The Mitutoyo Case: Will Japan Learn from Its Mistakes or Repeat Them?

Introduction

In the last few years, a number of Japanese companies have been implicated in export control violations that have highlighted deficiencies in Tokyo's ability to control the spread of sensitive dual-use technologies. One of the most prominent and egregious cases is that of the Mitutoyo Corporation, a leading precision measuring device manufacturer. The charges in this case revolved around the illegal transfer of five precision measuring devices to subsidiary in Malaysia via Singapore between 2001 and 2005. In June 2007, two important final judgments in the case were handed down: on June 25, a Japanese court gave four former executives multi-year jail sentences and fined the company ¥45 million (about $350,000 USD); the next day, the Japanese government imposed a two-phased export ban on the company with a total duration of three years.

The investigation in Mitutoyo's export activities began after inspections by the International Atomic Energy Agency (IAEA) in late 2003 and early 2004 turned up one of the company's precision measuring devices in a facility that had been a part of Libya's now-defunct nuclear weapons program. Before Tripoli's change of heart in 2003, it had contracted with Pakistani scientist A.Q. Khan and his network of nuclear suppliers to provide Libya with a "turn-key" nuclear weapons program.[1] The Mitutoyo measuring equipment, a dual-use item that can be used to assist in the manufacturing of centrifuges to enrich uranium for nuclear weapons, had been transferred from Japan to Mitutoyo's subsidiary in Malaysia, which in turn sold it (along with at least one other measuring device) to associates of Khan. Although this transfer by Mitutoyo is the most notorious, it was only one of thousands of devices that the company exported without appropriate licenses over more than a ten-year period.[2] The steps taken by the company to circumvent Japanese regulations were unprecedented and part of an overall business strategy to improve export performance.

Although the criminal proceedings ended with the four executives charged in the case receiving jail terms, the sentences were suspended and it is unlikely that any of the men will serve time in jail. As part of the administrative sanctions placed on the company by the Japanese government, Mitutoyo has been banned from exporting any products out of Japan for a period of six months starting on July 3, 2007. At the end of this period, a second phase of the sanctions bans Mitutoyo from exporting certain precision measurement devices for two-and-a-half years, although exceptions to the ban will exempt certain users.[3]

The administrative penalties represent the longest ban Tokyo has applied to one company – a total of three years, which is also the maximum length that can be imposed on violators under the current law. With approximately 70 percent of Mitutoyo's business coming from exports, the initial six month ban will impact the company's profitability in the short-term. However the lasting impact of the second phase of the ban is debatable, even if it is directed at one of the company's most popular items – computer numerical control (CNC) three-dimensional measuring devices. With the promised exemptions for certain customers, the affects of the sanctions on the company's bottom-line could be minimal. In allowing Mitutoyo to continue to trade with "safe" entities, it is unlikely that the administrative punishments will cause serious disruptions in the company's long-term success. The exemptions also likely ease industry concerns about the supply of these devices and suggest that Mitutoyo's customers do not have to scramble to find a new viable supplier.

Although at first glance both the administrative and criminal penalties that have resulted in this case appear significant, exemptions and other special allowances have limited the pain for the company and the executives involved. This "mercy" for those accused in this case is Tokyo's way of balancing justice with economic needs.

The question remains whether other companies could duplicate – or even improve on – Mitutoyo's system of circumvention. As Japan looks to strengthen its export controls in order to prevent any unwanted transfers of dual-use technology, the judgments in this case could impede effective reform as the consequences for bad behavior are not sufficiently obvious to serve as a deterrent against similar, profit-motivated behavior.

Export Controls: Stopping Proliferation at the Source

Historically, efforts by states to develop nuclear and missile programs have benefited greatly from foreign assistance. In most cases, the assistance was not condoned by the supplier country but instead came about through illicit transfers of knowledge and equipment. Iraq's pre-1991 efforts to build a nuclear weapon – and its success in creating chemical weapons and missiles – were assisted by lax export controls in Western countries. In the case of Pakistan, the now notorious A.Q. Khan network supplied Islamabad's nuclear program with much needed materials and technical know-how. Both Iran and North Korea have established supply networks aimed at illicitly obtaining sensitive dual-use equipment.

As these cases of proliferation highlight, export controls can be an important tool for slowing the progress of proliferation internationally. Ideally, strong export control systems in countries capable of supplying sensitive materials work within the overall nonproliferation regime to impede the ability of state and non-state actors to develop WMD programs. Although most supplier countries recognize the importance of having a viable export control program, they also recognize the necessity of balancing nonproliferation regulations with economic and trade policies. Maintaining this balance has proved a constant challenge for supplier countries.

