Understanding Fraud in Japan: From Deception to Financial Loss – What Businesses Need to Know

Fraud, a crime as old as commerce itself, remains a persistent threat to individuals and businesses alike. In Japan, fraud (詐欺罪, Sagi-zai) is a significant offense under the Penal Code, primarily Article 246. It involves obtaining property or illicit economic advantages through deceit. For businesses operating in or with Japan, understanding the specific elements of fraud under Japanese law is crucial for recognizing risks, implementing preventative measures, and responding appropriately when fraudulent activities are suspected or encountered.

Japanese fraud law is characterized by a clear, sequential chain of elements: a deceptive act by the perpetrator, a resulting mistake by the victim, a delivery of property or conferral of an advantage by the mistaken victim, and a consequent transfer of that property or advantage.

1. The Core of Fraud (Sagi-zai) in Japan – Penal Code Article 246

Article 246 of the Japanese Penal Code defines fraud in two main paragraphs:

• Paragraph 1 (Fraudulent Taking of Property / 詐欺取財罪, Sagi Shuzai-zai): This concerns deceiving a person to cause them to deliver tangible property. The punishment is imprisonment with work for not more than 10 years.
• Paragraph 2 (Fraudulent Obtaining of Unlawful Economic Advantage / 詐欺利得罪, Sagi Ritoku-zai): This addresses deceiving a person to obtain an unlawful economic advantage for oneself or to cause a third party to obtain such an advantage. The punishment is the same.

Key characteristics of fraud under Japanese law include:

• It's a crime of transfer (移転罪, iten-zai), meaning property or an advantage must pass from the victim.
• It's a crime of delivery (交付罪, kōfu-zai), where the victim transfers the property based on their own will, albeit a will flawed by deception. This distinguishes fraud from theft, where property is taken against the possessor's will.
• It's a crime against individual property interests.
• An attempt (未遂, misui) to commit fraud is also punishable (Article 250).

Fraud against the state or public entities is also possible, as these entities can hold property rights. However, specific offenses like tax evasion are typically dealt with under specialized tax laws rather than general fraud provisions (Daishin-in (Great Court of Cassation) ruling, May 25, 1911). The fraudulent acquisition of official certificates may constitute fraud if the certificate itself directly embodies a realizable economic value.

Objects of Fraud: Property and Economic Advantage

• Property (財物, Zaibutsu): This primarily refers to tangible movable property but, importantly for fraud, also includes real property (Daishin-in ruling, June 1, 1903; Daishin-in ruling, December 15, 1922).
• Unlawful Economic Advantage (財産上不法の利益, Zaisan-jō Fuhō no Rieki): This is a broad category covering any illicit gain that is not tangible property. Examples include:
  • Release from debt or postponement of payment: If a debtor deceives a creditor into forgiving a debt or granting an extension on payment, this constitutes an economic advantage. However, merely evading a creditor's demands temporarily through deception might not be sufficient unless it can be shown that, but for the deception, the creditor would have taken concrete measures leading to payment or security, and this was avoided (Supreme Court ruling, April 8, 1955).
  • Provision of services: Deceptively obtaining services (e.g., transportation, labor) for which payment would normally be required.

2. The Anatomy of a Deceptive Act (人を欺く行為, Hito o Azamuku Kōi)

The starting point of fraud is a deceptive act (欺罔行為, gimō kōi) by the perpetrator. This act must be capable of causing, and actually cause, a mistake in the victim regarding "important matters that form the basis of the judgment for delivery" (Supreme Court ruling, July 29, 2010).

