JFTC Flexes Its Muscles on Bid-rigging

1. (SBU) Summary: Japan's chief competition
regulator, the Japan Fair Trade Commission (JFTC), has
made a good start in applying the new powers it gained
at the beginning of the year in several bid-rigging
cases. Though not a player in what has been arguably
the most prominent bid-rigging case in 2006 so far --
one involving a subsidiary of the Japan Defense Agency
-- the JFTC has utilized its new leniency program and
its enhanced investigatory powers in a number of other
high profile cases. The danger now, according to one
of Japan's leading competition law experts, is that the
JFTC, long considered one of the weaker agencies of the
Japanese government, may not have the human resources
to meet the challenge of its new authority. This could
offer an opportunity to the opponents of a stronger
Japanese competition regime to roll back the gains made
in 2005 with the amendment of Japan's main antitrust
law. End summary.



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JFTC Joins the Big League


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2. (U) Since the beginning of 2006, Japanese media
have revealed several high-profile bid-rigging cases.
The most prominent of these has been a series of cases
surrounding projects contracted by the Defense
Facilities Administration Agency (DFAA), including a
number of facilities utilized by U.S. Forces Japan.
(Ref A) Although significant in scale -- with a total
loss due to collusion estimated at nearly USD 113
million at the current exchange rate -- and in
political impact, the DFAA cases, which have fallen
under the auspices of the Tokyo District Public
Prosecutors' Office have not, to date, involved the
main competition regulator, the Japan Fair Trade
Commission. (Note: The lower level of JFTC
involvement probably stems from the fact that the
charges raised in the DFAA case have centered more on
official corruption and less on collusive behavior by
private companies. End note.)



3. (U) Of potentially greater significance to long-
term progress in the fight against bid-rigging are a
separate series of cases where the JFTC has taken a
leading role so far this year. These are:

-- Projects for the construction of sewage treatment
plants in the Osaka area tendered by municipal
governments and valued at over JPY 100 billion.

-- Floodgate projects contracted by both the central
and local governments valued at JPY 70 billion

-- Installation of ventilation fans in highway tunnels
tendered by the Ministry of Land, Infrastructure, and
Transport and the former Metropolitan Expressway Public
Corporation (subsequently privatized into the
Metropolitan Expressway Co. and the West Nippon
Expressway Co.) and valued at JPY 22 billion.



4. (SBU) Each of these three cases represents a new
step forward in the JFTC's efforts to prosecute bid-
rigging using the new tools at its disposal following
the implementation of last year's amendments to the
centerpiece of Japan's antitrust legislation, the
Antimonopoly Act (AMA). In the floodgate and tunnel
ventilation fan cases, for example, some of the

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companies involved in the bid-rigging scheme reportedly
took advantage of the JFTC's new program of leniency
under which they could escape some or all surcharges
levied by the Commission in exchange for providing
evidence against their partners in collusion. (Note:
The JFTC does not comment on or confirm reports
regarding participation in the leniency program -
although presumably the details will emerge when
penalties are announced. End note.)



5. (U) In the sewage treatment plant case, the JFTC,
in what may be its boldest move, undertook a criminal
investigation of the companies concerned, a function
that, until the implementation of the 2005 AMA
amendments was the sole province of Japan's elite
public prosecutors. Japanese media on May 23 revealed
that the JFTC had issued formal criminal accusations
(kokuhatsu) against 11 companies involved in the
scheme, effectively turning the case over to the
government prosecutors and opening the way for the
arrests of the relevant company executives. While JFTC
has long had the power to file criminal charges, its
new ability to obtain a warrant and collect evidence
admissible in court should make it easier for
government prosecutors to accept and prosecute AMA
violation cases.



