Carlos Ghosn's arrest is more about Japanese criminal justice than corporate governance

**Carlos Ghosn's arrest is more about Japanese criminal justice than corporate governance**

By Colin P.A. Jones, contributing writer

Within days of Carlos Ghosn’s arrest for understating his compensation in Nissan’s regulatory filings came the predictable questions about what this meant about Japanese corporate governance. My answer would be not very much, except that perhaps those who look to Japan as a model of “stakeholder capitalism” might need to think more about the role of government as a stakeholder. In any case, Nissan’s complex alliance and shareholding relationships with Mitsubishi Motors and Renault (and thereby extension, the French government) mean it is an unlikely source of useful lessons on how other corporations should be run.

No, the real significance of his arrest will likely prove to be in subjecting Japan’s criminal justice system to intense global scrutiny. You can’t use a reporting violation as a pretext for detaining a famous Brazilian-Lebanese-French business leader associated with multiple global automotive brands in an unheated cell for weeks with limited access to lawyers and almost no contact with family members before formally charging him with a crime without generating some negative press. In a Nov. 22 article on news analysis site Agora, former economy ministry bureaucrat and university professor Kazuo Yawata wondered whether Ghosn’s arrest and removal might be a sign of the “suicide of Japan’s judicial system.”

What follows are some key points on how that system works.

**1) It's not the police**

Some in the media have wrongly reported Ghosn being in “police custody,” but he was arrested by prosecutors. Japanese prosecutors are exceptionally powerful, having the power to arrest, investigate and prosecute suspects. Prosecutorial arrests are rare, however, and those by the special investigations team at the Tokyo Public Prosecutor’s Office exceptional, usually involving high-profile political or corporate cases. The fact that Ghosn was arrested by this office for a minor regulatory offense means it is probably not actually about a minor regulatory offense.

High profile prosecutorial arrests generate significant press and are often accompanied by a leak-based media strategy. The press was waiting for Ghosn’s jets together with the prosecutors. Within a day of his arrest, Japanese tabloid magazines had stories out full of salacious details from anonymous sources about his extravagant, allegedly Nissan-funded lifestyle. Such details were irrelevant to the grounds for his arrest, but the goal is to paint the suspect as a “bad person.” Narrative control is a recurring theme of the process.

**2) *Bekken taiho* — arresting you to arrest you again**

Unless it is for a crime in process, Japan’s Constitution prohibits arrest except by judicial warrant “which specifies the offense with which the person is charged.” Law enforcement may find this bothersome, since in Japan the most important piece of evidence in many criminal cases is a confession of either the suspect or a co-conspirator, which are hard to procure if you don’t have the target in custody.

In Japan most high-profile murder cases start with an arrest not for murder, but for “wrongful disposal of a dead body.” The police have enough evidence — a dead body and something connecting it to the suspect — to make an arrest on that charge. The suspect can then be interrogated until they confess to the murder. Based on the confession, they can then be re-arrested and prosecuted for the murder. *Bekken taiho* — arresting a suspect for one crime in order to investigate others — is a questionable but common practice.

The grounds for arresting Ghosn and his conveniently foreign fellow board member Greg Kelly may likely seem ridiculous. How could the pair file an untrue statement of compensation (in Japanese!) in spite of all the financial controls, audit trails and other mechanisms public companies have in place to ensure accuracy in their public reporting, without the acquiescence and cooperation of Nissan management? Granted, both men were representative directors meaning they had both the power to do so and symbolic responsibility for potentially all acts of the company in theory. In practice, however, it is an absurd proposition.

But that is not the point: If prosecutors had reasonable grounds (such as whistleblower reports) that the filing was untrue, it would be sufficient grounds for arrest and the opportunity to investigate other, hopefully more serious crimes (though subsequent reports suggest the executives obtained expert advice about the filings). Press reports that prosecutors are also considering charging Nissan — the corporation — suggest they have concluded it is impossible to ignore institutional involvement in whatever malfeasance has gone on, though to me it also seemed like an announcement that additional human perpetrators would be unnecessary.