A. Nature of Deception

• False Statements: Making explicit false representations about facts.
• Deception by Conduct (挙動による欺罔, Kyodō ni yoru Gimō): Misleading through actions or implied representations. A classic example is ordering food in a restaurant with no intention or ability to pay; the act of ordering implies a willingness and capacity to pay (Daishin-in ruling, May 8, 1920; Supreme Court ruling, July 7, 1955). Similarly, ordering goods on credit with no intent to pay (a practice known as torikomi sagi or fraudulent ordering) is deception by conduct (Supreme Court ruling, June 6, 1968). Recent Supreme Court rulings have affirmed deception by conduct in cases like fraudulently obtaining a bank passbook by concealing one's identity as a member of an organized crime group (Supreme Court ruling, July 17, 2007) or using a golf course by concealing one's affiliation with such a group (Supreme Court ruling, March 28, 2014).
• Deception by Omission (不作為による欺罔, Fusakui ni yoru Gimō): Failing to disclose a material fact when there is a legal duty to do so. This duty to disclose (告知義務, kokuchi gimu) can arise from statutes, contracts, or general principles of good faith in transactions.
  • Examples where a duty to disclose was found:
    • An insured person's existing serious illness when applying for life insurance (Daishin-in ruling, February 19, 1932).
    • The fact that property being sold is already encumbered by a mortgage (Daishin-in ruling, March 7, 1929).
    • A bank customer's knowledge of an erroneous credit made to their account when making a withdrawal (Supreme Court ruling, March 12, 2003 – here, the "deception" was the implicit representation that the withdrawal was legitimate).
  • Examples where a duty to disclose was NOT found (generally):
    • A company's general business difficulties or past dishonored bills when entering a new transaction (Fukuoka High Court, March 20, 1952).
    • The existence of an ongoing legal dispute concerning property being sold (Daishin-in ruling, May 4, 1933).

B. Materiality of Deception

The deception must relate to material facts—those that would influence a reasonable person's decision to deliver property or confer an advantage. If the deception concerns a trivial or collateral matter that would not have affected the victim's decision, fraud is not established. For example, misrepresenting the brand name of a product, where its quality and price are otherwise as expected and the buyer relies on their own assessment, might not constitute fraud (Daishin-in ruling, March 27, 1919).

C. Deception Must Target a Person

The deceptive act must be directed at a human being, causing them to make a mistake. Manipulating a machine (e.g., a vending machine or an ATM with a stolen card without tricking a person) does not constitute fraud under Article 246. Such acts might be theft (e.g., Tokyo High Court ruling, March 3, 1980, for ATM cash withdrawal with a stolen card) or, if they involve manipulation of computer data to effect an illicit transfer of economic advantage, Computer Fraud (電子計算機使用詐欺罪, Denshi Keisanki Shiyō Sagi-zai) under Article 246-2.

3. The Victim's State of Mind: Mistake (錯誤, Sakugo)

The perpetrator's deceptive act must successfully cause the victim to develop a mistaken belief (錯誤, sakugo) about the material facts. If the victim is not actually deceived (e.g., they see through the lie but deliver the property anyway for other reasons), the causal chain for fraud is broken, though an attempt might still be established if the act of deception was capable of misleading.

4. The Act of Disposal: Delivery by the Deceived (交付行為, Kōfu Kōi / 処分行為, Shobun Kōi)

Crucially, fraud requires that the victim, acting under the influence of the mistake, voluntarily delivers (交付, kōfu) the property or confers the economic advantage. This "act of disposal" (shobun kōi) by the victim, based on their flawed will, is what distinguishes fraud (a crime of delivery) from theft (a crime of dispossession against the victim's will).

A. Victim's Awareness of Disposal (Shobun Ishi)

For a valid delivery act, the victim must have some level of awareness that they are transferring possession or conferring an advantage. If the victim is completely unaware that any transfer is taking place (e.g., the perpetrator distracts the victim and surreptitiously takes their wallet), the crime is theft, not fraud.

• The required level of awareness is not necessarily a full and accurate understanding of all aspects of the transaction. Courts have found fraud even when the victim's understanding was partial or manipulated.
• A Supreme Court ruling of December 14, 1951, found fraud where the defendant deceived a victim into bringing a wrapped sum of money from an inner room to the entranceway, and then, when the victim briefly stepped away, absconded with it. The court reasoned that the victim had been induced to place the property within the defendant's effective control. (However, some scholars question whether a true "intent to deliver possession" existed if the victim was merely moving the item within their own premises without intending to hand it over at that moment).
• In contrast, allowing a prospective car buyer to take a vehicle for a solo test drive, from which they do not return, has been treated as fraud, as the dealership voluntarily cedes temporary possession based on the (deceptive) implied promise to return or purchase (Tokyo District Court, Hachiōji Branch, August 28, 1991).

