The Journal The Authority on Global Business in Japan


JULY 2014
Avoiding Yakuza Influence on Your Business
Why standard due diligence is often not enough

By John Amari

This year, Japan’s biggest organized crime syndicate launched its own website as part of a recruitment drive.

Membership has been down due to the introduction of stronger laws in recent decades and a slowing economy, making it harder for yakuza to raise funds for their operations.

Despite this, risk management experts such as Stuart Witchell warn that traditional antisocial forces such as the yakuza are still making their presence felt, as recent corporate scandals involving criminal links have erupted in the media.

Sophisticated organized crime groups are now diversifying their business portfolios and entering new markets, in a departure from the seedy pursuits with which they have typically been associated.

Speaking to a full house at the Tokyo American Club on May 2, Witchell, senior managing director at global advisory firm FTI Consulting, Inc., warned of the risks posed by these antisocial groups to Japanese and foreign businesses.

    ACCJ Journal: How would you describe antisocial forces in Japan?

First off you have organized crime, such as the yakuza gangs whose members you may easily spot on the streets of Tokyo.

But there are also other groups that are potentially harmful to Japan’s economic position or even pose a physical danger for the Japanese public. This may include quasi-organized crime groups; some of the biker gangs, or bosozoku, come to mind.

This other side of antisocial forces may also include right-wing groups.

As of 2013, the National Police Agency estimated there were around 1,000 right-wing groups with about 100,000 members in Japan.

They are well known for their highly visible propaganda vehicles, which are fitted with loudspeakers and prominently marked with the name of the group, the Imperial Seal and flag of Japan, military flags, and propaganda slogans.

    How has these groups’ involvement in business changed over the years?

The yakuza have traditionally been involved in a number of businesses, including real estate and construction, as well as entertainment and sports. To this day, they continue to be involved in drugs, human trafficking, extortion, and money laundering.

The yakuza are well known for their collection of “protection rackets,” or funds from local pachinko parlors and bars.

These businesses regularly pay the yakuza a certain amount in fees. In return, if, for example, a rowdy customer turns up, they call the yakuza to get rid of the offending person.

As organized crime becomes more sophisticated, gangs are venturing into other businesses that may, at least from the outside, appear to be legitimate.

This makes it harder to distinguish if such ventures are affiliated with the yakuza. Organized crime members are often educated overseas and increasingly getting involved in a variety of business sectors.

    What are the main take-away points from your presentation today?

Number one is the level of due diligence that is required regarding acquisitions or new business partnerships. This entails looking at existing and potential vendors and the entire supply chain that may exist in any business.

Companies need to look at the level of pre-employment screening used when recruiting.

Another area for American firms operating in Japan to consider is the level of corporate governance present internally, which is particularly applicable to this market.

Having all the right policies and procedures in place and ensuring that, going forward, these procedures are consistently followed, will help guard against risk from antisocial forces, as well as other risks related to corruption, bribery, and fraud.

I see so many cases where firms insist they had numerous meetings with potential Japanese business partners before considering a partnership or acquisition. They relate how everything seemed very positive.

They do a bit of financial due diligence, meaning they get some accountant to have a look at the books and records. However, they don’t really probe deeper: Who are these people, exactly? What are their backgrounds? Are there any hidden risks not visible from the balance sheet?

    Why should companies take such risk seriously?

I think number one is the potential for damaging their reputation. When corruption is exposed in Japan, it’s a big scandal. Also, once something is in the media, it has a long-term effect on a company’s business.

If there are issues related to the US Foreign Corrupt Practices Act (FCPA), this is particularly serious.

The US government, over the last few years—in part due to the FCPA—has become more aggressive in going after not only US companies, but also foreign firms operating in the United States. All types of companies need to be more proactive in protecting themselves.

    Where should companies rank the risk of antisocial involvement in their risk management strategy?

For large organizations, let’s say investment banks, this should be a high priority, because these businesses are involved in multiple transactions on a regular basis.

For smaller organizations that are looking to establish themselves here, assessing risk is potentially very difficult, but they can do the minimum that is required, such as staff background checks.

    What services does your firm provide?

We offer a large range of solutions for companies looking to protect, preserve, and grow their enterprise.

In relation to anti-social forces we offer an effective and holistic risk mitigation program.

One side of this is preventative support—helping companies review, test, and assess their existing protocols that manage risk to include conducting appropriate due diligence and enhancing compliance systems based on industry best practice. This can also be applied to other business risks.

The other side of our work is reactive, where we investigate a potential issue, provide operational support in a crisis, or deal with a problem related to fraud, corruption, misconduct, or reputational damage.

    Any plans for future involvement with the ACCJ?

As a result of my presentation, we will be putting out a short synopsis of organized crime trends in Japan, which I encourage all Journal readers to examine. •