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Toshiba unit embroiled in fake deals worth over $360m

Window-dressing scheme driven by Tokyo-listed Net One Systems

The round-tripping scheme involved Net One Systems purportedly selling IT equipment to unspecified government agencies.

TOKYO -- A series of fictitious transactions worth more than 40 billion yen ($365 million) that inflated sales at a Toshiba subsidiary was led by a system developer listed on the Tokyo Stock Exchange's first section, it was learned Friday.

The scheme, which began as recently as 2015, involved bogus purchases of equipment from Net One Systems by companies including Toshiba IT-Services, which were supposed to deliver the products via Nippon Steel unit NS Solutions to public-sector customers, sources familiar with the situation said.

But no evidence shows any products having actually shipped, suggesting that the arrangement was a case of "round-tripping" -- a circular series of sales meant to inflate paper earnings.

Toshiba IT-Services booked 20 billion yen in sales from the transactions in question for the six months through September 2019. Toshiba said last week it would remove those sales from its third-quarter earnings.

The arrangement also included Fuji Electric subsidiary Fuji Electric IT Solutions and Mizuho-Toshiba Leasing, as well as multiple unlisted tech companies.

On paper, Net One would ship the gear directly to NS Solutions, with Toshiba IT-Services and other participants acting as middlemen. Net One ultimately bought the products back from NS Solutions to close the monetary loop.

"We were unaware that the transactions were fictitious, but there were things that seemed strange, such as a total lack of communication from the [final] buyer," a Toshiba IT-Services representative was reported as saying.

The involved companies were allegedly first approached by a manager at Net One, who said the equipment was being sold to government agencies but gave no further details, citing a need for confidentiality.

A Net One executive told Nikkei the company had "confirmed" its central role. "We believe there was no organizational involvement, but we are currently investigating" with a third-party committee, the executive said.

Toshiba said last week it had found no evidence that Toshiba IT-Services employees "played leading roles" in the arrangement.

Mizuho-Toshiba Leasing issued a statement Friday, saying its internal probe did not find that the transactions there were made with the knowledge that they were fictitious.

Fuji Electric acknowledged "questionable" transactions at its subsidiary and said it had outside investigators begin looking into the matter in December.

Net One and NS Solutions established investigation committees last month after being alerted to the suspicious transactions by tax authorities.

Net One postponed announcing results for the nine months through December until Feb. 13, with the intention of disclosing details of the transactions at the same time. It may be forced to revise its earnings.

Questionable transactions such as round-tripping can be particularly difficult to spot in the tech industry, where even legitimate deals often involve no physical goods changing hands. Japan has seen several such cases, including the 2008 bankruptcy of information systems company NIWS after it booked roughly 68 billion yen in falsified sales over five years.

While the Net One case supposedly involved physical equipment, the apparent "direct shipping" arrangement between Net One and NS Solutions helped it escape detection. This is commonly used in tech industry purchases, as it reduces inventory risks and cuts down on the time and cost of transportation.

Because of this practice, the lack of confirmation of actual items being sent did not strike Toshiba IT-Services employees as odd, and they saw no problem with going ahead with a deal whose terms worked in the company's favor.

"The profit margin was low, but we'd definitely be able to recoup the money we put in," a Toshiba IT-Services representative said, recalling the transactions.

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