Confessions of a price fixer

Supplier network shelters fugitives, ex-cons

TOKYO -- When meeting to fix prices on auto parts, Mr. X, a Japanese supplier executive, and his fellow conspirators chose out-of-the-way spots, such as a Big Boy restaurant in a neighboring state.

"It had to be a restaurant where other carmaker people never come," said Mr. X, who asked not to be named. "Because if they found out I was meeting with the other sales guy, they would know what we are doing."

It didn't take long before everyone knew what they were doing.

The onetime high-flying executive from Japan, who lived a comfortable expat life in the Midwest, was one of dozens of white-collar criminals nailed by what has snowballed into the biggest-ever antitrust dragnet in U.S. Department of Justice history.

But Mr. X's guilty plea and his time in a U.S. prison came with a special offer from the company for which he fixed prices.

"The story goes like this: 'I understand you can always say no, but if you accept the request to go to jail, we'll support you 100 percent,'" he said. "If I fight and lose, I lose everything. But if I don't fight the company, the company ... will support me for the rest of my life."

Today, Mr. X has done his time and is back at work with his company.

But Mr. X's rehabilitation is hardly rare. As one after another Japanese auto supplier gets snagged, it is the unwritten rule, say insiders and lawyers, that middle managers sometimes take the fall for superiors and get rewarded for not airing the company's dirty laundry in public court.

For more than three years, the international crackdown on price fixing at Japanese auto parts makers has showcased the cooperation of trust-busting authorities in the U.S., Japan and Europe.

But the handling of some cases and a trend of execs trying to evade justice also have exposed a rarely seen underside of Japan's business culture still at odds with international norms.

Jailing the Japanese

In America, the crackdown already has made history: The DOJ has issued record fines totaling just more than $2.4 billion.

Thirty-one parts suppliers, mainly Japanese companies, making everything from wire harnesses to wiper switches, have pleaded guilty or agreed to plead guilty in the crackdown since 2011. Forty-six individuals, almost exclusively Japanese, have been charged. The indictments continue, with two more individuals indicted on Nov. 14.

No one has challenged the charges in court; 26 individuals agreed to prison instead. Another 20 have yet to enter pleas or are otherwise ignoring their indictments.

A review of the cases by Automotive News finds some of the execs are still in Japan, gainfully employed by the suppliers for which they are charged with rigging bids.

As of early November, companies including Hitachi Automotive Systems and Mitsubishi Electric Corp. were among those still directly or indirectly employing people indicted by the U.S. government on felony charges, which carry a maximum penalty of 10 years in prison and a $1 million criminal fine for individuals.

Indicted individuals from other suppliers, such as Bridgestone Corp., Tokai Rika Co., Takata Corp. and Toyo Tire & Rubber Co., apparently left the companies but have not yet answered the DOJ's charges.

Still others such as Mr. X did their time, insiders and lawyers say, then returned to work as tacit compensation for taking the blame.

Increasing pressure

Corporate leniency has become a source of international friction.

U.S. Assistant Attorney General William Baer stepped up the pressure in a Sept. 10 speech, warning that his antitrust division would consider probation and corporate monitors for companies harboring sensitively placed executives who have not answered the charges against them.

The U.S. has not yet sought widespread extradition, but it is holding out that possibility. The DOJ successfully extradited its first foreign antitrust fugitive last spring.

The probe has exposed clashing corporate cultures.

"A U.S. company would never keep employing those individuals," said a former Department of Justice antitrust official. "In the United States, the first thing they would want to do is fire everybody. But that's not the instinct at Japanese companies."

Mr. X agreed to recount his tale as long as he was not named. It is not illegal to keep the ex-convict employed in Japan or in the United States.

But in either country, it could raise questions about corporate governance. And under his understanding with his company, Mr. X cannot talk publicly about his bid-rigging past. But he said that he wanted to speak out as a warning so others won't go through what he called his "nightmare experience."

For Mr. X and other Japanese sales managers stationed in America, it was second nature for them to divvy up vehicle components. It was the way business was always done, he said; don't mess with your rivals' turf, and they won't mess with yours.

So Mr. X was surprised that his boss called him in for a chat when the U.S. Department of Justice had a few questions.

