2003 JAPAN LAW: LOAN SHARKS
Keywords: Loan Sharks, Bankruptcy, Consumer Finance, Credit Risk, Personal Guarantees, Interest Rates, Debt Forgiveness, Money Lending Law, Money Laundering, Investment  Deposit Law, Interest Rate Control Law, Investment Law, Organized Crime Punishment Law
Copyright 2004. All rights reserved Attorney Roderick H. Seeman
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One of the amazing aspects of Japan today, despite its claims to such modernization, is the difference between consumer finance in Japan and the USA. It is well known that for years now that American consumers have been benefiting enormously from low interest rates (so incredibly ironically today almost totally thanks to the governments of Japan and other Asian central banks as they invest hundreds of billions in US government securities in supporting the dollar-and keep their own currencies from appreciating) refinancing their homes, to pay off their high interest credit cards and go on spending sprees, and supporting the world economy, the contrast with Japanese consumers could not be greater. American consumers, based on their own historical payment records, have probably the greatest access to finance ever known available for individuals. I swear my sister will have her credit rating engraved on her tombstone she is so proud of it. But based on that record your welcome to financial institutions is assured. Japan, with all its high technologies, exists in a much more primitive consumer finance environment. Despite interest rates at low levels seldom seen in history, Japanese consumers and small business people are increasingly taking their lives as they run out of  “respectable” options. This is of course the result of the post-war financial system whereby the government gave overwhelming priority to first rebuilding the economy and then to financing government directed “strategic” industries. Consumption by individuals and the interests of consumers were not the priority. To this day it is still not the priority. The large banks virtually ignore consumer finance and the “legitimate” consumer finance firms, which flood the television airwaves with cute advertisements, very often charge consumers interest rates exceeding 100% per annum, even while interest rates on deposits are near zero and huge corporations can borrow at below 2%. At the same time that American consumers have benefited from higher and higher real property values and low mortgage rates not seen in decades, Japanese consumers have not only seen their real property values decline by an average of 80% over the past decade, it not only does not provide a means of relief, with multigenerational loans so common for house loans in Japan, many feel trapped by their now much devalued homes. Even if  they walk away, which is much more difficult in Japan than the USA, the reality is that they may lose the property several generations of their family had counted on. With such outrageous options, and the economy sinking for a decade, many consumers and small businesspeople have turned to loan sharks with even more astronomical interest charges. This leads to suicide and families fleeing to parts unknown. Suicides in Japan now run at 31,000, double the per capita rate in the USA. Bankruptcies have grown by 500% in the five years up to 2002 to 214,600, but still less than the 1/3 the per capital rate in the USA. Reportedly, the average cost in lawyers fees for filing for bankruptcy is 4 million yen (nearly $40,000) a very unattractive route of escape for those financially trapped.

Some are calling the reliance on personal guarantees of corporate debts, particularly for small corporations, as a violation of human rights in Japan. Instead of relying on an analysis of the financial condition of the companies, the regular banks are instead relying on guarantors when they make loans to small corporations. When the corporations fail, a particular problem in recent years, the banks turn on the guarantors. Seizure of private homes, suicides and heart problems are the result. A survey by the Small and Medium Enterprises Agency found that 86.8% of firms with employees of 30 or fewer received loans only with personal guarantees, while this was the case in 30% of cases for companies with 300 employees or more. Creditors can seize everything apart from clothing, furniture and kitchen ware and a minimal 210,000 yen in cash. Many believe that some of the suicides are not just due to their own business failure but the troubles brought to others by the failures and the guarantees.

The reality of the legal situation with respect to the valid interest rates is very complex due to a number of factors.  As is so often the case in Japan the government sets out standards that are in theory applicable, but are often meaningless, due to the failure to provide criminal sanctions for all but the most egregious violations.

