Should a capital be deducted from compensation in fraud case?

Defrauded victims can ask a return of their expense to defrauders: if victims rescind contracts based on civil code (art.96) , they can seek restitutions as unjust enrchiment (civil code, art.704);  victims also seek repaymnet as damage compensaton by tort (civil code, art.709).

Restitution of unjust profit

In any events, when the scammer expent any money to as means of defrauding a victim, the scammer principally can ask deducting his payment from damage; It is because the money that a victim got shall be regarded as unjust enrichment, even if the money was spent as a means of cheating (civil code, art.703), precedent court ruling had stated (Supreme Court ruling on 24th March 1993, Showa 63nenn (o) 1749). The civil code stipulates that a person who made an expenditure based on unlawfull inducement cannot claim return of it. But the civil code does not make it clear whether a person who already paid back the money can seek restitution of money paid by unlawful inducement or not.

Supreme Court ruling

On 24th June 2008, the Supreme Court altered a precedent in nominal terms of purchasing transactions of U.S treasury bond;  it follows to the Supreme Court ruling on 10th June 2008 related to illegal money lending case. The defendant sold a U.S treasury bond to the claimants, promising to be able to get profitable dividend by the purchasing. Although the defendant did not purchased any bonds, he paid the dividend several times as promised, but soon later he failed to perform his obligation. In litigation procedure,the defendant claimed that the dividend should be deducted from his unjust profit.

The court of appeal approved the claim of the defendant. However, the Supreme Court, on the contrary, rejected the claim of the defendant: the scammer can not ask a return of his expense, if the expense was consumed by immoral purpose like as fraud; the scammer also can not ask deducting his expense from damages compensation; as a result, a victim can claim returning all of his payment including an expenditure of the defrauder.

Objection by one Justice

One of the Justices, Justice Tahara, objects to this ruling: he states that if the payment of dividends for the purpose of concealing illegal activity by defrauder, the ruling might be justified; but in this case, the payment of dividents by defraluder is already established at the contracts formed; the payment of dividends is embodied in fraudulent sheme and it should not be regarded as the activity concealing his cheating. 

The justice states the unfairness among victims. The status quo of recovery of damage in victims would be different; some victims might have already received dividends several times; but another victims might not receive any dividends yet; if the defraluder goes into bankruptcy before all victims receivd dividends in same ratio, and if they can seek damage compensation as same as their expense of purchasing bonds, this treatment shall be not justified.

30% of victims of billing fraud rejected banks’ assistance

By the end of April, the number of billing frauds are estimated 7,836 and the damage are deemed 11,182,760,000 yen in 2008, the National Police Agency described.

According to the National Police Agency, 30% of victims of billing fraud rejected assistance from banks, who recommended their customer to examine the reliability of the instruction of money transfer, the Asahi Shimbun reported on 22th June 2008.

The agency inquired to 429 of victims in their thirties to nineties cheated more than 3 million yen in last year; more than 80% of victims had believed that they never might be frauded. Even though 30% of victims were cautioned by banks, they  transfered money as dirceted by scammers.

 

Bank Transfer Scam Victims Relief Law goes into effect

Billing fraud

Swindling money using bank transfer systems has been on the rise in Japan, with the number of cases coming to 17,900 in 2007 involving some 25.1 billion yen, whereas the number was about 20,000 in 2004 involving some 28.1 billion yen. The number of scams reach 5,552 until the end of March 2008 involving 7.9 billion yen.

The victims were deceived into transferring money to bank accounts used for fraudulent purposes: many cases are concerning that criminal groups place a telephone call pretending to be a relative, police officer or lawyer and relate a false story, such as the victim’s child was involved in a traffic accident, and that out-of-court compensation be paid; the scammers utilize different name of account holders to prevent identifying themselves.

Under Civil law

It has been possible for such victims to get their money back if they file and win civil lawsuits, but lawsuits impose heavy burdens on victims in terms of time and legal costs.

Under the civil law, victims have to file a lawsuit against the account holder asking reimburse based on unjustified enrichment. then, they can ask banks getting back their deceived money.

