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International -- Cover Story
BLACKMAIL! (int'l edition)
A rash of scandals and a government crackdown are showing how mob-linked investors--the sokaiya--prey on some of Japan's biggest companies. Can business break free?
Corporate extortionist? No way. Satoshi Yamamoto prefers to be called a shareholder activist. His small, Tokyo-based publishing company, Rondan Doyukai, invests in Japanese companies and publishes stories on corporate misdeeds in a magazine, newsletter, and even a World Wide Web site (www.iijnet.or.jp/rondan). Insists Yamamoto: "We are professional shareholders."
Yamamoto has not been charged with any offenses and maintains his innocence of wrongdoing. But law enforcement officials and criminal attorneys say that Rondan Doyukai is actually Japan's biggest ring of sokaiya, or mobsters linked to yakuza crime syndicates that specialize in corporate extortion (BW--July 7). By threatening to disclose unsavory information through its magazines or at shareholder meetings, these sources say, Rondan has squeezed payoffs out of some of Japan's biggest companies. "Rondan Doyukai is by far the most powerful sokaiya group," contends Yoshiaki Shinozaki, a prominent criminal attorney who advises companies that have come under pressure from racketeers.
Yamamoto says Rondan did accept hush money from companies before the practice was outlawed in 1982. He adds that two Rondan associates were arrested in connection with payoff scandals involving Kirin Brewery Co. in 1993 and Ajinomoto Co., a global food-products maker that pleaded guilty to taking part in a global price-fixing cartel in 1997. Both companies and the Tokyo Metropolitan Police declined to comment on the cases. Yamamoto says one Rondan member was charged with violating the commercial code and has been released on bail. The other was fined and given a suspended sentence, he says.
No other industrialized economy has lived with corporate blackmail the way Japan has. In Western countries, gangs tend to stay in the background. But in Japan, yakuza racketeers have long been an accepted part of the economy. In a land where there are relatively few attorneys and court cases drag on for years, mobsters have been handy for settling everything from highway accident cases to landlord-tenant disputes. In the 1960s, politicians employed gang members to keep left-wing protesters in line. To this day, gangsters are glorified in print and on the screen as misunderstood social outcasts. With their oaths and full-body tattoos, the yakuza are viewed more as guardians of Japan's samurai traditions than as mere crooks.
Extortion has also thrived because in Japan's corporate culture, public information is given out sparingly and a tight web of cross-shareholdings among companies leaves individual stockholders out in the cold. In this atmosphere, it can be worth an executive's while to pay for silence. But official tolerance of corporate blackmail has been waning ever since the mob began going for ever-bigger victims and taking a higher profile in the easy-money economy of the late 1980s. Now, mobsters are coming under new pressure as some of Japan's--and the world's--most prominent corporate names have been swept up in scandals.
Nearly 70% of the 45 big companies responding to a recent poll by the newspaper Asahi Shimbun said they had received demands or threats from sokaiya racketeers. And for months, the Tokyo stock market has been rocked by disclosures that Ryuichi Koike, who police say is a sokaiya member, allegedly extorted $340 million in loans and millions more in payments and illicit trading profits from Dai-Ichi Kangyo Bank Ltd. and Nomura Securities Co.
"A DARK PAST." Koike, former Nomura President Hideo Sakamaki, and 11 DKB executives, including ex-Chairman Tadashi Okuda, have been arrested and jailed. On top of that, former DKB Chairman Kuniji Miyazaki hanged himself on June 29 after police questioned him about his possible involvement in the scandal. Koike has been charged with violating the commercial code. He has not entered a plea, and his attorney declined a request for an interview. Sakamaki has also been charged with violating the code, while Okuda has not been charged. Neither could be reached for comment.
In addition to the arrests of the executives, the government is moving against their companies. Nomura was charged with violating the Securities & Exchange law; it says it will try to avoid making payoffs in the future. And the Ministry of Finance has banned Nomura and DKB from taking part in government bond auctions for an indefinite period and may impose other sanctions.
Why the crackdown? Prime Minister Ryutaro Hashimoto is trying to reform Japan's inbred financial markets and woo global investors interested in everything from stock trades to making mergers. Figuring investors will continue to be scared away--and that Japan's fits-and-starts economy will thus suffer--authorities have begun going after the sokaiya and the corporations that support them. "This has been a long-term disease within the Japanese corporate culture," says Sei Nakai, deputy director of the Banking Bureau at the Ministry of Finance. Adds Kato Koichi, secretary general of the ruling Liberal Democratic Party: "This is big and serious."
But for decades, many executives actually employed sokaiya as muscle to keep unruly investors in check during their choreographed annual meetings. "Companies were never interested in paying out dividends, and the sokaiya were an effective way of suppressing shareholder dissatisfaction," recalls Manabu Miyazaki, author of Breakthrough, a best-selling memoir about his father's yakuza gang in Kyoto in the 1950s.
Keeping their cash to themselves helped corporations finance capital investment and fuel the nation's postwar recovery. Yet executives' reliance on mobsters turned out to be a Faustian bargain. By the 1970s, the sokaiya had figured out how to become stockholders themselves and threaten to ask embarrassing questions at annual meetings. Sony Corp. executivesstill recall what happened when a sokaiya group swooped down in 1984. At the time, Sony's Betamax standard for videocassette recorders was floundering. As then-Chairman Akio Morita watched with discomfort, the sokaiya turned what would have been a brief annual meeting into a 13 1/2-hour grilling of Sony about its strategy. Sony says it never paid off the sokaiya.
Mobsters ratcheted up the level of harassment later in the decade. As the stock market took off, three powerful criminal syndicates--the Kobe-based Yamaguchi-gumi and Tokyo's Inagawa-kai and Sumiyoshi-kai--moved into the corporate-blackmail racket. The easy pickings of the bubble economy "really educated the yakuza," says Akira Moriuchi, assistant director of the National Police Agency's organized crime division.