**3) ‘Hostage-based’ criminal justice**

When referring to their nation’s pre-trial criminal process Japanese defense lawyers (and even some former judges) commonly use the term *hitojichi shihō*, or “hostage-based justice system.” The “hostage” is the suspect, the “ransom” is their confession.

Within 48 hours of a prosecutorial arrest, the prosecutors must either release the suspect, initiate a prosecution or seek a detention warrant. Note that Ghosn was not immediately prosecuted for the charge on which he was arrested, meaning that by the time this deadline arrived prosecutors: lacked evidence (a confession, for example) necessary to ensure a conviction; and/or wanted to investigate the suspects regarding whatever other crimes might have occurred. Either way, they could be assured a judge would both authorize the detention of Ghosn and Kelly for 10 days and extend the detention period again if necessary (such an extension being duly granted on Nov. 30), a request the Tokyo District Court approved Friday.

The judiciary becomes involved very soon after an arrest in a way that may seem superficially similar to other countries but is actually quite different. In Japan, the first time a suspect sees a judge is not an arraignment hearing in open court where they are informed of the charges being brought against them so they can prepare a defense. Rather it is in a closed proceeding where the prosecutor argues that the suspect should be detained because they are still being investigated in order to determine whether to initiate a prosecution and, if so, on what charges. The standard grounds for seeking detention is that the suspect is a flight risk, might tamper with evidence or intimidate witnesses.

These may be legitimate concerns in the case of violent mobsters, less so for someone like Ghosn. Nonetheless, judges invariably accept these assertions at face value, presuming the suspect guilty before there has even been a trial. While Japan is known for its 99 percent conviction rate, the more shocking statistic is the rate at which detention warrants are granted, which is above 96 percent. Even that is regarded as an improvement from a decade ago when it was about as high as the conviction rate.

Although now detained, the suspect is not yet a defendant: They have not yet been prosecuted for anything, not even the crime for which they were arrested. Under the Code of Criminal Procedure, detention is essentially an investigative tool used to interrogate suspects and develop evidence. Suspects in detention have a constitutional right to counsel but not to have a lawyer present during questioning. In fact, the Code of Criminal Procedure empowers prosecutors to subordinate a suspect’s access to their lawyer to the needs of the prosecutor’s investigation.

Defense lawyers thus have to wait until the end of the day to find out what their clients may have already admitted to. And as the world is learning in the case of Ghosn, meetings with family members (if permitted at all) are highly restricted, must take place under the supervision of guards and cannot be in any language other than Japanese. This is more narrative control, to prevent suspects from getting information to the outside world that could muddy the story prosecutors are trying to build for trial, one memorialized in a confession prepared by prosecutors and hopefully signed by an exhausted and demoralized suspect. Then the prosecution can be brought.

**4) Confessions and punishment without trial**

It may seem incongruous that Japanese law enforcement is so focused on procuring mea culpas, given the nation’s Constitution specifically prohibits convictions based solely on confessions. In reality, with a confession in hand it is not hard to procure something that qualifies as corroborating evidence, and in any case the constitutional prohibition does not extend to convictions based solely on the confession of a co-defendant or testimony of a witness, both of which can also be produced in similarly coercive environments.

The pretrial detention system may seem shocking but is logical in its goal of minimizing uncertainty about the result of the trial by ensuring it is just a formality, at least as to the question of guilt. Most Japanese criminal trials are just about sentencing decisions. A defendant may, of course, challenge the validity of their confession at trial, but the burden of proof is on them — they must prove they are innocent in the face of it.