But, it may face a difficulty for victims to file those lawsuits when they can not identify the bank holders. The Tokyo District Court resolved this problem over the ruling on 30th March 2005: the ruling approved that victims could seek reimbursement to the banks in the name of unidentified bank holders in case the money remained in bank accounts.

New law

The new law, which was enacted on 21th December 2007 and will go into force 21th June 2008, enables victims to receive money swindled by criminal groups without filing lawsuits.

Measure of relief

The system is applied when, for example, a financial institution freezes a swindler’s account at the request of the police before the criminals withdraw the money.

Financial institutions such as banks, “shinkin” banks and credit union are to freeze funds held at bank accounts at the request of scam victims or police. Financial institutions are required to freeze accounts found to be used for criminal activity.

Under the new law, the Deposit Insurance Corporation will list details of frozen accounts, such as the names of account holders and outstanding amounts of deposited money, on its Web site for at least 60 days.

If the account holders do not object, the corporation then announces on its site that the accounts are covered by the recovery system for at least 30 days.

Fraud victims who transferred money into the designated accounts file applications to the financial institutions during the period and can get back equally divided amounts of the money within the range of their respective damages.

According to the Financial Services Agency, about 170,000 accounts holding about 8.3 billion yen in total were frozen nationwide as of the end of March last year. Included in the total are accounts suspected of being used for money-laundering, which are not covered by the law to aid billing fraud victims. Financial institutions are speeding up work to identify exact amounts seen as the proceeds of billing frauds. The Yomiuri reported on 21th June 2008.

From an article of the Japan Times on 2nd June 2008, about ¥5 billion in frozen bank accounts is likely to be distributed to victims of bank transfer scams after a law to relieve such victims comes into force in June. It is said that the Deposit Insurance Corp. of Japan and financial institutions will cooperate and start distributing the ¥5 billion this year.

Problem remained 

However, even under the new law, it will be difficult for them to get all of their money back because criminals usually spend the money before the accounts are frozen.

Furethermore, some hurdles remain. For example, because the frozen accounts from which the proceeds of the crimes are to be returned to victims are listed only on the Internet, an additional task to be undertaken will be notifying elderly fraud victims. The first public announcement under the recovery system is scheduled for July 16. However, elderly victims who are not personal computer users likely will not be aware of the announcement. Therefore, some of the financial institutions, such as major banks, will offer a service with exclusive call centers to tell victims whether they can seek repayment. The Japanese Bankers Association is urging billing fraud victims to ask banks for assistance first.

Psychological commercial practice misusing love emotion

Shizuoka district court approved a damage compensation of a customer purchasing products from distributors who brought the customer emotion of a sweetheart prior to the selling, the Shizuoka Shimbun reportd on 20th June 2008. The case seems similar as a similar one posted on 21th December 2007. 

The decision said that the female employee of the defendant company made the plaintiff man bring about the love emotion before she solicited purchasing to the plaintiff.  It might not say apparently the sales misused a psychological practice; but the court probably stated that such sales should be regarded as illegal commercial practice, because the plaintiff could not refuse the solicitation under the love emotion to the employee.

Using psychological sales practice is not regarded as illegal usually. However, it should become illegitimate when distributors misuse such practice as a means of exploiting customers: strictly speaking, the practice may not evaluate unfair aggressive commercial practices immediately; but customers who are conducted by psychological sales practice is not in the situation who shall make reasonable economic decision; in other word, they have not suitatility in transaction; on the otherhand, sellers can have recognition that while customers tend to make purchasing decision via their psychological sales practice, they can accomplish their purpose under abusing the situation of customers who could not refuse the sales invitation of sellers. 

This sales practice should be regarded abusing vulnerable situation of customers and prohibited as illegal conduct as unfair aggressive commercial practice, whilst  both civil law and consumer contract law do not stipulate it as illegal practice. The ruling might approve this .

Claims about financial services handled and resolved suitably?

The Financial Services Agency showed the details of redress of disputes concerning financial services transaction on 16th June 2008.  The result was submitted on the conference of the Association Tackling with Financial Services Disputes. An article of the  Asahi Shimbun  and the Sankei Shimbun reported on 18th June 2008.