B. Triangular Fraud (三角詐欺, Sankaku Sagi)

Fraud can also occur in a "triangular" situation where the person deceived (A) is different from the person who ultimately suffers the financial loss (B, the victim). For this to constitute fraud against B:

1. The deceived person (A) must also be the one who performs the act of delivering B's property or conferring the advantage.
2. The deceived person (A) must have the authority or be in a position to dispose of B's property (Supreme Court ruling, March 26, 1970). If A has no such authority, and simply takes B's property based on the perpetrator's deception, the perpetrator might be liable for theft by indirect perpetration (using A as an innocent agent), rather than fraud.

• Litigation Fraud (訴訟詐欺, Soshō Sagi): A well-recognized form of triangular fraud involves deceiving a court (the deceived party with authority to dispose) to obtain a favorable judgment, thereby causing the opposing litigant (the victim) to lose property or incur an obligation (e.g., Daishin-in ruling, November 27, 1911). The court, acting on false evidence, effectively "delivers" the asset or advantage.
• Credit Card Fraud:
  • Using another person's credit card: This is typically fraud against the merchant. The perpetrator deceives the merchant into believing they are the authorized cardholder, and the merchant (acting under authority from the card company to accept the card) delivers goods or services (Supreme Court ruling, February 9, 2004).
  • Using one's own credit card without intent or ability to pay: This is more complex. Most court decisions have found this to be fraud against the merchant, who delivers goods/services based on the implied representation of future payment facilitated by the card company. Some scholars analyze this as a triangular fraud where the merchant is the deceived party performing the delivery, and the card issuer is the ultimate victim who bears the loss when the cardholder defaults.

5. The Outcome: Transfer of Property or Economic Advantage & Financial Loss

For the crime of fraud to be complete (consummated), the property or economic advantage must actually be transferred as a result of the victim's delivery act.

A. Substantial Harm or Loss (Jisshitsu-teki Hōeki Shingaisei)

While any transfer resulting from deception is problematic, there's a developing notion that for criminal fraud, there should be some substantial infringement of a legal interest.

• If a victim is deceived about a minor point but still receives full equivalent value in a transaction they would have entered into anyway, criminal fraud might be denied due to a lack of significant harm.
• The Supreme Court ruling of July 19, 2001, addressed a case where a contractor deceptively hastened the payment of a legitimately owed sum. The Court held that to constitute fraud for the full amount, the deception must have caused the payment to be made earlier by a period that would be considered "socially distinct" from the rightful payment time, implying that a trivial advancement of payment might not be a sufficiently substantial "advantage" for fraud. This suggests a focus on whether a genuine, economically significant detriment was suffered.
• However, if a victim is deceived into purchasing a common item misrepresented as a rare or special one, even if they pay a "fair market price" for the common item, fraud can be established because they did not receive what they were deceptively led to believe they were acquiring (Supreme Court ruling, September 28, 1959).
• Recent Supreme Court jurisprudence (e.g., ruling of July 29, 2010) emphasizes that the deception must concern "important matters that form the basis of the judgment for delivery," which implicitly links to the substantiality of the harm or the vitiation of the transaction's core basis.

B. Fraud Involving Illegal Transactions (Fuhō Gen'in Kyūfu)

If a victim is deceived into delivering property for an illegal purpose (e.g., paying someone who falsely claims they will use the money for a bribe or to buy illegal drugs), the victim generally cannot recover the property under civil law (Civil Code Article 708 – prohibition of claiming restitution for performance for an illegal cause). Nevertheless, the perpetrator can still be guilty of criminal fraud against the victim. The criminal law protects the victim's possession and de facto property interest from fraudulent taking, regardless of the illicit nature of the victim's ultimate purpose (Supreme Court ruling, December 5, 1950).

