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Nissan's Ghosn crisis

A week after arrest, Ghosn prosecutors home in on future pay

Proof that $70m understatement was illegal is core of dispute

Ghosn allegedly underreported his income by $70 million over an eight-year period. (Photo by Keiichiro Asahara)

TOKYO -- One week after former Nissan Motor Chairman Carlos Ghosn was arrested on suspicion of underreporting pay, the case is shaping up to center on whether prosecutors can prove that the future payments the charismatic leader arranged for himself should have been clearly stated in the company's annual report.

Ghosn's underreported future compensation is said to add up to roughly 8 billion yen ($70.5 million). Tokyo prosecutors have focused on 5 billion yen of these payments and used them as the premise for his arrest.

While Ghosn is suspected of using the automaker as his personal piggy bank in various ways, including living in luxury homes for free and paying a relative for dubious consultation fees, the core issue of the indictment will be whether the amount of money Ghosn had deferred for future payment had been set, at which point he would have been required to report it in the annual report.

Sources say that Ghosn is prepared to fight the prosecution on this point, already denying that these future payments were actually set in stone. Nissan does not seem to have set aside these reserve funds in its annual budgets.

Yet, prosecutors have obtained internal Nissan documents that note clearly the deferral of payments, and believe that the payments were set and thus were under obligation to be included in the annual reports.

Ghosn has hired New York-based law firm Paul, Weiss, Rifkind, Wharton & Garrison to represent him.

According to sources, Ghosn's unreported pay includes eight years' worth of deferred salary adding up to 8 billion yen, and share-price-linked incentive compensation of about 4 billion yen, over a four-year period.

Ghosn's decision to defer pay to later years came on the heels of new requirements in 2010 that made it mandatory for listed companies in Japan to disclose executive pay exceeding 100 million yen, or $880,000. Ghosn, having the sole discretion of allocating the 2.99 billion yen total pot of Nissan executive pay, had set his own salary around 2 billion yen.

But conscious of criticism about excessive executive pay, Ghosn is said to have arranged for around 1 billion yen of his annual pay to be received after he retired, and therefore not noted in the Nissan annual report.

According to Japan's Financial Services Agency, regulations stipulate that remuneration and bonuses paid to directors and any other financial benefits received by directors as consideration for the execution of duties are subject to disclosure. These include stock options and retirement bonuses, and are required to be reported once the estimated amount is set.

Shinji Hatta, professor emeritus at Aoyama Gakuin University, and an expert on accountancy, said, "Whether the date of payment is set or not, the payments must be reported at the point when the amount is fixed."

As for the share-price-linked incentive compensation, or stock appreciation rights (SAR), it is known that while such rights for other Nissan directors were reported, Ghosn's 4 billion yen worth of SAR, for the four years leading up to the fiscal year ending March 2018, went unreported.

The amount of money to be paid out as SAR is calculated based on the share price at the point of execution of the rights. Experts are divided on when SAR should be reported, with some saying it is the day they are handed out, and others saying it is when the rights become eligible for execution. The reality, experts say, is that each company sets their own rules regarding the timing of disclosure.

One expert on financial reporting law told Nikkei that the rule on SAR disclosure is not clear and therefore "making a case for indictment from this angle could prove difficult."

Falsifying a corporate annual report is considered a crime that clouds the judgment of an investor and thus hurts the fairness of the securities market. In 2006, Japan raised the punishment of such actions to as many as 10 years in prison or up to 10 million yen, or $88,000, in fines, from the previous five-year maximum imprisonment and up to 5 million yen in fines.

Meanwhile, Ghosn's alleged misappropriation of company funds for his own ends may face a criminal investigation, as well as tax-related troubles.

Nissan's probe alleged that investment funds from its Dutch subsidiary Zi-A Capital were used to buy Ghosn luxury homes in a number of countries for his personal use. The automaker bore more than 2 billion yen in costs related to purchasing and maintaining the properties.

The probe also highlighted a consulting agreement with Ghosn's older sister. Nissan was unable to confirm whether the sister actually performed work for which she was paid, strengthening its view that Ghosn was using company funds to enrich her.

The misuse of company funds could open him up to charges of professional embezzlement under criminal law, as well as aggravated breach of trust under corporate law. But it would be no simple task to prove the overseas properties were purchased for his private use, as all are nominally owned by Nissan-affiliated bodies, such as indirectly owned subsidiaries. There are also high hurdles to proving he intended to harm the automaker, which would be the requirement to make a case for breach of trust.

Some believe Ghosn's alleged personal use of company funds would amount to compensation from the company, raising concerns over his tax reporting.

"If an executive at a Japanese company were to receive a home free of charge, for instance, it would qualify as executive compensation and the person may be required to report it on their final income tax return," said a licensed tax accountant with a long work history in Japanese taxes.

Whether a person with residences in multiple countries is considered a resident for Japanese tax purposes is decided based on a range of factors, such as how many days per year they spend in the country and the overall circumstances of their livelihood. If Ghosn -- who spends about a third of each year in Japan -- is counted as a resident, he would be required to report income from both inside and outside the country. If his returns are found to be lacking, he could be accused of failing to report taxes.

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