In aid of not becoming victim to financial scams and frauds it is advisable that you have an awareness of the ones that went unnoticed in the past. Like events in financial markets, there is an element of cyclicality to financial crimes and just when people have forgotten a scheme of the past, or those with a living knowledge have passed on, then the old dangers are able to once more re-enter the water. Japan is certainly not a country famous for its crime-rate. Deeply steeped in tradition, business in Japan is an internationally renowned exercise in honour and cordiality with countless strict precepts ranging from the correct way to exchange business cards, to the etiquette of returning a phone call. Lest we forget however, that Japan is the third-largest in the world by nominal GDP and the fourth-largest by purchasing power parity: there is a lot of money here, and where there is money, there is invariably crime. At street level this may be theft or mugging. At corporate level this is commonly fraud.
The Olympus Accounting Scandal
Established on 12 October 1919, initially specializing in microscope and thermometer businesses, Olympus Corporation is a Japanese manufacturer of optics and reprography products. A household name the world over, the business boasts many different product ranges and revenue streams . In 2011 this publicly listed Goliath had the world’s attention for an altogether negative reason: fraud. A series of inexplicable transactions had come to light that had until that time remained hidden.
Things were not adding up. $800 million paid to acquire three seemingly unrelated companies, including a mail-order face cream and a microwave cookery businesses; two of which had combined sales of less than $2 million. Within a year of the purchases, their equity had been almost entirely written off as a loss. This was followed by $687 million issued to unnamed recipients in the Cayman Islands- later found to be the largest advisory fee in history. The acumen of Olympus’s decisions had been turned on its head, and nobody wanted to talk about it.
Michael Woodford, the then freshly anointed president and CEO, made his way up from a humble sales position in the company to take the biggest seat. After becoming increasingly concerned about accounting inconsistencies he looked further into the past for the truth- this action was to see him fired. Without warning, at a board meeting ostensibly called to handle the malpractice of the previous CEO, all 12 board members voted to dismiss Mr. Woodford. A second motion was put forward to strip Woodford of his officerships of Olympus America and Europe. Woodford remains on the board, as only shareholders can vote him off.
An investigation conducted by Olympus and released on Dec. 6 described the transactions as an attempt to hide investment losses going back decades. The massive overpayment for assets and lavish fees, totaling at least $1.6 billion, were, in other words, a fraudulent attempt to cover up previous bad investments by a series of Olympus presidents, dating to the bubble economy of the 1980’s. How were investors to know that the stock they owned was purchased based on falsified financials when the rot was so deep that only a select few employees knew the truth and were complicit in carrying on the legacy of silence. Buyer beware. Lehman and Enron were also household names…
The AIJ Investment Adviser Pension Fraud
One of Japan’s biggest financial scandals to date involved AIJ, an investment manager entrusted with 200 billion yen (2.4 billion US dollars) in pension money which curiously disappeared into thin air, causing irreparable damage to the 84 pension co-operatives representing the 880,000 employees that entrusted it with funds. The firm was billed as a specialist in alternative investments and had a Cayman Island structure common to offshore hedge funds. In this case the controlling parties abused this set-up to enable them to falsify the performance records of the fund and enable them to run a large-scale Ponzi scheme: the most commonly repeated, tried and tested financial fraud that was first perfected by Mr Charles Ponzi in the 1920’s. Advances in technology have not since changed our behavioral biases, and desire to see positive, low-risk returns. The”AIM Global Fund” which invested in derivatives such as Japanese government bond options claimed impressive 10% – 20% annual returns while other funds were suffering negative performance during the same difficult market conditions.
Kazuhiko Asakawa, the Managing Director of AIJ reports that the firm was un-profitable from the very beginning and he was covering up the losses until they could remedy the situation, “I was confident that we would be able to regain the losses and repay investors,” Asakawa said. “How to do that, I can’t really answer,” he admitted. As is purported to be the case for many white-collar criminals, his initial intentions were not bad and he confirms such by stating on record that, “to clarify, I never intended to deceive” clients. As a former branch manager at Nomura Securities, Asakawa is precisely the sort of person that understands how Ponzi Schemes work. This was reflected in his sentencing, whereby he will be spending the next 15 years behind bars.
Avoiding Financial Scams
The problem with financial scams and frauds is that the tools we use to detect them are often obsolete. Where care and attention has been taken by professionals to manufacture all of the conditions that create trust and suppress suspicion, even the most objective and analytical of observers would be hard pressed to come to any meaningful conclusion that wouldn’t be written off as tinfoil-hatted scaremongering. If a company releases its financial statements and the numbers are all lies, how will you crunch them? You are having a conversation with a ghost. In short, if a multi-million, or even worse a multi-billion dollar operation is piloted by seasoned professionals who are incentivized to prolong the artifice that they have created then the layman, and often even other professionals often do not stand a chance. “How do you protect against investment scams?, you may ask. How do you protect against any investment loss?- Diversification. To say that 1 in 10 of your investments will fall to zero is a very pessimistic and statistically unlikely supposition, but for those that cannot sustain large losses, limiting exposure to any one investment has historically proven itself to be fool, and fraud-proof.
– OECD Economic Surveys JAPAN 2015 Overview
– Reuters, Analysis: The AIJ scandal and Japan’s pension time bomb, March, 2012
– Bloomberg, The Story Behind the Olympus Scandal, 2012
– SCAMS, SCHEMES & SWINDLES A REVIEW OF CONSUMER FINANCIAL FRAUD RESEARCH, Martha Deevy, Shoshana Lucich, Michaela Beals, 2012