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A Review of Sekisui House Land Fraud Incident

June 10, 2020

M&A Online

Keiichi Kubo, CPA


1. Investigation Report disclosed

2. Overview of the land fraud case

3. Facts not described in the summary

4. Internal control malfunction

5. Real Estate Department functions

6. Lessons learned


I am Keiichi Kubo, CPA, from Bizsuppli Inc.  Sekisui House’s fiscal year-end is January 31, and the Company planned to hold a general meeting of shareholders (AGM) on April 23, 2020 amidst the COVID-19 pandemic, but the hotel banquet room, the AGM venue, became unavailable, and the Company had to change the venue.  A shareholder proposal, which was made to the Company under such a situation, became a hot topic.  I would like to outline below the land fraud case which triggered the shareholder proposal.


1. Investigation Report disclosed


Sekisui House drew broad attention as a current director and a former director made a shareholder proposal which proposed election of 11 directors.  Although proxy advisory firms including Institutional Shareholder Services made recommendations to vote for the shareholder proposal, all the slate directors proposed by the Company were elected at the AGM on April 23, 2020, and the turmoil seems to have subsided.


The direct cause of this might have been a feud between executives, but the genesis was the land fraud incident in 2017 where the Company lost 5.55 billion yen.


After the incident, an investigation committee consisting of outside directors and auditors was set up, and an investigation report (13 pages) was submitted, but only a 2.5-page brief summary of the Investigation Report has been disclosed to the public.  The Investigation Report spent only 0.5 page on the overview of the incident.


A shareholder representative lawsuit seeking damages against representative directors was filed, and the court issued an order to submit the Investigation Report.  The directors and the Company appealed for the cancellation of the order, but it was rejected.  As a result, a redacted version of the Investigation Report has been filed with the court.


The Investigation Report is posted on the website SAVE SEKISUI HOUSE.  Someone who was not happy with the Company's management team set up the website and published the Investigation Report.


The Investigation Report includes typographical errors and some areas that need to be polished, which indicates that the Report was created for internal use.  In other words, the report has a "feel of handmade" by outside directors and auditors.


The Investigation Report begins with the following strong language:


“This is a case where a public company focusing on real estate business suffered the largest amount of loss of 5.55 billion yen in a land fraud.  Also we can reasonably assume that the lost money went to the underworld. It's just like a big financial institution suffering from a bank transfer fraud, which is something that cannot, and should never, happen.”


2. Overview of the land fraud case


I will outline below a brief overview of the incident based on the Investigation Report.


On April 3, 2017, a sale transaction of the land of a former inn in Gotanda, Shinagawa-ku, Tokyo was brought to the deputy general manager of the Condominium Business Department of Sekisui House.  The identity of the landowner could have been verified with a passport and seal certificate.


Sekisui House signed a land purchase contract on April 24, 2017 after running an internal approval process, and paid an earnest money deposit of 1.4 billion yen.  Instead of buying it directly from the owner, an intermediary company bought it from the owner and then Sekisui House bought it from the intermediary.  The intermediary’s purchase price was 6 billion yen, and Sekisui House’s purchase price was 7 billion yen.



Sekisui House would have been able to purchase for 7 billion yen the land that was said to have a market price of 10 billion yen.  After this, provisional registration of ownership transfer has been completed.


Then, Sekisui House made the remaining payment on June 1, 2017 of 4.9 billion yen, excluding the 700 million yen that Sekisui House would have to pay after the building was demolished.  Five days later, the Legal Affairs Bureau rejected the real estate registration.  It turned out that Sekisui House was pursuing to purchase the land from a fake owner.


3. Facts not described in the summary


Comparing the summary released by the Company and the Investigation Report, the brief summary did not include some important facts.


First, Sekisui House did not carry out the "identity verification by acquaintances" that real estate companies usually carry out as a countermeasure for fraudulent landlord groups.  This is done by showing the photos of the seller to the owner's neighbors and acquaintances.


The real owner was born and grew up in this inn, so every neighbor should have known the owner.  All you had to do was go around the neighborhood with a copy of the passport photo shown by the fake owner.


During the internal process to approve the purchase of the land, four reviewers/approvers were skipped, and the president who had previously inspected the site first approved it.  There are also media reports that all the reviewers/approvers granted approval after the earnest money deposit had been paid.


After the deposit payment and provisional registration were made, Sekisui House received four content-certified mail warnings.  They were mailed by the real owner, and it said that she never went into a contract to sell the land, and therefore the preliminary registration was invalid, etc., and one of them had the owner’s seal registration card number.


