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Company Executives Face Legal Consequences for Compliance Failures

In Japan, company executives and directors can face legal consequences for compliance failures, including administrative sanctions, regulatory fines, and even criminal charges. A recent study highlights the importance of effective risk and compliance management in Japanese companies to avoid such penalties.

Administrative and Regulatory Sanctions

Regulatory bodies in Japan have the authority to impose sanctions on companies that fail to comply with regulations. For example:

• If a listed company makes false statements in securities reports or audit reports, it may face delisting from the Tokyo Stock Exchange (TSE).
• The TSE may also designate the company’s stock as “on alert” if it deems improvement of its internal management system is necessary.

Criminal Liability

While Japanese law does not have a separate body of corporate criminal liability, companies can still be subject to criminal fines under various statutes. For example:

• The Anti-monopoly Act and Labor Law impose criminal penalties on companies that fail to comply with regulations.

Liability of Governing Bodies and Senior Management

Directors and senior management of Japanese companies are personally liable for breach of risk and compliance management obligations. Under the Companies Act, directors can be held liable to the company or third parties for damages resulting from their failure to perform their duties. Additionally:

• Senior executives may face administrative sanctions or regulatory fines for their role in compliance failures.

Corporate Compliance Defence

While there is no specific corporate compliance defence under Japanese law, companies that implement effective internal compliance management systems may be able to mitigate penalties for breach of statutory or regulatory obligations.

Recent Cases

A recent high-profile case involving Toshiba Corporation’s false accounting highlights the importance of effective risk and compliance management in Japanese companies. The company’s top management pressure to pad profits was cited as a key factor in the failure, which resulted in significant financial losses and reputational damage.

Government Obligations

While there are no legally binding risk and compliance management obligations for government agencies or state-owned enterprises, such entities may still be subject to general management obligations and other regulatory requirements.

Digital Transformation

The framework covering digital transformation in Japan is still evolving. While the public sector has not yet made risk management a statutory obligation, incorporated administrative agencies have different internal controls requirements than private companies due to their unique business structures and institutional constraints.