secret theft (TheCrime Report, 2009). Again,examples of all of these typesof crimes can be found world-wide. According to Pricewater-

houseCoopers (PWC), the phe-nomenon of WCC is the most

problematic issue for businessesworldwide. It persists withoutany apparent abatement andaffects all businesses no matterwhat the companys country,industry, or size. In addition,despite the efforts of authoritiesand the investments in preven-tion controls by companies, thelevel of WCC and the associatedcosts have not decreased (PWC,2007). The ACFE estimates thatthe typical organization, on aglobal basis, loses 5 percent ofits annual revenue to WCC. Itestimated total worldwide lossto WCC at $2.9 trillion annually(ACFE, 2010). Japanese entitiesare no exception to the victim-ization of WCC. It is essential

received attention, it has posed agrowing threat to US companiesdomestically.

Originally, WCC becamea concern for the US businesscommunity as a result of the

Watergate investigation. At thattime, it became publicly appar-ent that certain politicians hadbeen accepting bribes and illegalcampaign contributions. Dur-ing the mid-1970s, the focusof investigations revealed thatWCC had exceeded crime inthe street in terms of the dollarsinvolved and the number of par-ticipants (Kelley, 1976). By 1985the reported loss to WCC hadreached $2 billion a year (Wells,

1985). It has grown exponentiallysince then, with losses estimatedat (1) $400 billion in 1996,(2) $600 billion in 2002, (3)$660 billion in 2004, and(4) $652 billion in 2006.The most recent estimateplaces losses at $994 bil-lion per year in the UnitedStates (ACFE, 1996, 2002,2004, 2006, 2008).

White-collar crimeknows no boundaries.

The globalization of theeconomy has extended thisthreat beyond our borders so thatit has become not only a domes-tic issue, but also a worldwideissue for US companies. Asearly as 1996, the head of Ernstand Youngs fraud investigationand risk management divisionstated that fraud is truly globaland it doesnt matter whetherthe business is in London, NewYork, Sydney, Toronto, or HongKong; the risks of fraud are thesame everywhere (Fraud Dis-coveries Are Chance Happen-ings, 1996).

White-collar crime manifestsitself in many different forms.Traditionally, it included fraudu-lent financial statements, brib-ery, extortion, bid rigging/price

White-collar crime knows no bound-

aries. The globalization of the econ-

omy has extended this threat beyond

our borders so that it has become

not only a domestic issue, but also a

worldwide issue for US companies.


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2011 Wiley Periodicals, Inc. DOI 10.1002/jca

enced fraudulent reporting andthe issues that were involved.

The business communityin general is familiar with theEnron debacle and the othersubsequent financial statement

frauds in the United States thatled to the Sarbanes-Oxley Act(SOX). The major purpose ofSOX was to restore investorconfidence after these frauds.The law included numeroussections, but two of the moreprominent dealt with specifyingthat management is responsiblefor the companys financialstatements and Section 404that requires that managementattest to the effectiveness of the

companys system of internalcontrol. The Japanese had theirown equivalent of Enron witha company named Kanebo. InSeptember 2005 four of Price-waterhouseCoopers certified

safeguards (Silk, 1994). Anothercommonality between the USand Japan is the participationof organized crime in WCC. Inthe United States, the mafia hasbeen involved in WCC in sev-

eral forms, from financial fraudto bribery and extortion. Thearrest of Al Capone on chargesof tax evasion, a form of WCC,is an excellent example of orga-nized crimes early involvementin WCC. The Japanese mafia,known as the boryokudan(vio-lent ones) to the police and theyakuzato themselves, has alsobeen involved in WCC in thatcountry. In 1988, theyakuzawasobserved to be expanding into

WCC in the form of extortionstied to bankruptcy and insurancefraud. They were also extendingtheir WCC activities outside ofJapan. According to the US Fed-eral Bureau of Investigation crim-

inal division, there were indica-tions of Japanese WCC actuallyemerging in the United Stateswhen there was increased contactbetween Japanese and Americancorporations (Jones, 1988).

