Sokaiya Scandal
Mainichi Daily
September 12, 1999

Former Dai-Ichi Kangyo Bank Chairman Tadashi Okuda was found guilty of violating the Commercial Code on Wednesday. He was handed a nine-month prison sentence, suspended for five years, for illegally extending loans to a sokaiya, or corporate racketeer. This decision is one of the last to be handed down in a series of payoff scandals implicating top executives of the "Big Four" securities houses and Dai-Ichi Kangyo Bank (DKB).

The scandal centering on sokaiya Ryuichi Koike led to indictment of 31 financial-institution executives. The only one who has yet to receive a court ruling is Atsuo Miki, former president of the failed Yamaichi Securities Co. - once a Big Four brokerage. Besides paying off a sokaiya, Miki is also charged with violating the Securities Exchange Law for window-dressing the company's accounts, and his court case is expected to focus on these charges.

Five of Japan's biggest financial institutions were brought to their knees by a single racketeer. Of the five, DKB's crime is probably the worst. It reportedly provided 52 illegal loans worth 11.7 billion yen to Koike between July 1994 and September 1996 to ensure that its shareholder meetings remained free of disruption.

Loans from DKB gave Koike a pool of funds to expand his extortion targets. Okuda is among 11 DKB executives indicted for providing payoffs to Koike and was the bank's president when the unlawful loans were made.

Although he was widely seen as a central figure in the scandal, he repeatedly denied his guilt in his court testimony, heaping blame on a predecessor who committed suicide. Okuda also insisted that the scandal was largely a matter involving employees affiliated with the Dai-Ichi half of the merged bank. As he was from the Nippon Kangyo half, he maintained he was only marginally involved. Having actually been president of the merged bank when the loans were made, however, Okuda's claims are out of place.

The verdict by the Tokyo District Court concluded that the loans were part of organized attempts by the bank's top management to guarantee smooth-running shareholder meetings. The payoffs deepened the bank's ties to corporate racketeers and seriously impeded the soundness of shareholder meetings.

This ruling has lessons for all top managers of leading firms. The sokaiya incident first surfaced in May 1997 with the shocking arrest of a former Nomura Securities Co. executive. Although it escalated into a major social scandal, it has since receded into the background as new revelations of improprieties cropped up involving Finance Ministry officials, Defense Agency procurement procedures, and the window-dressing of top banks' accounts.

The sokaiya scandal must not be forgotten, however. A 1997 legal revision has stiffened the penalties for payoffs to racketeers. Even a demand for payment has become a punishable offense. The number of racketeers has consequently dwindled, but authorities need to remain vigilant. The 1982 revision of the Commercial Code outlawing the provision of payments diminished the activities of sokaiya, but they picked up again soon afterwards.

Only when companies completely sever their ties with sokaiya will the guilty verdicts handed to the top executives of the nation's leading financial institutions have true meaning.