Yakuza Inc.: Foreign Investment Meets Organized Crime in Japan
November 6, 2001
Evening Panel Discussion
Restructuring Japan Series Lead Sponsors
Deloitte Touche Tohmatsu
On November 6, 2001, Japan Society heard a panel of experts on Japan’s underworld share their knowledge of Yakuza behavior and debate the extent of financial risk to foreign investors. Panelists included Curtis Milhaupt, Fuyo Professor of Law and Director of Japanese legal studies at Columbia; Raisuke Miyawaki, former director of Japan’s National Police Agency’s Criminal Investigation Division; and Robert Whiting, author of Tokyo Underworld. Gillian Tett, Tokyo Bureau Chief of the Financial Times, moderated the session.
How great is foreign investor risk exposure to Japan’s underworld? Opinion is sharply divided, according to Gillian Tett. Some say the Yakuza are involved in a quarter of the bad loans in Japan, and are a significant roadblock. Others say Yakuza involvement is not significant and not a problem for foreign investors. The foreign investment bankers, who, by virtue of being closest to the situation, are most likely to know, have been extremely reluctant to comment, said Ms. Tett. The unequivocal answer given to her by a very senior official at Japan’s Resolution and Collection Corp. came, therefore, as a surprise: 18.3%. “We have ways of measuring this very exactly. It’s the aggregate of all our Yakuza sub-groups,” the official explained.
According to Robert Whiting, Yakuza are involved in every industrial sector as well as traditional mob activities like “gambling, prostitution, extortion and murder.” Ranging in profile from “bullies in Roppongi” to “college-educated mobsters who speak foreign languages,” they number 80,000 to 150,000. Estimated revenues to organized crime are five percent of Japan’s GDP, he said.
Mr. Whiting observed that Japanese people tend not to view Yakuza as all bad. They provided work for returning soldiers after World War Two. Even today many view them somewhat positively, as an outlet for social misfits. Yakuza ties to the LDP are deep, solidified by a rural-based patronage system distributing public work funds to gang-related groups in exchange for kickbacks and votes, he noted. The financial sector employed Yakuza to force the sale of real estate commercial development during the 1980s, in the buildup to the bubble economy, and Yakuza remain close to Japan’s construction industry, whose investment capital approximately equals 20% of Japan’s GDP, he said.
The U.S. has also supported the Yakuza, asserted Mr. Whiting. American troops garnered $8 million of monthly profits from activities in Japan’s black market, which opened ten days after surrender; and American intelligence used the Yakuza to fight communism in Japan in the 1940s and 1950s. In the 1960s and 1970s, Americans bribed Japanese officials to win lucrative contracts, especially Lockheed for the Tristar jet, and the Yakuza were suspected in several suspicious deaths surrounding these deals, he said. Gangster-turned-politician Hamada Koichi lost a massive sum in Las Vegas, with the proceeds suspected to have been intentionally circulated in this manner for eventual use in Richard Nixon’s election campaign, according to Mr. Whiting. And in the 1980s, in the wake of the Plaza Accord, “keizai” Yakuza laundered their funds in U.S. real estate and the stock market, he said.Mr. Whiting confirmed that U.S. investment companies in Japan have experienced verbal harassment from Yakuza over distressed assets put on the market. His advice to foreign investors: If your standard is that you will not do business with any firm with connections to the Yakuza, you might as well not come to Japan.
As an academic interested in corporate law, Curtis Milhaupt, Fuyo Professor of Law at Columbia University, became interested in how the Yakuza are organized (as “boryokudan” or violent groups) and operate within the Japanese political economy as quasi-firms with functional specialties. He noted that the Yakuza specialize in such areas as workouts, loan sharking, and debt collection, areas in which the Japanese legal system has traditionally been rather inefficient. There are also dispute settlement specialists jidanya and land fixers jiageya who evict recalcitrant tenants or squat land held as collateral and yonigeya, literally "one who helps others flee in the night." In these roles, the Yakuza often possess more legal and transactional experience than Japanese lawyers.
Prof. Milhaupt has conducted a study theorizing that organized crime in Japan arose, as in other transitional economies like Sicily and Russia, to fill the gaps between formal legal rights and state enforcement capabilities. This hypothesis has found significant empirical confirmation through tests performed by Milhaupt and his co-author, Mark West, which uses 25 years of data on membership in organized crime from the National Police Agency. A statistically significant negative correlation was found to exist between the membership in organized crime and resort to legal procedures such as filing a civil suit and taking out a loan. There is also a significant negative correlation between membership in organized crime and the numbers of crimes reported in Japan. The study led Prof. Milhaupt to conclude that the Yakuza are substituting for inefficient state mechanisms. He stated that "the best way to fight the Yakuza is to re-engineer the legal environment to make it more efficient and user-friendly, and in fact this has been happening. Many problematic areas in the legal system are now being addressed."
Raisuke Miyawaki, former director of Japan’s National Police Agency’s Criminal Investigation Division, stressed the importance of substance over names and the value of foreign pressure in toughening the law against mob activities.
According to Mr. Miyawaki, different types of mobsters were called by different names but eventually consolidated under the term “boryokudan.” Under the Anti-Boryokudan Law enacted in 1993, Yakuza members had to register with the government, but since many affiliates of the mob remain unregistered, the term “boryokudan” is not sufficiently broad. “In my view, these wicked people should be lumped together in a single word, the ‘Yakuza’…. This is the most accurate, encompassing word to describe the people whom foreign investors encounter in Japan,” he said.
Mr. Miyawaki suggested that heavier penalties be imposed for financial institutions handling mob funds, and stronger enforcement powers be allowed, under the Anti-Money Laundering Law. He also proposed a new law allowing ordinary people, including foreign investors, to determine whether or not an individual is a registered Boryokudan. Foreign lobby pressure would be useful to expedite these reforms, he noted.
What do Goldman Sachs and Morgan Stanley have to say about potential dealings with Yakuza as a result of the Japanese REITs recently announced? As these firms have substantial reputational risk, they are likely to have put mechanisms in place to contain Yakuza risk, Ms. Tett observed. “If this market gets very big, it becomes interesting and should be addressed publicly,” she said.
Who are the leading figures fighting Yakuza in Japan today? Mr. Miyawaki lamented that politicians dare not go after Yakuza for fear of losing votes. The rank-and-file police are against the Yakuza, but their efforts are ineffectual. Said Mr. Miyawaki, “I am troubled by the fact that we do not have a way to deal with this crisis situation. This is a role for the people at the top, who have to have a keen awareness and will go after them. I tried to do so. Unfortunately, not all the people at the top shared my view.”