In the late 1990s andearly 2000s, the United Statesincurred numerous corporate andaccounting scandals. Includedin these scandals in the UnitedStates were companies such asWorldCom, Tyco International,Waste Management, Q-West,Phar-Mor, and of course, Enron.In the wake of these scandals,Japan was wracked by a seriesof similar scandals in the mid-2000s that involved some of

the largest and most highlyrespected companies in the coun-try (Pontell & Geis, 2010). SeeExhibit 1 for a list, taken froma KPMG report, of some of theJapanese companies that experi-

Major Cases of Fraudulent Reporting in Japan

Date Company Issue

4/14/06 Livedoor Marketing Delisted for falsifying information

4/14/06 Livedoor Delisted for falsifying information

4/26/06 Chori Supervisory post assigned due to inappropriate accounting

6/20/06 Mikimoto Revealed recording fictitious sales for five years

10/7/06 ADTX Searched on suspicion of overstating sales

11/22/06 Higashinihonhouse Warned by Securities and Exchange Commission for falsifying information

12/6/06 TTG Assessed a penalty for acquiring funds by filing a false security registration

statement

12/17/06 Misawa Home Kyushu Revealed using inappropriate accounting practices

12/18/08 Nikko Cordial Group Supervisory post assigned due to partial misstatement of security registration

1/4/07 Taikisha Supervisory post assigned due to inappropriate cost accounting

1/4/07 IXI Delisted for fraudulent transactions

1/4/07 Tonichi Carlife Group Supervisory post assigned due to system failure and related accounting errors

3/30/07 Internet Research Inst. Supervisory post assigned due to auditor refusal to give audit opinion

(KPMG, 2007)

Exhibit 1


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DOI 10.1002/jcaf 2011 Wiley Periodicals, Inc.

aware that it is looking at strongsimilarities between what is hap-pening domestically in terms ofWCC and what has and will behappening in terms of WCC inJapan and exercise caution while

conducting due diligence duringinvestment pursuits in Japan.

REFERENCES

Association of Certified Fraud Examiners(ACFE). (1996). Report to the nationon occupational fraud and abuse.Austin, TX: Author.


Association of Certified Fraud Examiners(ACFE). (2004). Report to the nation

on occupational fraud and abuse.Austin, TX: Author.




The Crime Report. (2009, May 11).

Retrieved from http://thecrimereport.org/resource-guide/white-collar-crime/?page=2

Ferreti, F. (1975, January 23). Increase incrime statistics causing international con-cern. New York Times. Retrieved fromhttp://news.google.com/newspapers?id=qu4eAAAAIBAJ&sjid=SCQEAAAAIBAJ&pg=6906,1929806&dq=the+history+of+white+collar+crime+in+japan&hl=en

Finfacts. (2005). The Nikkei 225 index per-formance. Finfacts Reports/Services.Retrieved from http://www.finfacts.com/Private/curency/nikkei225

performance.htmFraud discoveries are chance happenings.(1996, August). Internal Auditor, 53(4).Retrieved from http:/proquest.umi.com/pqdweb?Did=000000010005654&Fmt=3&Deli

Haruo, F. (2005, December). No accountingfor ethics. The Japan Journal. Retrievedfrom http://www.japanjournal.jp/tjje/show_art.php?INDyear=05&INDmon=12&artid=e1d660485ce61f888f5557532c34e6c3

ferences from region to region,most fraud schemes were similarin terms of trends, perpetratorcharacteristics, and antifraudcontrols no matter where thefrauds happened (ACFE, 2010).

For example, the most commonfraud was the misappropriationof assets (usually cash), and themost costly fraud was financialstatement fraud. Other similari-ties included (1) the most com-mon form of detection was a tip,(2) the higher the level of man-agement, the greater the loss, (3)external audits are not effectivetools for detecting WCC, (4) theaverage duration of most fraudswas 18 months, and (5) the cost

of fraud appears to be reduced ifantifraud controls are in place. Itis possible to generalize at thisjuncture to Japan and say that,based on the f indings of thisACFE survey conducted on aglobal scale, WCC in Japan dis-plays the same WCC character-istics. However, further evidenceof this observation can be seen inthe results of the KPMG surveyentitledFraud Trends in Japan.This survey provided additional

evidence that Japan displayedthese same fraud characteristics(KPMG, 2011).

CONCLUSION

Because of the events ofMarch 11, 2011, there willbe more opportunities for UScorporate investment in Japanthan usual. According to EricChaney, the chief economist atAXA Group, as Japan endeav-ors to rebuild, there are going tobe across-the-board opportuni-ties for investment in Japanesecompanies (Kelly, 2011). Theseinvestments do not come withoutrisk, and one of the major com-ponents of risk involves the exis-tence of WCC in Japan. Corpo-rate US management should be

public accountants were arrestedbecause of their involvement inthe filing of falsified financialstatements by Kanebo in 2001and 2002 in an effort to conceala loss of over 80 billion yen

(Haruo, 2005). In Japan, afterKanebo and another companynamed Seibu Railway Co. issuedfalsified financial statements, theJapanese version of SOX, calledthe Financial Instruments andExchange Law and nicknamedJ-SOX, was passed on June 7,2006. There are provisions inJ-SOX similar to provisions inthe US version. In particular,Sections 302 (which refers tocorporate responsibility for

financial reports) and 404 (whichdeals with managements assess-ment of internal controls) aresimilar (Lee, 2011). In summary,US corporate managers shouldbe aware that the economic envi-ronment in Japan is very similarto the economic environmentin the United States in termsof WCC. In addition, there aremany similarities between thefraud characteristics found inthe United States as compared to

those in Japan.