Sekisui House, who thought that these were just interferences, obtained a written commitment from the fake owner stating that it did not send a content-certified mail.  Of course this doesn't mean anything.


To deal with the situation, the Company changed the final closing to an earlier date of June 1, 2017.  It was lucky for the fraudulent group.


On June 1, 2017, the police, called by the real owner, came to the site.  A police officer asked a Sekisui House employee there to voluntarily accompany to the police station.  It was during the final closing, and another Sekisui House employee who was informed of this thought that it was just another interference, and moved on to complete the final payment.


4. Internal control malfunction


Sekisui House missed all the opportunities to realize that it was a fraud.


The reason for this was that Sekisui House was too naïve about a fraudulent landlord group, and it lacked internal control for such a fraud.


Sekisui House is strong in its mainstay detached houses, but the condominium business was not their specialty.  Of the 2.4 trillion yen annual sales of Sekisui House, the condominium business sales account for about 4%.  The number of employees in this business is less than 1% of the total.


According to a media report, when the fraudulent group contacted multiple real estate companies for the sale of the land, all the companies other than Sekisui House declined to purchase the land saying that they could not verify the identity of the owner.


The Condominium Business Department was enthusiastic about advancing this project, and had the president inspect the site before internal approval was granted.  After that, the project was classified internally as "President's project" because the president granted his approval before anybody else.


If the president had instructed his staff to "verify the owner's identity and proceed with the transaction carefully," the outcome should have been totally different.


However, Sekisui House should have no one with sufficient experience in the condominium business.  They were just too naïve, rather than that the president was reckless.


There was a strong momentum within the Company to secure land for condominium developments, and the internal control did not work.


5. Real Estate Department functions


Sekisui House has a system of internal controls to prevent illegal transactions.  There is a department called the Real Estate Department, which checks credit details and contents of contracts.  The Real Estate Department is regarded as a department that functions like the credit department of a bank.


The above-mentioned request for internal approval was circulated to the Real Estate Department from the Condominium Business Department which was responsible for this particular transaction.   After the Real Estate Department checks the internal approval request, the Department sends the request to approvers.  In this case, the Condominium Business Department requested that the approval request be approved in an urgent manner, and four other approvers were skipped and the president approved the transaction ahead of the others.


Normally you cannot give a dissenting opinion if it is classified as "President's case.”  The president himself ignored the check function of the Real Estate Department.  In this case the Real Estate Department accommodated the Condominium Business Department’s request.  This can often be seen at companies with a strong sales team, but it can also be said that risk management departments such as the credit department are not well functioning.


Sekisui House had an internal control system that the Accounting and Finance Department cannot arrange for closing funds without approval of the Real Estate Department.  According to media reports, the Real Estate Department’s approval was not granted at this point, but the Accounting and Finance Department was granted approval to arrange for closing funds, maybe because the president’s approval was already in place.


After this, the Condominium Business Department did not let the Real Estate Department know their receipt of the four content-certified mails.  An article about the head of Real Estate Department, who left Sekisui House after this incident, was published in the weekly Bunshun April 16, 2020 issue.


Since the head had such risk information as suspicious people having visited the Company, he said to the director in charge of the Condominium Business Department, "Even if you lose the deposit of 1.4 billion yen, you might want to suspend the deal."  I think that the Condominium Business Department did not tell the head about the content-certified mails since they wanted to proceed with the transaction.


The weekly Bunshun article describes that the president (current chairman) knew about the content-certified mails because he said, "You know we received three or four strange mails?"


6. Lessons learned


As you can see from the company name, Sekisui House's condominium business is a relatively new business for them.  Sekisui House ranks 10th to 20th in this business ranking.  Being in a position to chase industry leaders tends to have a company overstep the mark.  Furthermore, there was a shortage within the Company of human resources who were familiar with the business.


In general, scandals often occur from businesses other than mainstay businesses.  If it is a mainstay business, companies have many years of business experience, and internal control is firmly established and operated.  Companies tend to have a number of excellent staff in their mainstay business.  In the case of Sekisui House, its weaknesses in internal control in the non-mainstay condominium business became the cause of the incident.


The money paid to the fraudulent group was distributed and nobody knows where they are. As mentioned, the Investigation Report describes at the beginning that “we can reasonably assume that the lost money went to the underworld.”  In other words, Sekisui House was not only a victim, but also engaged in anti-social acts of providing huge amounts of money to criminals.


Sekisui House has set the goal of "becoming a leading company in ESG management and realizing a sustainable society," but they should be aware that they have made contributions to criminals.

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