The association was established by representatives of industries and consumers in addition to the government in 2001; it is formed by 18 financial industry groups such as banking, securities, insurance and so on; it provides the Alternative Dispute Resolution concerning Financial Services. The association held his meeting on 17th June 2008; at the meeting, the status quo of claims and resolutions in 2007 were reported.

According to the report, the number of claims was 164,400 and the figure of cases allegedly causing damages was 31,518, whereas it was 13,742  in 2003; the growth of claims of financial services was triggered by rash of refusing payment of insurance.

The largest number of claimes was concerning indemnity insurance in which the number was 92,975; and the figure of application to the ADR was 10,148 in a life insurance and was 17,447 in an accident insurance.

However, the figure of cases that are dealt by the grievance committee is extremely in lower level; only 387 cases was filed to the ADR by virtue of not resolved by private negotiations. It means that only 1 % of claims were handled through the ADR . 99 percent of claims are treated by each member companies; the Japan Damage Insurance Association, who received about 17,000 claims in 2007,  asked the committee to review only 0.1 percent of complaints he received; the Life Insurance Association sought the comittee to review  0.3 percent of the total complaint received. Whilst the number of complaints to the Bankers Association are 2,174, only one case was asked judgement to the committee by the association.

These associations explain that member companies could have been solving complaints from customers effectively through inner procedures. But, these solutions might not take account of recommendations and assistance by specialist; they are based on judgements by in-house officers. it is still vague what sort of complaints are received by the associations and what relieves are provided to customers; the rationality of these solusions also still unlcear.  

Regarding claims concerning commodity futures transactions, about 60 percent of claims are treated through a mediation procedure of disputes resolution committee.

Duress by cyber attack increasing?

An article of he Mainichi Shimbun, on 14th June 2008,  reported recent cyber attacks case: attacked company Web pages are shut down by huge amounts of traffic and the perpetrators send e-mails demanding.

Major information security company Little eArth Corporation Co. (LAC) says that since late April, it has been approached by three firms in the Tokyo metropolitan area about such attacks. The companies’ servers are reportedly being targeted in distributed denial-of-service (DDoS) attacks, in which a vast numbers of requests are sent via a network of compromised computers (a botnet), eating up the available bandwidth and making their Web pages unavailable. Afterwards, an e-mail is sent demanding that money be deposited into a specific account in exchange for halting the attacks, with the initial amount around 500,000 yen. If it is ignored, another e-mail is sent a few days later, this time demanding a higher amount.

The article reports that these types of threats occur mainly overseas, but a Japanese company was confirmed for the first time to have fallen victim in May last year. Between then and March this year, there have been two or three other such incidents.

Court ruling based on revised Financial Instruments and Exchange Law

According to an article of the Yomiuri Shimbun on 15th June 2008, Tokyo District Court on 13th June 2008 ruled based on the new regulation for the first time.

The court ordered Livedoor Holdings Co. to pay more than 9.5 billion yen to Nippon Life Insurance Co. and five trust banks, all former shareholders of the Internet service company, to compensate them for the massive financial loss they suffered following the collapse of the company’s share price after the revelation that it had falsified its annual financial report.

In 2004, the Security Exchange Law (now the Financial Instruments and Exchange Law) was revised to include a new regulation under which a shareholder who suffers a financial loss due to false statements by a company can claim for total losses incurred from the day the false statement was made.

8 of other similar lawsuits, 3,300 plaintiff, have been filed with several court so far. The entire amount of damages claimed is about 6,070,000,000 yen.

Misleading information provided in TV shopping programs

According to an article of the Yomiuri Shimbun on 14th June 2008, the Fair Trade Commission has cautioned TV Asahi Corp. for providing misleading information on a horse saddle-style exercise machine sold in its shopping programs. This is the first time the FTC has admonished a broadcaster over a shopping program.

The broadcaster had claimed people could lose up to 6.6 kilograms by exercising on the machine for one hour per day for three weeks. However, the FTC obtained data from the manufacturer stating that a person could only lose up to 0.4 kilogram with this amount of exercise.

According to the FTC, about 53,000 of the fitness machines, Rodeo Boy II, were sold during a yearlong period via the shopping programs, with sales totaling about 1.5 billion yen.