PARALLEL IN WCCCHARACTERISTICS IN THEUNITED STATES AND JAPAN

As noted above, WCC is aglobal issue. The Associationof Certified Fraud Examinersconducted a global survey ofWCC that was published in 2010(ACFE, 2010). The results ofthis survey followed the samepatterns that had been observedin their other fraud surveys thatwere conducted specificallyfor the United States. Simplyput, what was happening in theUnited States appeared to behappening in the same manneron a global scale. The ACFEfound that despite slight dif-


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.com/extweb/home.nsf/docid/29CAE5B1F1D40EE38525736A007123FD

Silk, M. (1994). Cracking down oneconomic crime. China BusinessReview, 21(3), 21. Retrieved fromhttp://web.ebscohost.com/ehost/detail?vid=3&hid=24&sid=2db1ee9e-f7fe-4fc8-a96b-330196ffa7f9%40sessionmgr10&bd

Webb, M. S. (2011, March 18). Japan:Classic investment opportunity or toodangerous to touch? Money Week.Retrieved from http://www.moneyweek.com/investments/stock-markets/asia-and-japan/japan-classic-investment-opportunity-or-not-52

Wells, J. T. (1985, August). White-collarcrime: Myths and strategies. The Prac-tical Accountant, pp. 4345.

Wells, J. T. (1987, Spring). Red flags: Thekey to reducing white-collar theft. Cor-porate Accounting, pp. 5153.

White-collar crime. (2007). Legal Informa-

tion Institute, Cornell Law School.Retrieved from http://www.law.cornell.edu/wex/index.php/White-collar_crime

Lee, T. (2011). Japans version of Sar-banes-Oxley and Japanese f irmsin Taiwan. PricewaterhouseCoopers.Retrieved from http://www.pwc.com/tw/en/challenges/assurance-and-business-advisory/indissue0271.jhtml

Lewis, L. (2009, May 11). Lawyers soundalert about rising Japanese fraud. TheTimes. Retrieved from http://www.freerepublic.com/focus/f-news/2248349/posts

Nikkei closes at post-quake high. (2011,May 2). Retrieved from http://www.cnbc.com/id/42851979/Nikkei_Closes_at_Post_Quake_High

Pontell, H. N., & Geis, G. (2010, June 10).Introduction: White-collar and corpo-rate crime in Asia. Asian Criminology.Retrieved from http://www.springerlink.com/content/c14363813888q514/fulltext.pdf

PricewaterhouseCoopers. (2007). Global

economic crime survey 2007: Eco-nomic crime, people, culture, and con-trols. Retrieved from http://www.pwc

Jones, B. (1988, July 3). Japanese crimegangs have an eye on Australia. Syd-ney Morning News. Retrieved fromhttp://news.google.com/newspapers?id=SipWAAAAIBAJ&sjid=VeQDAAAAIBAJ&pg=5793,2730150&dq=the+history+of+white+collar+crime+in+japan&hl=en

Kelley, C. M. (1976, June). Accountants andauditors vs. white collar crime. InternalAuditor, 33(3), 3539.

Kelly, R. (2011, March 28). Japan disastersmay yield investment opportunities.Retrieved from http://www.todayonline.com/Business/EDC110328-0000015/Japan-disasters-may-yield-investment-opportunities

KPMG. (2007). News reports on corporatefraud and misconduct in Japan andthe effective employment of thirdparty consultants. Retrieved fromhttp://us.kpmg.com/jnet/English/Archives/2007/JulAug/Fraud_Print.asp

KPMG. (2011). Fraud trends in Japan:KPMG fraud survey report 2010.New York: Author.

J. Ralph Byington,PhD, CPA, is the dean and a professor of accounting at Coastal Carolina University.His publications include over 100 journal articles, book chapters, newsletter items, and proceedings. Heis active within the accounting profession, presenting numerous professional programs at the national,regional, and local levels. He has presented over 250 professional programs to business executives, CEOs,CFOs, state CPA societies, student organizations, and firms in Georgia, Louisiana, Mississippi, Texas,

New York, California, Illinois, Massachusetts, Florida, Arkansas, and Washington, DC. Jo Ann McGee,DBA,is an associate professor in the Department of Accounting and Business Law at Louisiana State Universityin Shreveport. She has presented professional programs and published in the accounting areas of expertisein protection against white-collar crime and ethical behavior in company reporting.

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