[Exclusive] Director of Japan's Securities and Exchange Surveillance Commission: "Investigation Staff Only 160... Twice as Many as Korea" [War Against Stock Manipulation]

②-⑴Powerful Authority of Japan's Securities and Exchange Surveillance Commission 'Grim Reaper'
Established in 1992 with reference to the US SEC system
Can investigate using communication records and bank account tracking

Japan Securities and Exchange Surveillance Commission (SESC) is an investigative and supervisory agency overseeing the three major unfair trading practices such as market manipulation, similar to Korea’s Financial Supervisory Service and the U.S. Securities and Exchange Commission (SEC). Established in 1992 with reference to the U.S. SEC, it wields strong authority and acts as the grim reaper of Japan’s capital markets.

"The number of staff responsible for investigating unfair trading at the SESC is about 160," emphasized Inoue Toshitake (pictured), Secretary General of the SESC, during a video interview with Asia Economy on the 15th, explaining the scale of the SESC’s personnel and organizational structure. The SESC is composed of a chairman and two commissioners, with the Secretary General directly below them in rank.

Inoue Toshitake, Secretary General of the Japan Securities and Exchange Surveillance Commission (SESC). (Provided by SESC)

Secretary General Inoue explained, "The Secretariat’s authorized personnel (as of 2023) is 389, and if you add the 300 auditors with investigative authority belonging to regional finance bureaus, about 700 people are working."

Considering that Korea’s Financial Supervisory Service has 69 dedicated investigators (in Investigation Departments 1 to 3 and the Special Short Selling Investigation Team), this is more than double. Japan is externally evaluated as having a well-established pre-detection system for unfair trading, which can be attributed to the experienced pool of specialized investigators.

Japan regulates unfair trading intensively in three areas under the Financial Instruments and Exchange Act: insider trading, market manipulation, and rumor spreading. Among these, insider trading is the most frequently detected type of unfair trading every year. Since its establishment in 1992 until last year (cumulative), the SESC has uncovered △365 cases of insider trading △105 cases of market manipulation △5 cases of rumor spreading.

Secretary General Inoue explained, "Apart from the SESC, there is the Japan Exchange Group’s self-regulatory organization (JPX Regulation), which is Japan’s market surveillance body, and the Japan Securities Dealers Association also conducts joint investigations."

Operating a Surcharge System Since 2005

Japan has been operating a surcharge system since 2005. A notable point is that it has an independent decision-making structure separate from the prosecution. If a surcharge order is necessary, Japan’s Financial Services Agency (FSA) decides on imposing the surcharge after internal deliberation without notifying the prosecution. He added, "If a surcharge measure is needed, the SESC reports to the FSA, and the FSA directly issues the surcharge order, so there is no separate procedure to notify the prosecution." He further explained, "A panel of three adjudicators within the FSA deliberates, and the FSA Commissioner makes the final decision."

This is why Secretary General Inoue repeatedly emphasized, "The SESC has an independent decision-making structure from the prosecution." He said, "The surcharge order is decided based on administrative procedures and investigations, so communication with the prosecution is unnecessary."

In contrast, in Korea, after the financial authorities complete investigations into unfair trading, they notify the prosecution, but surcharges cannot be imposed at that point. The principle is that the prosecution conducts investigations and notifies the Financial Services Commission of the investigation and disposition results regarding unfair trading suspects, after which surcharges are imposed. However, surcharges can be imposed if the Financial Services Commission has reached an agreement with the prosecution after notifying them of the unfair trading suspicion or if one year has passed.

SESC Has Compulsory Investigation Authority

Japan differs from Korea in that the administrative agency SESC is solely responsible for investigating unfair trading when it occurs. In particular, it has compulsory investigation authority, enabling it to promptly conduct investigations and surveillance if unfair trading is suspected. Secretary General Inoue said, "Administrative investigations are conducted on the premise of recommending surcharges and criminal prosecution, and both grant the authority to investigate bank account tracking, etc.," adding, "It is also possible to secure communication records for unfair trading investigations, so I have never felt that the investigative authority was insufficient."

In contrast, Korea’s recently revised capital market unfair trading response system did not include the introduction of on-site investigation and seizure authority for the Financial Supervisory Service, leading to criticism that it was a half-hearted amendment. Korea lacks authority to access communication records and freeze assets, limiting initial evidence collection and measures against suspects.

The Japanese SESC suppresses unfair trading by combining the surcharge system and criminal prosecution procedures. Secretary General Inoue said, "Japan’s surcharge system calculates surcharges based on the amount of unjust profits, and if the case is judged to be malicious and serious, criminal prosecution procedures are carried out to block unfair trading activities." The maximum prison sentence for the three major unfair trading offenses is 10 years: up to 10 years for market manipulation and rumor spreading, and up to 5 years for insider trading.

However, the maximum surcharge amount is lower than in Korea. Secretary General Inoue said, "Surcharges are imposed based on a substantial amount of unjust profits, and in the case of insider trading, they are calculated based on the difference between purchase and sale prices," adding, "If a person who has paid a surcharge within the last five years commits a repeat offense, a 1.5 times surcharge is applied."

Meanwhile, due to Japan’s demographic structure where the elderly population accounts for 30%, securities crimes targeting the elderly are on the rise. Secretary General Inoue said, "Incomplete sales of complex derivatives to elderly people with declining cognitive abilities are increasing, and we conducted related investigations in 2023," adding, "We issued four administrative disposition recommendations related to this last year."

Editor's NoteThe 'Ra Deok-yeon Gate,' the largest stock manipulation crime in history (with total unjust profits of 730.5 billion KRW), is approaching its one-year anniversary (April 24, 2023), yet the victims’ nightmares have not ended. There is no effective victim relief measure in Korea’s capital market. Litigation is the only option, but due to cost burdens and difficulties in proving damages, victims cannot even attempt it. The amendment to the Capital Markets Act, which supplemented the limitations of criminal punishment and introduced effective monetary sanctions following the 'Ra Deok-yeon Gate,' is significant. However, to eradicate securities crimes that continue to increase in various forms, it is necessary to establish a system that can efficiently detect and investigate them and to further improve the system for swift and strict sanctions. Asia Economy’s Securities and Capital Markets Special Coverage Team examines advanced systems in overseas capital markets and reviews the challenges and directions for our market to suppress securities crimes. We also seek effective measures for investor relief as intelligent and organized criminal acts occur.

We plan to intensively report from various perspectives on all kinds of unfair trading such as insider trading, fraudulent trading, market manipulation, and reporting obligation violations. We will strive to prepare comprehensive countermeasures to eradicate capital market crimes. Please send tips to (lsa@asiae.co.kr). We will investigate thoroughly and report.

▲Team Leader Lee Seon-ae, Manager △Kim Min-young, Hwang Yoon-joo, Cha Min-young, Kim Dae-hyun Reporters

This content was produced with the assistance of AI translation services.