Anti-Social Forces Screening in Japan: Checks and Contract Clauses

Anti-social forces screening (反社チェック) means checking, before and during a business relationship, that a counterparty and its directors are not organized crime groups or other anti-social forces (反社会的勢力). In Japan, against the background of government guidelines and prefectural ordinances on excluding organized crime groups, such checks and the inclusion of organized crime exclusion clauses (暴排条項) in contracts are widespread. Foreign companies starting business in Japan are expected to meet the same standard.

Why anti-social forces screening is expected

In June 2007, the executive committee of the government’s Ministerial Meeting Concerning Measures Against Crime agreed the Guidelines for Companies to Prevent Damage from Anti-Social Forces. The guidelines characterize anti-social forces as “groups or individuals who pursue economic gain through violence, intimidation and fraudulent methods”. They then ask companies to do the following.

• Respond as an organization rather than leaving matters to the staff member in charge
• Work with external specialist bodies such as the police, the Center for the Elimination of Boryokudan (暴力追放運動推進センター) and attorneys
• Sever all relations, including business relationships
• Respond to unreasonable demands through legal means, on both the civil and criminal fronts
• Never engage in back-room deals or provide funds

If a relationship with anti-social forces comes to light, the consequences can threaten the continuity of the business, including suspension of dealings by financial institutions, termination of contracts by business partners and effects on licenses. Opening a bank account also requires a representation that you are not an anti-social force (Opening a corporate bank account as a foreign business owner).

In sectors such as finance, real estate and construction, organized crime exclusion clauses are built into industry association templates and standard terms. Foreign companies face the same checks and representations when they lease an office, open an account or commission construction work in Japan.

The National Police Agency and other bodies survey companies on their efforts to sever ties and publish the results. As many years have passed since the guidelines were issued, it is important to review the guidelines and ordinances internally and check whether they still fit current business practice. The guidelines themselves are not legally binding, but it has been pointed out that if a company suffers damage while its systems for severing ties are inadequate, its directors may be held liable.

What the ordinances on excluding organized crime groups require of businesses

Every prefecture has enacted an ordinance on excluding organized crime groups. Their content varies by prefecture, so check the ordinance for each area where you do business. The Tokyo ordinance is used as an example here.

Checks and special terms are best-efforts obligations, but without checks a company may continue doing business without realizing who its counterparty is. Without special terms, terminating the contract once the facts emerge also becomes difficult. In practice, the safeguard is to set screening procedures internally and keep records of the checks carried out.

How to screen for anti-social forces

Do not rely on a single method; combine methods according to the risk.

1. Check basic information: Use the certificate of registered matters to confirm the trade name, head office, directors and date of incorporation. Frequent changes of trade name, head office or directors in a short period are a warning sign.
2. Search public information: Search newspaper databases and the internet for the company name and the names of its representative and directors, combined with terms relating to misconduct.
3. In-house and industry information: Cross-check against information accumulated internally and information from industry associations.
4. Specialist investigation firms: Engage one for significant transactions or when searches raise concerns.
5. Consult external bodies: If suspicions are strong, consult the police or the prefectural Center for the Elimination of Boryokudan.

When searching, include not only current names but also former trade names and directors’ maiden names and aliases. Results for Chinese names vary depending on whether they are written in Japanese kanji, pinyin or English, so check multiple spellings.

For overseas counterparties and directors of foreign nationality, Japanese-language information alone may not be enough. Consider also reviewing media reports in their home country, identifying beneficial owners (shareholders) and checking national sanctions lists. The list of persons subject to asset freezes and other measures under the Foreign Exchange and Foreign Trade Act (外為法, FEFTA), published by the Ministry of Finance, is another source to check.

When and whom to screen

Not every counterparty needs to be investigated to the same depth. Tiering by risk keeps the burden manageable: limit small, one-off transactions to searches of public information, and consider using an investigation firm for ongoing or large transactions, investments and real estate deals.

When acquiring a Japanese company, relationships with anti-social forces are also an item in due diligence (Due diligence checklist).

Internal rules and how to keep screening records

If each staff member screens in a different way, gaps and inconsistent judgments arise. Set out the following in internal rules.

• Scope of screening (types of counterparty, value thresholds, which directors and shareholders are covered)
• Methods (databases used, search terms, criteria for engaging an investigation firm)
• Who concerns are reported to, and who is responsible for deciding whether to proceed
• What is recorded (date, person, method, result and decision) and how long records are kept

Records also serve as explanatory material when a counterparty raises questions, or when a financial institution or audit firm reviews your systems. If the Japanese entity and the overseas head office use different standards, aligning the group’s policy makes it easier to operate.

What an organized crime exclusion clause should contain

Exclusion clauses are widely included in master transaction agreements, service agreements, leases and other contracts. They typically provide for the following.

• Representations and covenants: The company, its directors and anyone who effectively controls its management represent that they are not anti-social forces and covenant that they will not become so in future
• Definitions: Many examples list organized crime groups, their members, persons for whom five years have not passed since ceasing to be members, companies affiliated with organized crime groups and so on
• Prohibited conduct: A promise not to make violent or unreasonable demands, engage in threatening words or conduct, damage the other party’s credit, and the like
• Termination without notice: If a breach is discovered, the contract can be terminated immediately without notice
• Damages: The terminating party is not liable for the other party’s losses, while the terminated party compensates for losses caused by the termination
• Application to subcontractors and others: Subcontractors and sub-contracted service providers are required to accept the same terms

When English-language contracts are used with foreign companies, it is also prudent to include a clause with the same content. General points on contracts are covered in Key points for contracts in Japan.

What to do if you suspect a match

• The staff member in charge should not judge or respond alone, but report to the responsible manager so that the organization responds.
• Consult the police, the Center for the Elimination of Boryokudan and an attorney before telling the counterparty about your suspicions.
• Terminate or suspend dealings in accordance with the contract terms, and keep a record of what happened.
• Do not comply with unreasonable demands; record the exchanges and share them with external bodies.

Avoid concluding that a counterparty is an anti-social force merely because a search turns up an article about someone with the same name. Refusing to deal, or telling third parties the reason, without sufficient grounds may lead to a separate dispute over reputation and credit. Consulting external bodies is most useful precisely when the judgment is uncertain.

Summary

Anti-social forces screening works best as a package: screening procedures, periodic reviews, exclusion clauses in contracts and a system for responding to suspicious cases. Foreign companies need a system that checks both Japanese information and information from their home country. Working with partner attorneys (弁護士), TIMOA helps companies build internal screening procedures and introduce organized crime exclusion clauses into their contracts. For details, see our IP, Risk & Compliance services.