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Other Agencies Act on Bid-rigging...To a Point


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6. (U) The Japanese government will also be
considering new contracting guidelines aimed at
increasing the application of competitive bidding
procedures by all ministries and not just the Ministry
of Lands, Infrastructure, and Transport (MLIT), the
traditional focus of measures to reduce bid-rigging.
On May 11, according to Japanese press reports, the
"liaison committee" of Japanese central agencies that
issue public works contracts agreed to apply
competitive bidding for all contracts except those in
which there is "clearly only a single contractor" and
to review all contracts currently being processed in
order to issue a plan in June that will identify those
contracts that will be converted to competitive
bidding. That decision followed a May 10 meeting of
the Central Construction Commission, an MLIT advisory
body, that recommended revision of the guidelines for
bidding and contracting of public works projects in
order to expand the scope of competitive bidding at
both the central and local levels. According to press
reports, this proposed amendment to the MLIT guidelines
would be the first in five years.



7. (SBU) Despite these measures, however, media
reports continue to indicate that bid-rigging tied to
the longstanding practice of "descent from Heaven"
(amakudari), by which senior bureaucrats assume post-
retirement employment at government contractors,
persists. Several of the major bid-rigging scandals in
2006 to date -- most notably the DFAA and floodgate
incidents -- involved retired government officials,
according to media reports. An MLIT official in charge
of construction market access confirmed to econoff
that, due to the right to choose one's employer
enshrined in the Japanese Constitution, MLIT guidelines
on reemployment aimed at limiting collusion could only
be made voluntary. Retiring officials could ignore the
guidelines if they chose to do so. (Note: Japan's
National Civil Service Law does stipulate that central

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government employees are prohibited for two years
following retirement from taking jobs at profit-making
corporations that have strong relationships with
governmental organizations where they worked in the
five years before retirement. End note.)



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Environment Favors Stronger Competition Regime


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8. (SBU) Commenting on the JFTC role in these recent
cases, Keio University competition law expert Jiro
Tamura noted that, unlike the leniency program, which
is fundamentally a passive activity for JFTC, actually
undertaking a criminal investigation, as in the sewage
treatment plant case, "takes guts" because it requires
the JFTC to play in the same legal league as Japan's
elite prosecutors. In the big cases of 2005, Tamura
noted, the JFTC had generally taken action against AMA
offenders following moves by the prosecutors. He added
that for their part the prosecutors, after years of
focusing on political figures, had taken on a new
interest in economic crime. He pointed to the arrest
and prosecution of the flamboyant Internet entrepreneur
and investor Takafumi Horie (Livedoor Co.) as an
example of the prosecutors' new interest in the
business world.



9. (SBU) Tamura credited JFTC Chairman Kazuhiko
Takeshima as being very eager to energize the Fair
Trade Commission right from the start of his tenure in


2002. He indicated that if Takeshima's concrete
progress in increasing JFTC enforcement activities had
lagged his rhetoric, that was due in large part to the
delays and difficulties in achieving passage of the
amended AMA, a critical tool if the JFTC were to have
"teeth." Now, however, with the amended law in effect
and the new contest with the prosecutors in pursuing
criminal activity, the JFTC could not return to its
previous low-profile status, Tamura noted.



10. (SBU) The leniency program of the amended AMA
also was forcing changes in the code of conduct for
Japan's attorneys, Tamura said. Previously, lawyers
for companies accused of bid-rigging would freely share
information among themselves in a common effort to
determine what evidence the JFTC might have in a
particular case. Now, with the incentive of leniency
available, companies were seeking to behave more
independently and to force their lawyers to sign
binding confidentiality agreements. Bid-rigging
cartels, he noted, had been held together as much by
threat of retaliation from the other members of the
cartel as by common interest, and companies frequently
looked for ways to cheat on their ostensible partners.
The onset of the leniency program gave those who wanted
to escape from an unwelcome decision by their cartel
partners a new way to do so.



11. (SBU) In addition, Tamura indicated, the
application of the law preventing government officials
from participating in bid-rigging schemes (Kansei Dango
Boshi Ho) and the strict application of suspension from
bidding by MLIT on AMA violators -- a reaction in part
to the strong public outcry over 2005's headline-
generating steel bridge case (ref B) -- have meant that
more and more companies were deciding to compete
fairly. The bidding suspension, which had previously
been negotiable between MLIT and the firms, had
inflicted real economic damage on some of the offending

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firms, Tamura said.