As land prices doubled and tripled in a mad flurry of dealmaking, many banks found themselves lending to mob-linked construction companies. Some even hired gang members to collect loans or scare reluctant tenants into leaving lucrative properties. Other companies used the mob to line up illegal Chinese and Iranian aliens to remove industrial waste and do construction work cheaply. After the bubble burst in 1990, some stockbrokers felt obliged to compensate gangland figures through under-the-table deals for losses they had suffered as the stock market declined. The reason? Many brokers had mob ties stretching back to the 1960s, when companies preparing to list their shares sought out sokaiya protection against nosy investors. Disclosure of their underworld links, the brokers feared, would devastate their reputations.
Such fears are the bread and butter of sokaiya blackmailers. Mob pressure on corporate Japan has become so pervasive that, asserts publisher Yamamoto, many large companies maintain budgets for payments to sokaiya. Ten percent of the billings at Japan's largest law firm, Mori Sogo, now come from advising 100 major listed companies on how to deal with sokaiya. Hideaki Kubori, a Mori Sogo partner, has produced videotapes telling companies how to provide security for annual meetings--and what to do if the sokaiya show up. He even holds mock annual meetings at which he plays the role of a mobster grilling the president.
BLUFFING? The uneasy relationship between executives and the sokaiya is turning Japan's annual meeting season into a circle-the-wagons ritual. This year, more than 2,000 major companies held their annual meetings on June 27 to thwart potential blackmailers interested in raising a ruckus. The government dispatched 10,000 cops to the meetings to provide security. The coordinated meetings have reduced mob disruptions markedly. In fact, the number of sokaiya is estimated to have declined to around 1,000, from 1,700 just after corporate payoffs were banned in 1982.
But Moriuchi says mob blackmailers are now demanding--and getting--kickbacks from major companies for steering business to yakuza-related waste-hauling, vending-machine, and construction contracts. Executives are also being pressured to purchase costly subscriptions to sokaiya publications that are little more than shams. Osaka-based Takashimaya Co., an upscale department-store chain, says that to protect its name, it funneled at least $1.4 million to sokaiya and subscribed to some 300 publications put out by underworld groups.
The latest crop of sokaiya scandals shows that extortion can also pass from one generation of executives to another. Back before its 1971 merger with Nippon Kangyo Bank Ltd., Dai-Ichi Bank Ltd. had a long-running relationship with legendary sokaiya and magazine publisher Rikiya Kijima. For years, Kijima kept the bank's annual meetings short and sweet. He took particular care that shareholders didn't question management too closely about absorbing Kangyo, then Japan's 10th-biggest bank. "The previous Dai-Ichi management owed a lot to Kijima," says Yushiro Ikuyo, a Smith Barney Inc. banking analyst.
Just how much became clear years later. As early as 1985, says a DKB spokesman, Kijima introduced Ryuichi Koike to senior officials at the merged bank. An attorney familiar with the underworld says Koike described himself as the successor to Kijima, who died in 1993. The attorney says Koike also suggested he had been sponsored by a yakuza gang.
In 1988, when DKB was facing questions over $30 million in questionable loans, Koike helped stifle questions at an annual meeting. Then, starting in 1992, he began receiving loans, some of which were funneled into a property company owned by his brother. A Nomura spokesman says the funds were ultimately used to buy shares in Nomura and, possibly, other brokers. A lawyer for Koike's brother, Yoshinori, declined to comment.
After buying 301,000 Nomura shares outright and through his brother's company, prosecutors say, Koike was well positioned to make a move on the broker. With the stock market slumping and the cost of its European expansion soaring, Nomura announced a record $500 million loss in 1995. At the same time, it reinstated ex-Chairman Setsuya Tabuchi and ex-President Yoshihisa Tabuchi (no relation) to the company's board.
Both men had been disgraced and forced to resign in a 1991 scandal revolving around helping a mob boss make windfall profits. But they remained powerful behind the scenes. Sakamaki, who had been pushing to clean up Nomura's image, would have been embarrassed by public questions about the Tabuchis and Nomura's ties to Koike. To win Koike's silence during the 1995 annual meeting, prosecutors say, former President Sakamaki approved a $2.8 million payoff.
Now, prosecutors also want to know if DKB lent an additional $2.6 million to the Rondan sokaiya group. Yamamoto told BUSINESS WEEK that one of the group's investors did borrow money from the Tokyo bank. He declined to reveal the investor's name or the amount. The bank says it's looking into the matter.
TOOTHLESS. Will Japan ever break free of such intrigue? It will be hard to clean house unless Japan overhauls the way it deals with financial wrongdoing. Japan's toothless Security & Exchange Surveillance Commission has only 200 staffers, a fraction of the number its U.S. counterpart has. And Japanese prosecutors are hamstrung by laws that prevent wiretapping and sting operations in organized crime cases, unless drugs are involved. Currently, a conviction on a sokaiya extortion charge carries but a six-month sentence.
Hashimoto's government promises to come up with tougher measures to fight blackmail in legislation next year. But he has yet to prepare the public for what that could bring. Rooting out the mob from the business world would mean arrests, headlines, and an admission that big manufacturers and financial institutions have been tainted by corrupt dealings. An anti-mob campaign could even turn bloody if the sokaiya and their yakuza allies fight back. "In the end, standing up to them will come down to risking one's life," figures Citizen Watch Chairman Michio Nakajima, who says he has never paid the sokaiya. But after decades of blackmail, isn't it time for Japan's leaders to fight back?By Brian Bremner and Emily Thornton in TokyoReturn to top