In fairness to law enforcement, most of the time they probably deal with people who are clearly culpable, and prosecutors just want the baddies to tell the truth about what transpired. Ideally “the truth” and the story the prosecutors want to tell at trial are the same thing. Unfortunately, one of the criticisms of this system in complex cases that are hard to prove without confessions — those involving corporate malfeasance and corruption, for example — is that prosecutors may commence the process with a preconceived story about what transpired and overzealously use the coercive environment of the interrogation room to force suspects to render interrogations that match the story. In an infamous 2003 case police and prosecutors in Kagoshima managed to force a dozen innocent people to confess to an elaborate vote-buying conspiracy that turned out at trial to have been completely specious.

Think about it: How long could you simply vanish, separated from family, pay bills, respond to e-mails or do your job, before it caused serious long-term damage to your life and career? In addition to encouraging confession, even a false one proffered just to escape the stress of constant interrogation and life in an uncomfortable cell in a facility controlled by your interrogators, the pre-charge detention system gives police and prosecutors in Japan incredible powers to punish someone severely without even putting them on trial. Ghosn’s career as an executive at Nissan and possibly anywhere else has been terminated based on allegations that may never be proven in court.

**5) Have prosecutors taken sides?**

Perhaps he will ultimately be convicted of every charge brought against him. Given the impact the arrest has had on whatever plans Ghosn may have had for Nissan (including a possible merger with Renault) Japan’s prosecutors will invariably be suspected of “taking sides” — the Nissan side — in what is essentially a cross-border corporate spat.

I like to think Japan’s elite prosecutors are above such things. Nonetheless, awareness of how this case will affect their reputations — not just in Japan but around the world — will doubtless create intense pressure to ensure Ghosn is found culpable, ideally at trial but at least in the court of public opinion. The tools they have to force such a result are frightening and seem easy to misuse.

*Colin P.A. Jones is a professor at Doshisha Law School in Kyoto and primary author of “The Japanese Legal System” (West Academic Publishing, co-authored with Frank Ravitch). The views expressed are those of the author alone.*

## Comments

* A.\_M.: I was told one time that if you ever are "detained" in Japan, say nothing. Hold out and say nothing--do not speak at all. J-prosecutors won't have anything. Let the apes find evidence if there is any.
* B.S.: Ask a Japanese lawyer or prosecutor if a defendant is "innocent until PROVEN guilty" and they all say "of course , of course". Then look at how Ghosn and others in detention are treated with the constant re-arrests and inability to get bail granted. The Japanese system is clearly Guilty until proven innocent!
* HSM: If Japan is not going to take measures to reform this primitive “hostage-based” prosecutorial system, international companies should become more risk-adverse by taking measures to run Asian operations outside Japan.
	+ S.J. (at HSM): There has already been an exodus of foreign multinationals and expats out of Japan over the last couple of decades. Japan's draconian taxation on expats ('Tokyo pushes back on ‘bizarre’ death tax that deters expats', The Japan Times, Nov 13, 2017), its deeply insular and xenophobic corporate culture, loss of global competitiveness and a judicial system which is inherently stacked against foreigners are just some of the reasons why Japan is so unattractive to expats.

	As I wrote in the comments section of another story on the Nissan-Ghosn case last week here in the JT:

	"Japan's entire judiciary is designed to be a tool to help the Japanese establishment (government and large corporations) maintain their power and control by providing them with a veneer of legitimacy even in situations where they're in the wrong.

	It's worth noting that both Japanese judges and lawyers are complicit and part of this scheme to weaponize the judiciary, maintain their power and keep the system opaque and closed to outsiders. Due to ridiculously strict requirements, Japan has a total of only about 30,000 lawyers in the entire country - roughly the same number as the U.S. state of Missouri. This is by design, since the small pool of lawyers in Japan means that they are more vulnerable to pressure from influential groups within the country. Foreigners are all but barred from becoming full Bengoshi lawyers (the kind that can represent someone in court). The last I heard, I think all of Japan had 1 (yes, that's ONE) such non-Japanese lawyer practicing law in Japan.

