Corporate Japan beefs up compliance after pain of auto parts cartel sanctions
19 July 2016. By Sachiko Sakamaki.
Japanese companies are strengthening their compliance programs in the wake of auto parts cartels being punished by regulators in several jurisdictions. In addition to traditional methods such as compliance manuals, training and restrictions on contact with competitors, some companies have started deploying sophisticated digital tools that monitor emails to detect signs of antitrust violations.
Nevertheless, Japanese companies remain exposed to antitrust enforcement abroad, underlining the difficulty of coping with a dynamic global regulatory environment.
As a series of auto-parts cartels were exposed starting in 2010, dozens of Japanese manufacturers were punished by competition authorities in Japan, the US, Europe, China, South Korea and other jurisdictions, hit with massive fines and damages claims brought in civil litigation.
Yazaki Corp, a manufacturer of wire harnesses and other automobile components, was one of the companies implicated. The Tokyo-based firm faced a $470 million fine and prison sentences for six employees imposed by the US Department of Justice in 2012, and a 125 million euro ($140 million) fine from the European Commission the following year.
Completely unprepared for investigations and litigation abroad, Yazaki was hit with an “unprecedented impact” that Legal Affairs Division Executive Officer Osamu Goto said opened a new chapter in the company’s 75-year history.
Yazaki employs nearly 280,000 people in 45 countries and it had global sales of 1.66 trillion yen ($15.7 billion) in the year to June 2015. According to credit research company Teikoku Data Bank, the parent company recorded a 19 billion yen loss on sales of 768 billion sales in the year ending June 2015, following a 5 billion yen loss the previous year, showing the scale of the hit on its bottom line.
After that rude awakening, Yazaki’s managers started strengthening the firm’s compliance program. It has restricted contact with competitors, set up a compliance committee headed by its president, and started offering training to managers and employees around the world. And last year it introduced a digital system that uses a sort of artificial intelligence to detect context rather than simple key-word searches to read employees’ emails and flag up possible wrongdoing.
“We’ve been doing various things because our president has become extremely cautious after we were ‘burnt’,” Goto said. “We consider the cost insignificant compared with the fines we had to pay.”
Kimitoshi Yabuki, an antitrust lawyer at Tokyo-headquartered Yabuki Law Offices, said digital tools are a new addition to corporate compliance programs.
“In addition to the three traditional tools — compliance programs, training and restrictions on meetings with competitors — a recent trend among companies is the use of digital forensics,” said Yabuki. “Managers regularly check employees’ emails to detect any behaviors that may be against laws or corporate rules.”
Yuichi Ikeda, an expert in electronic discovery and digital forensics at PwC Advisory in Tokyo, said companies involved in the auto-parts cartels had started employing tech-assisted review systems for emails in the past year or two as they had become more serious about beefing up their compliance programs.
“The regulators’ investigation and [auto-parts cartels] class actions in the US are winding down, and now the companies have started working on remedies by introducing or augmenting their compliance programs,” Ikeda said. “But it’s not cheap, so its use is limited to relatively large companies that want to prevent a recurrence.”
The cost of monitoring one email account is roughly around 5,000-10,000 yen ($47-94), Ikeda said. That could cost a company tens of millions yen or hundreds of millions of yen, depending on the scale of such auditing and whether it hired external specialists to conduct monitoring.
Hitachi Automotive Systems was also involved in the auto-parts collusion, having paid 195 million dollars in fines to the US Department of Justice and 26.9 million euros to the European Commission. Since then, the challenge for its parent company, Hitachi, a conglomerate with 335,000 employees and 1,056 subsidiaries, has been enforcing the compliance message among its entire staff.
In 2013, Hitachi appointed Senior Vice President Toshiaki Kuzuoka as its chief compliance officer, and officials in charge of risk management, all reporting to Kuzuoka, were appointed at 14 of its business units and 14 group companies. Compliance officers in 11 regions around the world are required to offer support according to local rules. The company has also introduced a whistleblower system, and offers e-learning on antitrust compliance in Japanese, English and Chinese. In fiscal 2012-13, 200,000 employees participated in group discussions on antitrust issues.
“Antimonopoly violations have been enforced more strictly than before around the world, and what’s accepted in Japan can be seen as a violation in the US,” said Satoshi Watanabe, a senior manager in Hitachi’s compliance department. “It’s important to get compliance rooted among our entire workforce through various means.”
The company is considering employing a digital auditing system as it is now only manually checking selected emails, Watanabe said.
Although many companies that have been punished for antitrust violations are working hard to improve compliance, many other firms have taken a more relaxed position, according to a survey published last year by the Japan Fair Trade Commission.
Among companies that had experienced foreign competition enforcement, 62 percent had rules on document storage and bans on destroying any documents once an investigation started, and 67 percent had rules on contacts with competitors. But among those that hadn’t been sanctioned abroad, only 27 percent had rules on documents and 25 percent had contact rules. Even among Japanese companies operating in the US and the European Union, only one in ten had compliance manuals dealing with local antitrust law.
“Many companies are strengthening their existing compliance programs or creating new ones, and we’re offering training,” said Hiromitsu Miyakawa, a partner at Jones Day in Tokyo. “But it will take more time for compliance consciousness to permeate among all sales employees at the same level as staff in legal departments.”