This situation was improved, but only to a minor extent, with legal revisions made in July, 2003 and that took effect in September, 2003. The penalties for unregistered moneylenders was raised from 3 million yen to 10 million yen. The prison term was raised from 3 years to 5 years. Penalties for violating corporate money lenders were raised to 100 million yen. One wonders how increasing penalties on laws, the enforcement of which was widely avoided, would achieve. Is it that “this time we are really, really serious.”  Unregistered money lenders, the ones lending money at interest rates often exceeding one thousand percent per annum, will also be penalized for distributing ads for their loans or approaching potential borrowers directly. With such rich profits and the minimum likelihood of penalty, one must question its effectiveness. There was no change made in requiring only a simple registration to enter the business, some effort will be given to blocking criminal elements from registering. Most relevantly, the only relief granted by the government under the new law to people trapped by these bloodsuckers was to relieve them from paying any interest exceeding 109.9%. This from the same government which routinely pushes banks to provide “debt forgiveness” into the billions and billions of yen to such large corporations as Daiei Department Stores, the massive bail-out of banks, reaching trillions of yen, not to mention a plethora of construction companies, who are, by the way, major contributors to the ruling party. Meanwhile the government did take the opportunity presented by the new legislation to simultaneously provide that those seeking protection under the bankruptcy laws will now find it even more dangerous. New criminal penalties are being provided for bankrupts who hide assets or those which destroy loan contracts. Showing once again the government clearly has its priorities where to make its limited application of criminal penalties.

It has oft been stated that the maximum legal limit for interest rates is 29.2%. That is the maximum interest rate under the Investment Deposit Law. This law has some punitive provisions for violations. On the other hand, the Interest Rate Control Law limits interest rates to a maximum of 15% for loans of 1 million yen or greater,  18% for loans between 100,000 yen and 1 million yen, and a maximum of 20% for loans less than 100,000 yen. This law does not however have punitive provisions. Where there are criminal provisions you know the government may be serious. But as shown above, the only relief granted in the recent new legislation was to permit borrowers not to have to pay interest on borrowings where the interest rate exceeds 109.9%. and then only on the amount exceeding that interest level, not the amount going up to 109.9%

The police claim that 166.000 people were victims of usury crimes in the first six months of 2003, but more than in all of 2002, which reached 122,000. Remember this does not include “legitimate” consumer finance firms. In 2002 the Japanese police arrested only 446 people involved in illegal lendings, thought to be only a tip of the iceberg. Of the 238 criminal cases filed, 208 involved charging illegally high interest rates and 116 involved unregistered moneylenders. A major business today is selling lists of people with particularly desperate financial conditions. Loan sharks buy up these directories to market their financing services.

In August, 2003 the police arrested a senior mobster who was believed in charge of over 1000 loan sharks.  The leader was closely associated with the Yamaguchi-gumi yakuza gang. The police believe his group brought in at least 100 billion yen in illegal interest. In one particular case involved, six borrowers were being pressed to pay 1.25 million yen in interest when the legal rate would have made it only 25,000 yen. One group of only 20 loan sharks under his control were believed to have raked in 10 billion yen in only 3.5 years. One associate helped to collect 3.13 million yen in interest from 8 debtors, for which the legal interest would have been 58,000 yen, collecting fifty times the legal rate. The loan sharks in the group were trying to collect interest at rates up to 3600 percent per year. The leader was demanding 120-160% interest per month from his operatives.

As a part of the effort to show that they were truly serious about cracking down on illegal money lenders, in line with the enforcement of the revised Money Lending Law in September, the police launched a crackdown. They filed 125 cases against such businesses during the month, theoretically assisting 61,000 victims and compares to 238 cases in all of 2002.

The major banks, under prodding by the police, are beginning to crack down on suspicious bank accounts believed to be associated with criminal elements, particularly loan sharks. The police in November 2003 arrested one leading crime gang leader on charges of violating the Investment Law as well as the Organized Crime Punishment Law, on charges of money laundering some of this money, amounting to billions of yen, through such means as purchasing bearer bonds and even massive Las Vegas Casino deposits and placing them in safe deposit boxes in banks in Japan.