6. Specialized Forms of Fraudulent Conduct

A. Computer Fraud (電子計算機使用詐欺罪, Denshi Keisanki Shiyō Sagi-zai) – Article 246-2

Enacted to address the rise of cybercrime, this offense targets the illicit acquisition of economic advantage not by deceiving a person, but by manipulating computer systems. It covers:

1. Giving false information or illicit commands to a computer used for another's business processing, thereby creating a false electromagnetic record related to property rights (e.g., illicitly increasing one's bank balance online).
2. Using such a falsely created electromagnetic record for business processing to obtain an illicit advantage.

The "property rights" involved include bank account balances, prepaid card values, etc. This crime fills a gap where traditional fraud's requirement of deceiving a person is not met.

B. Quasi-Fraud (準詐欺罪, Jun-sagi-zai) – Article 248

This offense addresses situations where, instead of outright deception, the perpetrator exploits the immaturity of a minor (under 20) or the diminished mental capacity of a person to induce them to deliver property or confer an economic advantage. The means used might be persuasion or taking advantage of vulnerability, falling short of the "deception" required for regular fraud. It requires that the victim still has some capacity to perform a delivery act; if they are completely incapacitated, taking their property would be theft.

7. Fraud in the Business Arena: Risks and Realities

Businesses can be both perpetrators (through their employees or an an entity, if specific conditions for corporate liability are met) and victims of fraud. Common scenarios include:

• Internal Fraud: Employees engaging in fraudulent expense claims, falsifying accounting records to hide losses or embezzle funds, or colluding with vendors for kickbacks.
• External Fraud:
  • Supplier/Vendor Fraud: Billing for goods not delivered or services not rendered, price collusion.
  • Customer Fraud: Using stolen or fraudulent payment methods, making false warranty or insurance claims, returning stolen or counterfeit goods.
  • Investment Scams: Businesses themselves can be targeted by sophisticated investment frauds.
  • Advanced Fee Fraud: Promises of large returns or loans in exchange for upfront fees that are then stolen.
• Corporate Misrepresentation: Knowingly making false or misleading statements in financial reports, prospectuses, or advertising, which could deceive investors, lenders, or consumers, potentially leading to fraud charges (and often violations of securities or consumer protection laws).

8. Defending Against Fraud: Key Strategies for Businesses

Given the diverse nature of fraud, businesses must implement multi-layered preventative strategies:

• Robust Internal Controls: Segregation of duties (especially in financial processing), mandatory approvals for significant transactions, regular reconciliation of accounts, and physical security over assets.
• Due Diligence: Thorough vetting of new customers, suppliers, and business partners. Know Your Customer (KYC) procedures are vital.
• Employee Training: Educating employees about different types of fraud, red flags, internal reporting mechanisms, and ethical conduct.
• Cybersecurity and Data Integrity: Strong IT security to prevent unauthorized access to financial systems and data manipulation (relevant for preventing computer fraud).
• Audits: Regular internal and independent external audits to detect and deter fraudulent activities.
• Clear Ethical Guidelines and Whistleblower Systems: Fostering a culture of integrity and providing safe channels for reporting suspected wrongdoing.

Conclusion

Fraud under Japanese law is a serious offense predicated on a chain of deception leading to a mistaken delivery of property or conferral of an economic advantage, resulting in a loss to the victim. The law addresses various manifestations, from simple deceit to complex computer manipulations and exploitation of vulnerable individuals. For businesses, the implications are profound. Not only can they be victims of external or internal fraud, but the actions of their employees can also, under certain circumstances (typically involving specific statutes with dual punishment provisions), lead to corporate exposure. A keen understanding of what constitutes fraud, coupled with proactive and robust internal controls and a commitment to ethical business practices, is essential for navigating these risks in the Japanese legal environment.