"It was an internal interview, so I didn't hide anything. Afterward, they said, 'Thank you very much, but please pick an attorney,'" he recalled. About six months later, the feds raided their U.S. offices, copying hard drives and documents.

That's when the company began to play hardball. It pressured Mr. X to plead guilty, he says, partly because a company can expect lower fines if it cooperates promptly.

In exchange, the company would take care of his family while he was in jail and find a position for him after he was freed.

"They had the offer ready for me when they asked me to plead guilty," Mr. X said. "I understand, and I don't blame anybody."

Aid to guilty employees

Legal experts say it is a common, if unpublicized, practice.

"In most cases, the Japanese are pretty lenient and want to take care of employees," said Kimitoshi Yabuki, an antitrust defense attorney in Tokyo who has represented individuals and companies targeted by the bid-rigging crackdown. "The companies think they are victims of the DOJ investigations."

Companies often want to retain valuable employees, especially younger ones with productive careers ahead of them. But there is also a sense of solidarity stemming from Japan's cultural inclination toward lifetime employment.

The companies often pay their employees' legal fees, fines or travel fees for family visitation. In Mr. X's case, he says, his company footed his $20,000 criminal fine and supported his wife while he was locked up.

They may also provide a "jail consultant" to coach the Japanese businessmen on surviving behind bars. Said Yabuki: "These are normal salarymen who never imagined they'd end up in prison."

Yet, judged by Western norms, such treatment raises hackles.

"It's like the Mafia," complained one Japan-based executive at an international parts supplier. "The boss says you can come back after doing your time. Just because it's the Japanese way, doesn't mean it's right."

'A little unique'

Compared with the U.S., Japan's legal system goes easy on bid rigging.

In recent years, Japan's Fair Trade Commission has toughened its stance on collusion across all industries. And in the auto parts cases in particular, it has worked closely with the DOJ and the European Commission to identify and punish violators.

But while the U.S. has charged 31 companies and sentenced 26 individuals to prison, the Fair Trade Commission has taken action against just 17 companies and jailed no one. Meanwhile, Japan's follow-through seems to be losing steam. The DOJ's latest action came on Nov. 14; the Fair Trade Commission's most recent fine was in March 2013.

Japan rarely fines or presses criminal charges against individuals. In the auto parts crackdown so far, the trade commission has filed criminal accusations against just five individuals, executives from the ball-bearing makers NSK Ltd. and NTN Corp.

Three NSK executives avoided prison with suspended sentences, and the two NTN defendants had yet to go to trial by early November.

"The Japan system is a little unique," a Japan Fair Trade Commission official said. "Judges here still think white-collar crime is less serious."

The commission has put more bite behind its bark. The number of its investigators nearly doubled to 452 in 2011 from 263 in 2000. In 2013, it levied ¥30.24 billion ($262.1 million) in fines, compared with just $80.3 million in 2006.

The DOJ applauds the commission for getting tough.

"They have been very supportive of us," a DOJ official said. "This has been a very successful investigation with a lot of individuals who have been prosecuted and agreed to prison.

"Anytime you get an executive in a white-collar crime situation to go to prison for one to two years, those are very significant sentences," he said.

U.S. Assistant Attorney General William Baer: Probation, corporate monitors possible for companies harboring indicted executives. Photo credit: BLOOMBERG

Golf and beer

Yet, in Japan, the differences from the U.S. are plenty:

• Collusion is usually an administrative, not criminal, offense.

• Corporate fines are typically lower than in the U.S.

• Individuals are rarely, if ever, penalized.

• Offending companies almost never face the onslaught of civil lawsuits that inevitably hit companies stateside.

"There is no real enforcement in the criminal context," said Junya Ae, a Tokyo antitrust lawyer with Baker & McKenzie who has defended suppliers in the crackdown. "Japanese may feel that the conduct is not illegal in a subjective sense."

Japan's Ministry of Economy, Trade and Industry, the powerful custodian of Japan Inc., is among those taking a skeptical view of the U.S.-led international investigation.

Ministry officials say collusion is a thing of the past. They blame it partly on cultural misunderstandings or rogue businessmen.

"Sometimes the parent company really cares, but the overseas office doesn't know the appropriate compliance," said Kaori Ito, deputy director of the ministry's Competition Enhancement Office.

