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04 June 2018
In response to the significant corporate scandals that have come to light in recent years, Japanese authorities and regulators have been working to improve compliance awareness within corporate Japan.
The Japan Exchange Regulation (JPX-R) is a subsidiary of the Japan Exchange Group, Inc and a regulatory body empowered under the Financial Instruments and Exchange Act to, among other things, conduct listing examinations, compliance reviews, market surveillance and broker-dealer inspections of companies listed on the Tokyo and Osaka stock exchanges. The JPX-R has published certain guidelines to share its views on compliance and risk management, such as its Principles for Responding to Corporate Scandals of February 2016. More recently, on March 30 2018, it published its Principles for Preventing Corporate Scandals (the prevention principles).
While the prevention principles do not have the force of law behind them and do not constitute formal obligations for those entities subject to JPX-R oversight, they do provide valuable insight into the views of the JPX-R and, by extension, other Japanese regulators. The principles represent a useful set of guidelines to better understand how Japanese market participants are expected to manage their compliance function. Companies active in Japan are advised to consider the principles carefully and assess whether their compliance measures are appropriate.
Principle 1: gain thorough understanding of actual situation
This principle highlights the importance of proactively seeking to recognise, in terms of structure and actual operations, the effectiveness of a company's compliance programme. It provides as follows:
Principle 2: fulfil responsibilities with sense of mission
This principle highlights the importance of ensuring that an entity's compliance function is appropriately empowered and supported by management. Under this principle, management should:
Principle 3: encourage two-way communication
This principle highlights the importance of open and reciprocal reporting lines within companies as an important deterrent against compliance issues. Under this principle, management should:
Principle 4: detect non-compliance early and respond swiftly
This principle acknowledges that while it may be impossible to completely eliminate the risk of compliance issues from arising, if compliance issues are promptly identified and addressed, the negative impact can be controlled. Under this principle, management should:
Principle 5: execute consistent business management throughout entire corporate group
This principle highlights the importance of implementing a consistent approach to compliance across an organisation and its affiliates, providing as follows:
Principle 6: be accountable in view of relevant supply chain
Similar to Principle 5, this principle posits that companies should be aware of their compliance-related obligations to potentially extend over their business partners, suppliers and entire supply chain. It provides as follows:
The prevention principles are a timely reminder of the continued emphasis being placed on compliance by Japanese regulators. They stress the importance of an effective and appropriate compliance regime and allocate significant responsibility for the establishment of such on companies themselves. Companies are expected to actively engage in their respective compliance functions and implement policies and procedures that are appropriate based on the relevant facts and circumstances. From a Japanese compliance perspective, the prevention principles are a warning signal to companies that simply rely on historical norms or apply blanket compliance policies across an entire organisation, without regard to the actual facts, is inappropriate and may not constitute an effective approach to compliance. This suggests that Japanese regulators may be transitioning to a more risk-based approach to compliance, which will place a greater burden on companies to carry out their compliance functions in a vigilant and proactive manner. Compliance remains a significant concern in Japan and all companies operating in Japan, regardless of whether they are under the JPX-R's oversight, should review and consider the guidance set out in the prevention principles.
For further information on this topic please contact Peter Armstrong or Yoshihiko Matake at Nagashima Ohno & Tsunematsu by telephone (+81 3 6889 7000) or email (firstname.lastname@example.org or email@example.com). The Nagashima Ohno & Tsunematsu website can be accessed at www.noandt.com.
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