SNA (Sydney) — Suruga Bank is facing allegations of fraudulent lending practices that disproportionately targeted Japan’s foreign residents, wiping out personal savings, and placing the safety of tenants at risk.

For about five years, Shizuoka Prefecture-based Suruga Bank’s loan practices have been under scrutiny.

Towards the end of 2017, the bank drew public attention after the Financial Services Agency (FSA) launched an investigation into its investment decisions involving a series of women-only share houses called Pumpkin Carriage (Kabocha no Basha) located in Tokyo.

Between 2015 and 2017, Suruga Bank provided over ¥100 billion (US$720 million) in loans to approximately seven hundred people wishing to invest in the Pumpkin Carriage share houses, operated by a property agency called Smart Days, which in turn worked closely with Suruga Bank.

The money was provided as “no money down” loans, which meant that investors were not required to provide any initial deposit and were able to obtain loans covering the entire amount of the investment. This was a feature that attracted those without the means to make such deposits–often less experienced and financially vulnerable people.

Smart Days promised that it would provide the women residing in these houses with access to income that could earned through dealings with various companies, particularly job search and consumer goods organizations.

Unfortunately, the Pumpkin Carriage share houses did not fill up with tenants as expected, and the organizations which Smart Days planned to partner with never made an appearance.

In an effort to stave off the collapse of the program, the company sold more share houses and used the money from its new buyers to try to pay back the previous ones. Ultimately, this Ponzi scheme approach collapsed, rendering Smart Days bankrupt and unable to fulfill its promises to both investors and occupants.

It wasn’t until early 2020 that the Pumpkin Carriage share house victims finally reached a settlement with Suruga Bank with the help of their lawyers association. The bank wrote off loans associated with almost every share house, incurring a loss totaling over ¥165 billion (US$1.2 billion) across more than a thousand borrowers.

Third-Party Panel Report

With the FSA on their trail in early 2018, the bank established an independent third-party panel to investigate the scandal, and it published a scathing report on September 7, 2018, causing five senior executives, including the then-chairman and the then-president, to step down.

According to the third-party panel, numerous and “systemic” fraudulent activities surrounded the Pumpkin Carriage loans, including real estate agents assuming rents and occupancy rates higher than the actual rates, as well as the falsification of some data.

Although it could be argued that Suruga Bank was, at least in part, manipulated into providing large loans due to the unethical practices of real estate agents, the report found that “there were cases in which the bank’s sales staff actively engaged in fraudulent acts and encouraged falsification, and cases where falsification was carried out by itself.”

The report outlined specific misbehaviors, such as altering loan applicants’ bank balances in order to qualify for loans which they couldn’t afford.

Furthermore, the report pointed to a deeply abusive work culture within the bank in which employees had routinely been pushed to reach unrealistic sales targets. This abuse allegedly included even a case of death threats aimed at bank staff and their family members.

Following the investigations, the FSA instructed Suruga Bank to suspend for at least six months all new real estate loans in which “less than 50% of the entire building is used for own-residence.”

The bank was also instructed to provide training regarding appropriate loan practices and compliance with laws and regulations.

Suruga Bank was additionally required to adopt and foster a “sound corporate culture” and to submit a business improvement plan showcasing the “establishment of a management system for eliminating anti-social forces and effective in preventing money laundering and terrorist financing.”

New Allegations

The Pumpkin Carriage scandal appeared to be wrapped up by the end of 2018, and the investigation and business improvement orders appeared to have put Suruga Bank on the path toward recovery of its tarnished reputation.

However, the Shingetsu News Agency was contacted several months ago by an individual presenting themselves as a “whistleblower.” We agreed to grant this individual anonymity in exchange for receiving their information. While we have also used other sources in compiling this report, which we will specify below, readers should judge for themselves how much weight to put on characterizations offered by someone who refuses to go on record with their true identity.

The whistleblower’s basic allegation is that the Pumpkin Carriage scandal is only “the tip of the iceberg” of fraudulent practices which Suruga Bank has engaged in, and the full scope of its dirty deeds is only now emerging into the light.

According to this anonymous whistleblower, as well as other sources, the fraudulent methods employed during the Pumpkin Carriage scandal have also been used in regard to non-share house property investors. This has led to Suruga Bank being able to finance decades-old properties—many of them apartment buildings–and to inflate revenue figures to offer loans that are unlikely to ever be repaid.

The whistleblower specifically claims that “the portfolio of loans against existing properties is about eight to ten times as large as the share house loan portfolio”—so large, they contend, that cancelling the existing loans “would bankrupt Suruga Bank immediately.”

Targeting of Foreigners

Making allegations similar to those of the whistleblower is a group formed last May which calls itself the Suruga Illegal Victims Alliance—as the name suggests, it is made up of people who contend that they are victims of the bank and illicit loan provision practices.

While Japanese women were the main target of the Pumpkin Carriage scandal, the Suruga Illegal Victims Alliance insists that the bank’s non-share house loans have disproportionately targeted another vulnerable group—foreigners living in Japan.

They contend that up to 10% of Suruga Bank’s loan recipients have been foreigners—often with incomplete Japanese-language skills—in a country in which non-Japanese make up only about 2% of the population.

Suruga Illegal Victims Alliance has presented an article by an alleged foreign victim who says he was provided a property investment loan in the amount of ¥140 million (US$1 million).