12. (SBU) Tamura was skeptical that much would change
in the near term with respect to the phenomenon of
amakudari. He guessed that the Japanese agencies
concerned believed they had taken adequate measures to
address the problem. He indicated that more attention
might usefully be applied at the other end of the
employment process: recruitment. People with little
practical experience but who had graduated from elite
universities and scored highly on their civil service
exam dominate the ranks of the Japanese bureaucracy,
Tamura stressed. Mid-level recruitment and mobility to
and from the private sector, Tamura said, would greatly
benefit the entire government and particularly
relatively less prestigious agencies like the JFTC,
which had always had to accept the weaker applicants
for government service, with the cream of the crop
going to more powerful institutions like the Ministries
of Finance and Foreign Affairs. Private attorneys on
two-year appointments at the JFTC had proven helpful
but, because of their short tenure at the agency, had
had less of an impact than if they had been able to
become career staff.. [As a practical matter, how
would JFTC hope to hold on to good lawyers for the long
term? New personnel track?]



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Higher Expectations: The Danger of Success


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13. (SBU) Strengthening the human resources of the
JFTC, Tamura stressed, was absolutely essential with
respect to criminal prosecutions where the JFTC actions
would be subject both to comparison with and to
scrutiny by the government prosecutors. Right now, the
JFTC staff are working seven days a week to process
their cases, according to Tamura. One major error in
processing a criminal case could, however, derail all
of JFTC's other achievements by handing the opponents
of the strengthened AMA (e.g., politicians from rural
areas, conservative business leaders) evidence to
question the agency's fitness to handle its new
authority. With a January 2008 review of the 2005 AMA
amendments mandated in the revised law itself, these
elements have a ready opportunity to take advantage of
any egregious error by the JFTC. Tamura noted that a
number of companies were already challenging the agency
by fighting JFTC's surcharge orders, which the JFTC, in
order to maintain its own authority, had to resist.
(Note: The amended AMA raised the maximum rate of
surcharges the JFTC could levy on firms as
"compensation" for illegal profits attained through
anticompetitive behavior from six percent to 10 percent
of a company's income during the period it was engaged
in the illegal activity. End note.) The workload and
the risk were such at present that many JFTC officials,
Tamura said, were scared that a serious mistake in
pursuing a case was likely.



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Who Will Be JFTC's Champion After Koizumi?


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14. (SBU) In addition, Tamura was concerned that the
JFTC would lose its political support once Prime
Minister Koizumi steps down in September. In Tamura's
view, Chief Cabinet Secretary Shinzo Abe, if he became
Prime Minister, would not pursue reform as aggressively
as Koizumi has. Abe, he said, was much more concerned

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about protecting himself and less likely to take
political risks than Koizumi. Former Chief Cabinet
Secretary Yasuo Fukuda, he believed, would be more

SIPDIS
likely than Abe to support Japan's competition
authorities but would still not equal the strong
backing received during Koizumi's tenure. (Note: The
five-year term of JFTC Chairman Takeshima will also
finish in 2007, thus giving Koizumi's successor an
early opportunity to put his own stamp on the agency.
End note.)



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Comment


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15. (SBU) Bearing in mind Prof. Tamura's observations
regarding the potential dangers of moving too
aggressively, the JFTC appears to be off to a good
start in applying its new powers. Certainly, based on
our reading of the frequent media commentary concerning
the unending revelations of bid-rigging and public-
private collusion, popular support for JFTC action
against bid-rigging remains strong. The primary task
for that agency, and for those who want to see it
assume a more prominent role in bringing about economic
reform in Japan, is to grow into its newly realized
authority. JFTC, though, may need to grow up fast as
the elements opposed to a stronger competition regime
in Japan may be postponing their counterattack until a
possibly more auspicious post-Koizumi era.

Schieffer