TV Asahi featured the product in its shopping program Selection X, and other information programs between June 2006 and July 2007, claiming the machine could help reduce body weight.

To prove the product’s effectiveness, the programs introduced several individuals who allegedly had lost between 1.4 kilograms to 6.6 kilograms after using the machine for an hour a day over three weeks.

In response to the FTC’s inquiry, TV Asahi also disclosed it had carried out its own experiment with 14 people, but that six of the 14 trial subjects were dieting during the three-week experiment.

The FTC concluded that the TV programs might have led viewers to believe a considerable amount of weight could be lost in a short period of time merely by using the machine.

The administrative order is based on the Act against Unjustifiable Premiums and Misleading Representations, which prohibits a misleading commercial practice (art. 4(1)):  

No entrepreneur shall make such representation as provided for in any one of the following items in connection with transactions of goods or services which he supplies: (i) Any representation by which the quality, standard or any other matter relating to the substance of goods or services are shown to general consumers to be much better than the actual one or much better than that of other entrepreneurs who are in a competitive relationship with the entrepreneur concerned contrary to the fact and thereby which tends to induce customers unjustly and to impede fair competition

Then, the Fair Trade Commission may order the entrepreneur concerned to cease the said act, or to take the measures necessary to prevent the reoccurrence of the said violation, or to take any other necessary measures including public notice of the matters relating to the implementation of such measures. Such an order may be issued even when the said violation has already ceased to exist (art.6(1)).

Trigger of the ordere

An article of weekly magazine brought about the order. The Yomiuri stated: 

Last summer, Weekly Gendai magazine published stories claiming the broadcaster had falsified data on the product. In response, TV Asahi filed a libel suit in August with the Tokyo District Court against the magazine’s publisher, Kodansha Ltd. and others, demanding they pay compensation and publish an apology.

Did customers claim to TV Asahi?

Why did the TV Asahi claim to Kodansha?  In all likelihood, the TV company must have considered that he could win this litigation.

According to the disclosure of the TV Asahi to the FTC, the effectiveness of the machine was limited; in other word, not all customers could enjoy the result of diet. Before the TV Asahi filed a lawsuit to Kodansha, some of customers might have claimed to TV Asahi or the maker. Then TV Asahi might have succeeded to reject these claims. If it is true, TV Asahi’s conduct would be extremely irresponsible and must be said to seriously betray a reliance of consumers.

Plumbing repair services claims

On an article March 2008, the NCAC reported a feature of complaints regarding a spate of problems involving plumbing repair services:

A number of problems can take place in the plumbing system such as in the kitchen, bathroom and/or toilet and problems include water leakages from taps or blockages in pipes. In the event of such a problem, it is often the case to look up distributed advertisements and flyers and/or advertisements in telephone books to find a plumber appearing to provide services at a ‘low cost.’ However, there have been spates of consumer inquiries and complaints relating to plumbers called to provide services in an emergency situation concerning their fees and services provided.
Under these circumstances, NCAC provided the following information to consumers in order to prevent further consumer damages:

Number of consumer inquiries and complaints

As for plumbing repair services provided to a consumer who called the plumber by looking at advertisements such as flyers, PIO-NET received 1,104 consumer inquiries and complaints in the Fiscal 2006 and 795 in the Fiscal 2007 (there were 522 cases in the corresponding period of last year, demonstrating a year-on-year increase of 273 cases with an increase rate of 52.3%). In this manner, the number of consumer inquiries and complaints shows an upward trend year by year.

Case examples of consumer inquiries and complaints

After looking through distributed advertisements, flyers and telephone books, the consumer called a plumber advertising ‘Water leakage repair service – Base rate: From 3,000 yen.’ The consumer asked the plumber to perform the repair by assuming that the fees would be reasonable though was charged at a surprisingly high rate.

The consumer called a plumber to have a water leakage and pipe blockage repaired. However, the plumber did not explain the causes or status of the problems in a sufficient manner but insisted that the installation needed to be replaced. The consumer consequently concluded a contract which bore high costs.