This alleged victim testifies that both a real estate seminar representative and a real estate agent dismissed his concerns about not being able to fully understand loan documentation put before him. They even affixed the official seals (hanko) on the loan application because, he says he was told, “many foreigners have trouble affixing seals to documents.” All of this occurred, he says, in the presence of a Suruga Bank employee.

This man goes on to recount that, at first, everything seemed to be in order, but after some months expenses for needed property renovations began to mount, and the rental income never came close to meeting the amounts which had been discussed. He says that his own personal savings were wiped out, and that his mental and social conditions became distressed.

An Alleged Victim Goes on Record

While most of the allegations presented against Suruga Bank—aside from the Pumpkin Carriage share house scandal—have come from about half a dozen sources, Shingetsu News Agency convinced two of these alleged foreign victims to tell their stories on the record.

Osaka resident Edward Baker claims to be one of the foreigners targeted by Suruga Bank and its collaborators, and the story which he relates very much fits the pattern described by the others.

The following is Baker’s account of his own experience.

In 2013, Baker says that he attended an International Solution Group Japan investment seminar in which the main listeners were foreign businesspeople. A representative from this seminar repeatedly promoted the potentially lucrative nature of real estate investment in Japan. Later, speaking to Baker directly, this representative specifically recommended Suruga Bank as a place to get started.

This advice led Baker to have meetings with Suruga Bank and Pacific Asset Management, a property broker. They quickly identified two properties which were said to be promising investment opportunities.

In what he later realized probably should have been a red flag, the broker from Pacific Asset Management dominated the conversation and seemed to dictate what was written in the contracts, as well as who signed what, where, and when. Baker found it odd that he was excluded from active participation in discussions that directly concerned him, but he was repeatedly assured that everything was fine and he didn’t believe at the time that he had any reason to be distrustful.

Baker explained that “one of the primary drivers of my decision to go ahead with purchasing with these properties was that [they] were being carefully assessed by [Suruga Bank], which was part of what was explained to me, and that the bank would only approve financing for a lender that was deemed to be in a position where they could handle the various ups and downs of owning properties like this.”

Similar to accounts by other sources, Baker found over time that the expenses of owning the two properties exceeded their income. While he still owned the properties at the time of the interview, he says that there is simply no way that he could continue to pay the astronomical bills. Both properties were close to insolvency.

In hindsight, Baker states that “the fact that the only way I was able to achieve the financing was through document manipulation—that is a major problem for me. It essentially undermines the belief that I had in the legitimacy of the process and the legitimacy of the bank.”

Another alleged victim who agreed to be identified, Benedict Lee, who used to work in the finance industry in the Tokyo area, tells a story similar to that of Baker. He observed: “I trusted the bank. I thought an institution of this calibre would not sell me lemons. But that was a big mistake and I thought a financial institution should be trusted, and in the end that was far from the case.”

Suruga Bank’s Response

Before publication of this report, Shingetsu News Agency contacted Suruga Bank, familiarized it in general terms with the accusations being leveled against it, and invited it to respond.

The bank’s public relations office did respond, although not at great length.

In regard to the September 2018 third-party report which uncovered unrealistic loan targets, the pressuring of employees, the falsification of loan applications, etc., the public relations office responded that “currently there is nothing like that.” As for past practices, its comment was that “we respect the contents of the investigation.”

On the issue of loan recipients being caught in property investments in which expenses outrun expected income, it responded, “the running cost of the properties (management fees, repair fees, etc.) are not set by the bank. For customers who need support due to the burden of running costs after purchasing a property, we sincerely respond by proposing repayment support measures.”

In respect to the allegations that foreigners without complete Japanese-language skills have been disproportionately targeted for dodgy loans, its response was simply “we have no such understanding.”

Latest Developments

In April 2022, Suruga Illegal Victims Alliance submitted a “Shareholder Proposal to Suruga Bank” in which several remedies were proposed. One of these included Suruga Bank’s agreement “to prohibit the receipt of loan screening materials from real estate agents in order to prevent falsification of loan screening materials.”

The victim’s alliance is working alongside the Sakura Kyodo Law Offices in an arbitration process, which launched in February, with Suruga Bank. The basic position the victims is that the loan contracts themselves should be invalidated on account of the fraudulent practices.

In an exclusive interview with Shingetsu News Agency, Yuusuke Kin, the lawyer handling the task, revealed that they have been gathering victim requests to have debts cancelled or payments otherwise reduced. About ten formal and informal meetings have been held between the two sides.

While the outcome of these talks is not yet clear, Kin speculates that they might possibly be wrapped up next March, ahead of the bank’s annual general meeting.

Unsung Impact on Tenants

On a final note, Baker has come to believe that the media reports have missed a crucial aspect of the story. He thinks that people like himself who made unwise decisions to take out loans and to invest in unprofitable properties are not the primary victims.

He notes that the unsound loans have not only created debts for investors, but that these cash-strapped owners are often unable to afford even some essential repairs for apartments where tenants live.

This means that broken facilities are sometimes not being repaired, including fire alarms and sprinklers not adequately inspected, etc.

Baker worries that “there are hundreds, possibly thousands, of people—tenants—living in these properties. And these properties are falling apart…People living in these buildings are becoming endangered.”

“Someone is going to get hurt,” Baker ventures, “someone is going to die.”

Michael Penn contributed to the compiling of this report.

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