Japan's export control system is generally considered to be one of the strongest in the world. However, as with any export control system, Tokyo's export control efforts are challenged by technological advances and the sheer volume of trade that flows through its borders. Japan's difficulties in addressing both these areas played a key role in allowing Mitutoyo to carry out its strategy of circumvention.

Corporate Culture Fostering Noncompliance

Mitutoyo, founded in 1934 by Yehan Numata, was the first Japanese producer of precise measuring devices known as micrometers. The company opened its first foreign subsidiary – the MTI Corporation – in New York City in 1963.[4] As of early 2006, the company had about 2,400 employees in Japan; it also had subsidiaries in 26 countries, employing upwards of 4,500 worldwide.[5] It has become a global leader in the manufacturing of precision measuring instruments with about 30 percent of the global market.[6]

Despite Mitutoyo's significant growth in the last 70 years, the company remained a "family business" for most of its history, breading chronic nepotism within the leadership. Those who have studied the company and the violations it committed point to the company's corporate culture as a contributing factor in the ultimate decision to be noncompliant with Japan's export control laws. At Mitutoyo, the company president, a title that remained within the Numata family for six decades, was the preeminent decision maker within the company; decisions came from above with often little effort to gain input or consensus from other executives. As a result, company executives concerned with export compliance would have had little opportunity to affect decisions with regards to high-tech transfers.[7]

In the 1980's, during a period when licensing laws in Japan were more relaxed, Mitutoyo began transferring high-tech measuring devices to entities in Iran. Between 1982 and 1992, the company transferred numerous three-dimensional measuring equipment and several other precision measuring devices to entities connected to the Iranian Revolutionary Guard and the Ministry of Defense & Armed Forces Logistics.[8] However in 1992, concerns about weapons programs in numerous countries, like Iran, Libya and North Korea, led the Japanese government to increase restrictions on dual-use items seen as capable of providing material support in the development of WMD. Many of the devices manufactured by Mitutoyo fell under the new restriction and the company saw the new regulation as a threat to its export market.[9]

Mitutoyo experienced a downturn in profits in 1992, and a decision was made at the highest levels of the company to not allow Japanese export control laws to endanger the company's sales volume. In 1993, after Japanese export control authorities denied Mitutoyo a license for the transfer of three-dimensional measuring devices to Iran, the company's leadership developed a strategic plan for circumventing export control laws.[10] As part of this effort, the board established the innocuously named "export management committee." This team oversaw the development of a business strategy aimed specifically at finding and exploiting weaknesses in Japan's export control system to allow the company to ship controlled items without a license.

Mitutoyo's Business Model: Strategic Circumvention

A key part of Mitutoyo's export strategy was the development and implementation of a software program which, when installed, made Mitutoyo's precision measuring equipment appear less accurate. This ploy made items appear to not require an export license and thereby allowed them to easily pass through Japanese customs authorities without being detected. The actual software allowing the devices to operate at their intended specifications were exported to the end-user from a subsidiary in another location, such as Germany, and installed by Mitutoyo officials from Japan once in the end-user's possession.[11] With an apparent flare for irony, the software program was code named "COCOM", which is the acronym for the Coordinating Committee for Multilateral Export Controls, the multilateral export control regime established during the Cold War to prevent the leakage of technology to Warsaw Pact countries.[12] At the time of the software's development, many of the precision devices being illegally transferred by Mitutoyo would have been controlled based on COCOM guidelines.[13]

Mitutoyo's export committee also effectively utilized the company's foreign subsidiaries in countries like Malaysia and Singapore that were not targets of more stringent export control regulations. Items shipped to these subsidiaries could then be re-exported to a third country. The use of its subsidiaries allowed Mitutoyo to re-transfer items to countries like Iran and Libya without raising questions within Japan's export control system. Although exact figures on how much equipment was transferred this way is not publicly available, the reliance on this strategy appears evident when looking at Mitutoyo's trade practices after the mid-1990s. For instance, beginning in 1995, the number of exports by Mitutoyo to its subsidiary in Singapore soared from 20-30 per year to approximately 200 per year.[14]

Mitutoyo equipment was also easily acquired by Japanese brokers working with companies in Iran. According to findings from the Tokyo police department, between 1984 and 1997, Mitutoyo exported nine three-dimensional precision measuring machines to organizations related to Iran's military and defense industry through Seian, a trading company with ties to Iran. Of the nine machines one was transferred in 1984, one in 1989, two in 1990, one each in 1991, 1992, 1993, 1997 and 2002.[15]