 When making a complaint to the company, the consumer was intimidated and payment was demanded. The consumer felt threatened and paid what the company asked for.

Final report about new consumer affairs agency

A governmental panel, the Council for Promoting Consumer Policy, in charge of  establishing a new consumer affairs agency has compiled a final report. A new agency will  be established based on this report hereafter. The report was submitted to Prime Minister Yasuo Fukuda on 13th June 2008.

Acceleration for establishing a new agency

Moves to integrate consumer-related activities, which are currently handled by different government ministries and agencies, come in the wake of a recent spate of food mislabeling incidents, faulty products and other problems, including the outbreak of food poisoning involving Chinese “gyoza” dumplings, over which the ministries and agencies were criticized for their slow initial response.

Orgnization

The agency, set up as an external organ of the Cabinet Office, is expected to be comprised of 150 to 200 officials. It wil be expected to contain at least one committee comprised of members from consumer affairs-related civic groups.

The agency will be empowered to design, execute and coordinate consumer policies and unify contract offices for consumers. Whilst there are 75 laws relateing consumer protection, only 30 laws will come under its auspices; these law are relating to four consumer areas — product labeling, commercial transactions, product safety, and prices and livelihood. The laws that are transfered to the agency perfectly is counted as 14. As a result, the agency will not be granted strong authority on consumer policy yet.

Regarding to the Specific Commercial Trading law, part of trading practices are transfered to the new agency. In terms fo JAS law, the Ministry of Agriculture, Forestry and Fisheries will still has the authority concerning standerising work of food safety; and the jurisdiction of of inspections and amendment order will be withhold in the MAFF.  

Jurisdictionsand authorities

The agency’s tasks will include: regulating commodities and financial products transactions; ensuring product and food safety; ensuring proper food and product labeling and tackling matters concerning commodity prices.

The agency may take charge of approving revisions of public utility fees, prevention of extreme price hikes and supervising the Food Safety Commission. This will enable the agency to decide on the appropriateness of price raises. The Construction and Transport Ministry and the Cabinet Office agreed to revise fees on trains, taxis and buses. If the consumer agency is set up, it would take over the Cabinet Office’s role and discuss such matters with the ministry.

The government has prioritized preventing deflation, economic stagnation and falling prices. However, recent surging oil prices are pushing up prices of food and other products, raising the cost of living. The agency will also handle the nation’s price policy, including revising utility rates, by having laws and regulations transferred to it from the Cabinet Office.

The consumer agency also is expected to be authorized to prevent retailers from withholding food supplies from the market.

The agency will also be empowered to recommend remedial measures against problematic companies or individuals.The government will consider legal action to help victims of fraud and other illicit commercial activities, including seizing profits earned via such activities and enabling the state to sue on behalf of the victims.

New legislation will be established requiring municipal-run consumer centers to immediately report life-threatening cases to the Consumer Agency; It would be based on a view of the lukewarm govenment response to food-related problems in the past.

Cnflicts with other authorities

The government plans to make the envisaged agency responsible for consumer affairs, which are currently handled by multiple government entities. It also plans to quickly respond to unfavorable economic situations, such as opportunistic price rises. However it means that the government faces stiff resistances from existing ministries and agencies which have jurisdictions to consumer’s affairs partly.

Whilst the new body will be given the authority to issue advisories for other ministries and agencies on consumer-related issues, the new agency has to take counsel with existing ministries or agencies. Transition of jurisdictions about commercial practices is limited or restricted. Thus, it would be worried to invite double jurisdictions on same affairs whereas those measures may prevent bloated of the new agency;  It is because the jurisdiction of the new agency is vague; it might provoke confusing or contradiction to make administrative enforcement.

Shedule

The government plans to submit a bill to set up the new agency during an extraordinary Diet session that may convene in August so the agency can be inaugurated next spring.

Futures work

One of panel members, my acquaintance, points out several unsolved issues; how to accomplish consumer protection activities in local government effectively; how to improve gathered information to the government; how to implement advisory empowerment; how to reflect consumer opinion to the agency. 

Reference

the Yomiuri on 14th  June 2008 and 13th June 2008, the Japan times on 14th June 2008