NEC employees behind $18M fraud scheme

By Colleen Taylor, Contributing Editor -- 5/29/2007

Japan-based electronics giant NEC Corp. is reeling today after a regulatory tax assessment uncovered $18.12 million (2.2 billion yen) in fraudulent transactions committed by NEC employees.

In a filing made with the U.S. Securities and Exchange Commission (SEC), NEC said that it received an adjustment notice from the Tokyo Regional Taxation Bureau in respect to a tax assessment it had been subject to for the fiscal year ended March 31, 2006. During the process of the tax assessment, it was discovered that five fraudulent transactions had been carried out by NEC employees in the period between fiscal 1999 and fiscal 2005.

According to the adjustment notice, 10 NEC employees instructed contractors to pad or create fictitious orders to their subcontractors, such as orders for software, maintenance and installation. This resulted in the fraudulent outflow of NEC's money through these contractors, NEC said in the filing.

The sum of the fraudulent transaction is approximately $18.12 million. The 10 employees received approximately $4.1 million (500 million yen) in kickbacks from the subcontractors, and used it for their own personal purposes, such as on entertainment expenses.

NEC is set to pay in a very real way for the misconduct of its employees. The amount of income adjusted as a result of the bureau's notification, added to other items indicated in the notice, is approximately $35.54 million ( 3.96 billion yen). NEC said it is not required to pay any additional corporate tax as a result of this issue, as there will be a reduction in the amount of loss carried forward from the previous year.

Not surprisingly, NEC said it has been carrying out internal inquiries with the assistance of external lawyers since it was informed of the issue. The company said it has been taking "strict disciplinary actions" in accordance with its internal rules and regulations against the employees who were found to be involved in the fraudulent transactions. Further internal inquiries will be carried out by NEC, and the company said it will simultaneously investigate the possibility of seeking compensatory damages or filing a criminal complaint.

"NEC deeply regrets the occurrence of these fraudulent transactions at a time when strengthening of corporate compliance and the improvement of internal controls is being strongly sought after, and sincerely apologizes for any inconvenience caused," the company said in the filing.

Today's announcement is just the latest in headaches for the scandal-ridden Japanese electronics giant. In a filing made last week, NEC disclosed that it may well lose its listing on the Nasdaq stock market because of long overdue SEC filings. NEC's filings have been held up by an internal investigation of its historical stock options granting practices spurred by the recent industry-wide crack down on illegal stock options backdating. The company is also the subject of an ongoing informal probe by the SEC based on its options granting practices.

The filing made last week also revealed that since October 2006, the NEC Group has been among the parties subject to investigations by the U.S. Department of Justice (DOJ) and the European Commission regarding potential violations of antimonopoly laws in the SRAM industry; investigations by the Korea Fair Trade Commission regarding potential violations of Korean competition laws in the semiconductor industry; and investigations by the Japan Fair Trade Commission, the DOJ, the European Commission, the Korea Fair Trade Commission, and the Competition Bureau Canada regarding potential violations of antimonopoly laws in the TFT liquid crystal display industry.

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