In Japan, for example, it was long customary for executives from rival companies to routinely meet for drinks or golf. Such customs, a red flag in the United States, can be misinterpreted, Ito said.

The DOJ's fines, which can be up to 10 times those in Japan, are seen as excessive, while its leniency program -- which lessens the penalties on companies naming others -- creates an opaque process that pits one company unfairly against another, said Yuji Shiozaki, deputy director of the ministry's automobile unit.

Meanwhile, authorities in other countries have cued off the U.S. indictments for their own pile-on, often rolling out copycat charges without their own investigation, he said.

The fact that the target companies are almost exclusively Japanese has conjured a subtext of politically motivated Japan bashing. "Many suppliers complain about that," Shiozaki said.

To better educate companies about overseas compliance issues, the ministry published a set of guidelines in 2010. It was a case of too little, too late: The vast majority of collusion activity pinpointed by the DOJ happened between 2000 and 2010.

Slow change

Attitudes change slowly, even at the Ministry of Economy, Trade and Industry.

Last month, then-METI Minister Yuko Obuchi was forced to resign over allegations of misuse of political funds.

Days later, scandal erupted again when her newly appointed replacement admitted that members of his political staff tried to expense a night at an S&M sex club in Hiroshima where women in their underwear are reportedly tied up and whipped by customers.

Yet with more Japanese executives headed to U.S. prisons, insiders here say the old-boy attitudes have been jolted.

The buzzword of the times: konpuraiansu, Japanese for compliance. Compared with just a few years ago, parts makers are scrambling to educate employees on actions that are off-limits.

"Training is so important. We train not only salespeople, but everyone else as well," Tadashi Arashima, president of Toyota-affiliate supplier Toyoda Gosei Co., said in a July interview.

"It's much stricter."

In September, his company also fell prey to the crackdown. Gosei pleaded guilty to fixing prices on hoses sold to Toyota and on airbags and steering wheels sold to Toyota and Fuji Heavy Industries, the maker of Subaru cars.

It was fined $26 million.

In the new era of compliance, even lunching with a former co-worker who left for a rival company is a big no-no. Executives who cross paths in airport lounges nervously cast about for a third party to corroborate that nothing is amiss, recounts one high-level, Asia-based executive at a non-Japanese supplier.

'Very afraid'

At long-established industry conferences such as that of the Japan Society of Automotive Engineers, some attendees aren't even allowed to ask exhibitors for specs on the technology being displayed.

"We can look at the booth, but we can't ask any questions," said Hiroya Miyazaki, vice president for automotive bearings at NSK. "We must avoid contact with competitors' engineers."

After the conferences, attendees are required to file reports with the company's lawyers on whom they contacted.

"We have become very afraid," he said.

NSK doubled the staff in its global compliance office to 12. Now, there are training courses every month, executives said.

NSK was fined $68.2 million by the DOJ in September 2013 for fixing prices on bearings. The Japan Fair Trade Commission fined it $48.8 million in March of that year for the same violation.

"We must avoid contact with competitors' engineers. We have become very afraid."
Hiroya Miyazaki
vice president for automotive bearings, NSK Ltd.

There wasn't always this paranoia.

But now, even Japanese investigators show up in dawn raids, dressed in black suits and ties, one Japanese supplier executive says.

They wait for the company to call its lawyers and, once they are let inside, demand the use of a dedicated room.

This is their makeshift headquarters, where they set up computers and copy machines to methodically duplicate the supplier's files and documents.

When the fines finally come down, the supplier's top executive is encouraged to report in person to the Fair Trade Commission to be read the charges and sign over official payment of the fine.

Mr. X is unconvinced the lessons have fully sunk in.

"To be honest, I don't feel that anything has changed. People in Japan still underestimate what they are doing," he said. "As long as you are in Japan, you know you will never be arrested."

Carmakers to blame?

Yet a sense of victimization lingers.

Suppliers argue that the relentless pressure from automakers to annually cut costs creates a fertile field for suppliers to circle wagons in an effort to stave off predatory pricing.

Parts makers in Japan also dispute the notion that bid rigging gouges carmakers with overpriced parts.

"It's just a price level to start negotiations. The real price is decided later," Mr. X said. "We know that we can never win fighting about the price. That is the biggest reason we do price fixing. The carmakers created the price-fixing culture."

