How to Build an Anti-Social Forces Screening System: Practical Steps for Companies That Have the Clause but No Process

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

Many companies include an anti-social forces exclusion clause in their contracts but have not documented the concrete process of who checks what, and when, before starting a transaction. It is common for companies to be asked to present their system when preparing for an IPO or opening a relationship with a financial institution, and only then realize that they had the clause on paper but nothing behind it in practice.

An exclusion clause is the basis for terminating a contract if the counterparty turns out to be an anti-social force; it does not itself set out the procedure for checking before a transaction. What is examined in a review is whether the checking procedure is actually operated and whether evidence of it is kept.

Legal Basis and Position in IPO Preparation

Anti-social forces screening is not uniformly required by any specific statutory provision. The main reference point in practice is the "Guidelines for How Companies Prevent Damage from Anti-Social Forces" agreed on June 19, 2007 by the Secretaries' Meeting of the Ministerial Meeting Concerning Measures Against Crime. These guidelines define anti-social forces as "groups or individuals that pursue economic gain by making full use of violence, force and fraudulent methods," and set out basic principles such as severing relationships, including transactions, and cooperating with external specialist bodies.

The organized crime exclusion ordinances, which had come into force in all prefectures by October 2011, also serve as a basis. The Tokyo Metropolitan ordinance sets out, as obligations of effort for businesses, confirming that contract counterparties are not connected with organized crime groups and introducing exclusion clauses into contracts. Because these are obligations of effort, penalties are not imposed immediately, but IPO reviews and financial institutions' credit decisions check whether an internal system in line with these obligations has been built.

An application for a new listing requires the submission of a confirmation letter pledging that the company has no relationship with anti-social forces. Since cases in which no confirmation records remain are particularly likely to be pointed out for early contracts and transactions that began through introductions by acquaintances, it is helpful to prepare a list of business partners, shareholders and officers and to organize the status of checks when entering IPO preparation.

Who to Check, When, and How

The subjects of screening fall into four categories: new business partners, shareholders, officers and prospective hires. For business partners, set the scope of checks according to the contract amount and whether the relationship is ongoing; for shareholders, consider whether to trace back to the beneficial owner upon issuance or transfer of shares. Officers are checked upon appointment and hires before joining, each according to their authority.

As for timing, there are three situations: a prior check at the start of a transaction, periodic reviews at fixed intervals, and comprehensive checks during M&A or IPO preparation. It is practical to set periodic review procedures not only at the start of a transaction but also to cover changes such as replacement of officers after the contract is signed.

There are three main means of investigation: searching newspaper article databases, engaging specialist research firms, and making inquiries through industry associations. Keep a balance between effectiveness and cost by using them appropriately according to the size and nature of the transaction: newspaper article searches that the company can easily carry out itself, specialist research firms that offer high accuracy but take money and days, and industry contact points that allow inquiries into a party's track record in the same industry.

Steps When Suspicion Arises

How to respond when an investigation raises suspicion about the counterparty depends on whether it is before or after the contract is concluded.

Before the contract is concluded, the basic policy is to forgo the transaction. Decide in advance a process in which the matter is not decided by sales staff alone but is reported to administrative departments and management, and the organization decides to stop the transaction.

If suspicion arises after the contract is concluded, consider termination under the exclusion clause in the contract. After checking whether termination without notice is possible and the clause exempting liability for damages, proceed with sending a notice of termination, settling deliverables and unpaid amounts, and considering methods of communication that avoid direct contact. To prevent the transaction from being continued based solely on judgments on the ground, it is important to designate the final decision-maker in internal rules.

Managing Check Records and the Format of the Register

Whether the system is functioning is judged objectively by whether records exist. To be able to respond to IPO reviews and inquiries from business partners, keep the following five items in a register or similar.

• Date of check
• Subject of check (name of business partner, shareholder, officer, etc.)
• Means of investigation used (newspaper article database, research firm, industry inquiry, etc.)
• Result of check
• Approver

By consolidating these in a list or a dedicated management system and storing them linked to contract data, you can accurately present the history of checks later. If no records remain, in practice the company may be regarded as not having carried out the checks.

Initial Operation at Startups and Professional Support

Early-stage startups do not need to set up a large-scale system from the outset. Start operations with three points: designating the person in charge of checks, always checking in advance for contracts above a certain amount, and preparing a single register to record the results.

If you create the register and the checking process while the number of transactions is still small, you can greatly reduce the burden of reviews after the business expands. Since the existence of check records may also be examined in legal DD during fundraising, companies proceeding with legal DD around a Series A benefit from starting early. Sample wording for the contract clause itself is explained in a separate article.

At LegalAgent, we support the design of anti-social forces screening systems and the preparation of internal rules through Compliance Support, and comprehensive reviews of existing business partners and responses to listing reviews through IPO Support.