	Which brings us to the curious way Japanese lawyers represent non-Japanese clients in civil and criminal cases. They all seem to understand that they may be asked to represent a foreign client once in a lifetime, but they and their firms have to work with Japanese judges, the opposing side's lawyers and Japanese clients on a daily basis. By representing foreign clients, they often risk alieniating these Japanese parties. Many Japanese lawyers will therefore refuse to represent foreign clients citing conflict of interest.

	Even when Japanese lawyers accept foreign clients, they are under tremendous pressure to undermine and sabotage their foreign clients by not giving them proper legal representation - pressure which they often succumb to. There is also no such thing as attorney-client privilege, so anything a foreign client tells their Japanese lawyer can and does get disclosed to the opposing attorneys (either directly, or indirectly through the judge, court clerk or colleagues, etc).

	Other aspects of the Japanese judicial system which make it among the most corrupt and unethical in the world include intentionally mistranslating documents, intentionally misinterpreting foreign plaintiffs, defendents and witnesses, and tampering and destruction of documents and other evidence in order to help the Japanese side (by the courts and even by the foreigners' own lawyers).

	Then there is the whole issue of corrupt Japanese judges. This was perhaps best exposed by former Japanese justice Hiroshi Seki in his book, “Zetsubo no Saibansho” (“Courts without Hope”), highlighting corruption, incompetence, and political influence among Japanese justices ("Ex-judge lifts lid on Japan’s ‘corrupt’ judicial system: Tell-all memoir brings to light collusion, bias among justices", The Japan Times, April 30, 2014).

	This is another area where Japan's image of a first-world developed country and a democracy are very much at odds with the reality of Japan."
	+ M.L. (at HSM): Some international corporations -- notably P&G -- used to have Asia HQ in Japan, and then moved a few years back to Singapore. Much of this has to do, of course, with increasing size of China market.
		- S. (at M.L.): It's more likely because they want to pay less taxes.

		If it's because of the China market they'd move to China, not Singapore.

		I've seen the same thing in regards to Ireland, Virgin Island, etc.
* E.: If I had a magic wand I would reduce the period of detention after the first 48 hours to 7 days in total and mandate as a condition for the 5 day court approved extension that an accused gains full access to an attorney during questioning . And the state will provide one if the accused cannot afford one. At that point either the accused is charged or not. If charged, release on bail would be required after 48 hours or 7 days if the court approved the extension except where the accused is deemed a threat, flight risk, etc. Likewise I would not allow for extensions of detention for "new charges". Bekken taiho is gaming the system by the prosecutors and should be prohibited. New charges can of course be added later based on probable cause but this should not lead to further periods of an accused being held in custody. If these changes were made Japan would be resetting the balance appropriately. Perhaps a good thing can come out of the notoriety of Mr. Ghosn's personal tragedy and these kinds of changes are implemented.

I do disagree with Mr. Jones that this case is also very much about corporate governance. Nissan will become another case study in what NOT to do. And again the notoriety of this case should provide added impetus to the Abe Government's consistent push to strengthen the Corporate Governance Code in the face of opposition from Keidanren. (Note it has been PM Abe and the LDP that has been the one pushing for Corporate Governance in Japan not the opposition.)

Here are some thoughts on the governance issue. Renault appointed 2 of 3 Rep Directors in Nissan, had a majority of the BOD seats and 43.4% of the outstanding shares which is essentially control. Renault allows Ghosn to take on Chairman & CEO of Renault on top of the Nissan Chairman, CEO & Rep Director and later allows him to become Chairman & Rep Director of MMC 2 years ago only giving up the Nissan CEO role. The Nissan CFO who retired this year after 9 years at Nissan is a Brit appointed by Renault. For years the top 2 senior executives at Nissan are foreigners who are very close associates of Ghosn who in the past 2-3 years left - one to run Aston Martin the other Peugeot. When we look at Nissan governance there should be some appreciation for who was running Nissan throughout this period (Renault) and who specifically were given authority by Renault to exercise control. Nissan's abysmal corporate governance failures can arguably be laid at the feet of Renault. Not entirely as there was a Japanese COO and others during this period who deserve considerable blame but why are we not seeing any interviews of the former CFO who (for him) "luckily" retired earlier this year and recently named as CFO of AstraZeneca in London and the other two who left?

