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A tobashi scheme is a
financial fraud In law, fraud is intentional deception to deprive a victim of a legal right or to gain from a victim unlawfully or unfairly. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover mone ...
through
creative accounting Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distor ...
where a client's losses are hidden by an investment firm by shifting them between the portfolios of other (genuine or fake) clients. Any real client with portfolio losses can therefore have its accounts flattered by this process. This cycling cannot continue indefinitely, so the investment firm itself ends up picking up the cost. As it is ultimately expensive, there must be a strong incentive for the investment firm to pursue this activity on behalf of its clients.


Etymology

''Tobashi'' () is Japanese for "flying away". It describes the practice where external investment firms typically sell or otherwise take loss-bearing investments off the books of one client company at their near-cost valuation to conceal investment losses from the clients' financial statements. In that sense, the losses are made to disappear, or 'fly away'.


Structure

The scheme often makes use of off-balance sheet financing or special purpose vehicles with non-coterminous accounting periods. Assets and liabilities are transferred at fictitious valuations, in the hope that losses are deferred until the market recovers. There are no rules as to how frequently the assets are transferred, and because there is little transparency over the valuation, losses can grow at every sale. As the market rout in the 1990s was drawn out, simple loss deferrals would no longer be sufficient. Advisors would devise schemes where they would be compensated for holding on to their bad investments over time by other means, such as buying specially issued bonds or paying for non-existent services. During the Japanese stock market boom in the late 1980s, investment bankers persuaded many Japanese companies to raise capital by issuing bonds with warrants attached, although they did not require the funds for operational purposes. Clients were tempted by the potential returns the investment firms said they could generate on stock market investments. However, as stock values fell, companies were in a vicious circle where not only their investments soured, the debt remained after issued warrants expired, weakening the companies' capital base. In Japan, it is an offence under the Securities and Exchange Law for a brokerage itself to compensate the final client's losses. In 1991, it became a criminal offence for brokers to compensate clients for investments which had gone bad or to otherwise conceal their losses. In the late 1990s new accounting rules introduced required investment valuations to be
mark-to-market Mark-to-market (MTM or M2M) or fair value accounting is accounting for the "fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fair" ...
, forcing losses or gains to be shown in the financial statements. Despite the tightening, a loophole involving
intangible asset An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, exclusive franchises, Goodwill (accounting), goodwill, trademarks, and trade names, reputation, Research and development, R&D, Procedural knowledge, ...
s continued to be exploited: Japanese acquisition accounting rules allow companies to record M&A fees on their deals as part of consideration, and goodwill on consolidation may be depreciated over 20 years.


Scandals

''The Wall Street Journal'' reports that in 1992 alone, four securities firms were exposed in the local press for various ''tobashi'' scams; Cosmo Securities, Daiwa Securities, Yamatane Securities, and the former Maruman Securities all had more than one billion yen of losses that were concealed.


Yamaichi Securities

In January 1992, Yamaichi Securities executives resorted to such a ''tobashi'' scheme, setting up a separate company called Yamaichi Enterprise which opened an account at the Tokyo branch of
Credit Suisse Credit Suisse Group AG (, ) was a global Investment banking, investment bank and financial services firm founded and based in Switzerland. According to UBS, eventually Credit Suisse was to be fully integrated into UBS. While the integration ...
. Depositing ¥200 billion in Japanese
government bonds A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity da ...
, the Yamaichi subsidiary then used the dummy companies to generate profits for clients while eventually absorbing losses of ¥158.3 billion. A separate scheme using foreign currency bonds resulted in losses of ¥106.5 billion being hidden in Yamaichi's Australian subsidiary. In August 1993, Japan's Ministry of Finance inspected 47 financial institutions for ''tobashi'', all of whom denied the practice. In December the MoF asked for reports from all 289 brokers on ''tobashi'' activity.


Olympus scandal

In October 2011 amidst the controversial removal of the newly appointed chief executive officer, it was revealed that
Olympus Corporation is a Japanese manufacturer of optics and reprography products, headquartered in Hachioji, Tokyo. Olympus was established in 1919, initially specializing in microscopes and thermometers, and later in imaging. Olympus holds roughly a 70 percent sh ...
had been operating a tobashi scheme in which US$2 billion was said to have been siphoned off to cover bad investments made up to 20 years ago.Powell, Bill (9 November 2011
"Olympus Scandal: A Confession, but Still No Answers"
''TIME''. Retrieved 10 November 2011
On 8 November 2011, in what ''
The Wall Street Journal ''The Wall Street Journal'' (''WSJ''), also referred to simply as the ''Journal,'' is an American newspaper based in New York City. The newspaper provides extensive coverage of news, especially business and finance. It operates on a subscriptio ...
'' referred to as "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history", the company admitted that the money had been used to cover losses on investments dating to the 1990s. and that it had adopted "inappropriate" accounting practice. The company laid the blame for the inappropriate accounting on ex-president Tsuyoshi Kikukawa, auditor Hideo Yamada, and executive VP Hisashi Mori, all of whom resigned.


See also

*
Repo 105 Repo 105 is Lehman Brothers' name for an accounting maneuver that it used where a short-term repurchase agreement is classified as a sale. The cash obtained through this "sale" is then used to pay down debt, allowing the company to appear to redu ...
, a
Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
tobashi scheme using
repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of secured short-term borrowing, usually, though not always using government securities as collateral. A contracting party sells a security to a lend ...
s to conceal debt *
Hollywood accounting Hollywood accounting (also known as Hollywood bookkeeping) is the opaque or " creative" set of accounting methods used by the film, video, television and music industry to budget and record profits for creative projects. Expenditures can be infl ...
, using an inverted tobashi scheme to hide profits *
Creative accounting Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distor ...
*
Fraud In law, fraud is intent (law), intentional deception to deprive a victim of a legal right or to gain from a victim unlawfully or unfairly. Fraud can violate Civil law (common law), civil law (e.g., a fraud victim may sue the fraud perpetrato ...


References

{{reflist Finance fraud