If automakers were truly hurt financially by the practice, he reasons, they would sue the suppliers for damages.

That hasn't happened yet. In fact, auto executives sometimes wash their hands of the matter.

"We don't have any concrete plans to bill them or sue for damages," said Yasuyuki Yoshinaga, president of Subaru maker Fuji, which, according to DOJ plea agreements, was overbilled for parts including seat belts, ignition coils, windshield wipers, fan motors, air conditioning systems, airbags and steering wheels.

"At this moment, we don't think we have any evidence that can prove the prices were dramatically higher," he said.

But legal experts expect a round of civil suits after the criminal cases work through the system.

Angry consumers are already circling.

In September, Yazaki Corp. agreed to pay $76 million to resolve a class action brought by consumers for fixing prices of wire harnesses, instrument panels and fuel senders, Law360.com reported. The DOJ fined it $470 million for the same misdeeds.

The crackdown on bid rigging has spread to wherever Japanese suppliers do business: Japan, Europe, South Korea, China and Singapore. Last month, South Africa joined in.

Major Japanese suppliers such as Yazaki Corp., Denso Corp., Panasonic Automotive Systems, NGK Spark Plug Co. and Takata Corp. have been ensnared.

Non-Japanese companies also have been enveloped, including the German unit of TRW, the Japanese subsidiary of Valeo and Swedish seat belt and airbag maker Autoliv Inc.

The parade of U.S. criminal indictments and guilty pleas shows little sign of stopping as each case digs up new leads. The Japanese call it "potato harvesting" -- the domino effect of one supplier frantically squealing on another to win leniency.

Crackdowns to come

Yet businessmen such as Mr. X, who do time and return to work, aren't the big worry for the DOJ.

"If you're someone who surrendered yourself and traveled thousands of miles to serve prison and then went back to work, that's the last person I'd worry about violating antitrust laws," said the former DOJ antitrust attorney.

The serious problem is the trend of Japanese executives increasingly holding on to potentially influential jobs at their companies in Japan while under indictment, according to the former DOJ attorney.

"The first couple of years was mostly people pleading guilty in the U.S. And if you look at the frequency over the last year, it's more people getting indicted than are pleading guilty," said James Mutchnik, an antitrust attorney at Kirkland & Ellis in Chicago, who represents auto parts companies and individuals targeted by the DOJ in the crackdown, including several Japanese executives still residing in Japan.

Because price fixing was often systemic at the companies, getting targeted is sometimes a matter of timing. Executives active during certain time frames can get nailed, while successors or predecessors in the same position skate by, lawyers and supplier executives say.

"Nobody sets out to be a price fixer. It's just part of the job," Mutchnik said. "The job gets defined by cultural practices, and those are the things that put you on the wheel.

"The only thing you are at risk for is when the music stops, where are you? Whoever's without a chair gets stuck."

Of the individuals charged by the DOJ who have yet to plead guilty or are ignoring indictments, many remain in Japan, lawyers say, where extradition is the only way to get at them.

The DOJ is beginning to question their status.

"It is hard to imagine how companies can foster a corporate culture of compliance if they still employ individuals in positions with senior management and pricing responsibilities who have refused to accept responsibility for their crimes," Baer, the U.S. assistant attorney general, warned in his Sept. 10 speech.

The U.S. also may get aggressive about extradition, another DOJ official said. The department conducted its first-ever antitrust extradition in April, when it brought back an Italian national from Germany on charges of rigging bids for marine hoses.

That should worry Japanese businessmen hiding from indictments in their homeland, lawyers say.

"It is widely understood that the risk of extradition is increasing," said Ae, the antitrust lawyer.

Those executives are put on Interpol's highest-level watch list and can easily be arrested if they travel outside Japan.

Mr. X still works for the same company. He says he's thankful just to have a job. But he adds that his case is also a cautionary tale for those in Japan who still do things the old way.

"They need to know my nightmare experience and how prison ruined my life," Mr. X said. "I don't want young people to have the same kind of experience I had. We have to stop this."

Chieko Tsuneoka contributed to this report.

You can reach Hans Greimel at hgreimel@autonews.com -- Follow Hans on Twitter: http://www.twitter.com/hansgreimel

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