Nissan was out of compliance with critical parts of the Japan Corporate Governance and was in the "we are not complying and here is why" mode. They had no independent directors until recently and then added two, a race car director and an ex-bureaucrat. They did not have the strongly recommended Board of Director executive compensation (review and approve all exec compensation) and audit committees staffed solely by independent directors. If they had those committees it is probable this disaster to Ghosn and the Nissan shareholders could have been averted. Who was responsible for implementing them? The Representative Directors and CFO under instruction from the Board of Directors and approved by the Shareholders.

Here is the bottom line for me - Nissan was being run like a majority owned JV of the type common 30-40 years, something with which I have considerable personal experience, but the internal controls and checks and balances that normally existed even in those JVs were non-existent in favor of total deference to Mr. Ghosn and the direct lieutenants he appointed. As the savior of Nissan, a fact, Mr. Ghosn came to operate Nissan like an "owner shacho" of the sort we have seen elsewhere.

There is going to be blame for just about everyone related to this debacle and I fully expect more arrests to be made of senior Nissan executives who knew of the issues and did nothing about it. They also breached their fiduciary responsibility to the company and its shareholders.
	+ A.J.S. (at E.): I agree, and especially about the relevance of this incident to corporate governance. When I was at Sony during the Idei era, the Ghosn example definitely influenced thinking about who Idei-san's successor should be: namely, a foreigner.

	The choice was Howard Stringer, then head of Sony's US subsidiary -- notwithstanding that he had failed utterly at one of his main tasks in that earlier job, launching a digital music business. (While Sony US was floundering around with the lame idea that Sony players should play only Sony-owned music, Steve Jobs launched something called iTunes, followed soon thereafter by the iPod.) Stringer's tenure as Sony CEO was singularly lackluster, with the company experiencing losses. Even the main achievement for which he's remembered -- being CEO when Sony invested in Spotify, which years later brought $900M on exit -- had nothing to do with Sony's own operations. (And he has to share the credit with his successor Hirai-san, who chose to hold onto the Spotify stock for years after Stringer's departure.)

	I doubt Sony was the only company that succumbed to this shallow thinking. Certainly Ghosn's ouster, even if he is found innocent of some or all of the charges (if and when those are filed), will make Japanese companies think twice about following Nissan's example, and that could be for the good.
* B2: Japan and its current 19th century/early 20th century judicial and criminal justice administration systems are sorely in need of top to bottom reforms and a complete overhaul of all laws and a more assertive independent judiciary that will stop rubber stamping all government actions and become part of the balance of powers in a healthy functioning democracy that functions for all citizens irregardless of wealth and political position and deliver justice in a timely manner (current legal cases drag on for over a decade).

I do not expect these reforms to be voluntary undertaken by the LDP government which has been in power for decades so the Foreign Chambers of Commerce and supporting governments need to step up to the plate on this and stop being so preoccupied with money (economic) issues and stop giving the current government a blank check on its non-enforcement of Hague Conventions when it effects Japanese citizens. A modern (21st century) judiciary and criminal justice system is urgently needed in Japan.
	+ M.L. (at B2): Whatever the prosecutors manage to come up with, the old guard at Nissan is now back in power. These are people totally lacking in vision and any understanding of future of global automobile industry. It's only matter of time before Nissan again faces bankruptcy. Who would dare, after Ghosn's experience, save them then?

## Source

* https://www.japantimes.co.jp/community/2018/12/01/issues/carlos-ghosns-arrest-japanese-criminal-justice-corporate-governance/#.XbOM\_LJE2hA