The Next Chapter in the Suruga Bank Forgery Scandal

By Jeff Wynkoop

The Suruga Bank share house forgery scandal is entering a new chapter. A second share house operator and client of Suruga Bank called “Golden Gain”(ゴールデンゲイン)applied for bankruptcy protection on May 23rd. This follows the April 2018 bankruptcy of the share house operator “Smart Days” (スマートデイズ), which was the operator of the woman-only “Kabocha no Basha” (カボチャの馬車) share house. Investors are understandably upset. Not only are they not receiving their expected return, they are also trapped in new loans with no income to repay them.

The structure of most of these share house investment schemes is similar. The operator finds individual investors who are willing to provide equity and/or land in exchange for a ‘guaranteed’ minimum return. The operator then uses the cash and property to receive financing for the project, and has either a share house refurbished or a new share house constructed. The operator leases the completed share house from the investors (i.e., the owners) in order to operate its subleasing business. However, if the operator goes bankrupt because it can’t find enough tenants, the investors remain directly on the hook to repay the project loans.

Document Forging

In the Kabocha no Basha share house project, the Financial Services Agency (“FSA”) found “numerous employees” of Suruga Bank to be involved in forging documents to enable the deal to take place. In fact, Suruga Bank has hired an independent legal firm to inspect its own operations because of the very large number of complicit internal employees. The forged documents included fake bank book entries and deposit slips, which the operator used to create the impression that there was more equity behind the deal than there really was. This allowed the project to pass internal controls at Suruga when it should have been judged as too risky for bank financing.

Tip of the Iceberg

Alarmingly, the Kabocha no Basha deal may be only the tip of the iceberg. As of 2018, Suruga Bank had over 1,250 share house client projects with over 200 billion JPY in outstanding loans. There is serious concern that many (if not most) of these share house clients benefitted from forged bank documents, fake land prices, etc. to receive bank funds for dodgy projects. And not just the share house market and individual investors are being negatively affected. There are many small design and construction firms, sublease companies, etc. that are also at risk of going under in a domino effect.

On May 22nd, Deputy Director-General Endo of the FSA’s Supervisory Bureau reported to a finance committee of the Japanese Diet that the FSA is currently carrying out an on-site inspection of Suruga Bank, and based on the inspection results and the Diet committee’s recommendation, he plans to deal with Suruga in “an appropriate and strict” (厳正かつ適切) manner. Suruga Bank already has lowered its consolidated profit forecast for the end of March 2018 by 50% to 21 billion JPY, and created a reserve for share house-related losses of 38.2 billion JPY for 2018 and 25 billion JPY for fiscal year 2019.

Top image: Suruga Bank, Tokyo, via Wikimedia