Even after the discovery of its measuring devices in Libya and the obvious attention that it drew from the Japanese authorities, Mitutoyo continued its illegal trade activities. In July 2005, Mitutoyo again utilized its COCOM program to carry out the export of three highly accurate three-dimensional precision measuring devices to its Singapore subsidiary, Mitutoyo Asia Pacific.[16] According to the police investigators, one of the machines was transferred to Vietnam, and the other two went to Malaysia.[17]

Tokyo's investigation of Mitutoyo's activities lasted more than more than two years. In February 2006, Mitutoyo's head office in the city of Kawasaki was raided by Japanese authorities. In August 2006, the Tokyo Metropolitan Police arrested the four executives on suspicion of exporting two controlled measuring devices without a license. The accused pled guilty to the charges on December 4, 2006.[18]

Judging Mitutoyo: Balancing Justice and Economics

Many officials and experts in Japan consider the Mitutoyo case to be particularly pernicious to international nonproliferation efforts. A number of factors play into that assessment. Firstly, unlike many companies that may violate controls due to sloppiness or simple error, Mitutoyo was fully aware that the exported measurement machines were subject to licensing restrictions and top executives of the company chose to intentionally violate the export law. Secondly, the sensitivity and volume of items transferred by Mitutoyo has caused unprecedented damage to world-wide nonproliferation efforts. The exported devices were highly accurate pieces of equipment and could be utilized in the development of a uranium enrichment capability. Due to the actions of Mitutoyo, these highly sensitive items were obtained without a license by customers who included members of the AQ Khan network. Through the work of Khan and his cohorts, Mitutoyo's equipment was directly assisting Libya's nuclear weapon's development. Mitutoyo transferred an estimated 10,000 highly accurate measuring devices without proper licenses in the decade that the COCOM software was utilized. While most of these items are likely being used for civilian purposes, it is impossible to determine how many have been transferred to nuclear programs in places like Iran and North Korea.

Considering Mitutoyo's significant market share and importance as a global supplier in certain measuring devices, some within the industry were concerned that the punishment handed down by the Japanese government would affect global supply chains.[19] This concern may explain why other governments have not raised concern in public about the Mitutoyo case despite the fact that the leakage of technology was so significant. U.S. defense companies, for example, are regular customers of Mitutoyo; it is likely they and their U.S. government counterparts were also concerned about losing this vital supplier.

Ultimately, the fears from industry appear unwarranted as the punishments meted out to the company and its executives were limited.[20] The four men charged in this case were former vice chairman Norio Takatsuji, president Kazusaku Tezuka, executive in charge of export control screening Hideyo Chikugo and factory chief Tetsuo Kimura. In handing down the final criminal judgment against the four, the chief judge, Masahiro Hiraki, at the Tokyo District Court pointed out that the conduct of the accused had damaged trust in the nuclear proliferation regime and ruined Japan's international credibility in the field of export controls. The judge agreed with the prosecution that Mitutoyo's executives were well aware of the potential diversion of their devices to nuclear weapons programs.[21] Despite this fact, the judge chose to give the accused suspended sentences since the four appeared to show remorse, also noting that they had already chosen to leave the company.[22]

The administrative sanctions that followed the criminal convictions do not appear to threaten Mitutoyo's ability to supply its customers in the long-term, even with the imposition of multi-year export restrictions. The initial six-month complete export ban placed on the company will likely have a negative short-term affect on the Japanese-based operations, which relies heavily on exports to attain profitability. However, the ban does not affect foreign based operations where the manufacturing and transfers are carried out outside of Japan's jurisdiction. Therefore, Mitutoyo's operations in other countries can continue to sell items domestically and internationally so long as they do not involve Japanese-origin equipment or technology that would normally require an export license from Japanese authorities.

The second phase of the ban, which last another two-and-a-half years is directed at the specific items that are seen as most sensitive – namely CNC three-dimensional measuring devices. Mitutoyo's global market share in these devices is significant. For that reason, Tokyo included in its final ruling exceptions that permit Mitutoyo to continue to trade in these devices with approved entities. These exemptions will likely allow Mitutoyo to continue to trade with many of its major customers, thereby maintaining its export business and preventing an adverse impact on the global supply of such measuring equipment.

Getting it Right Next Time

Mitutoyo was one of a number of illegal export cases that have surfaced in Japan in the last few years. Other recent export control violations have included large firms like the Yamaha Motor Corporation, as well as smaller firms such as Seishin Enterprises, the latter receiving a complete two-year export ban as a punishment for missile-related trade with Iran.[23] Considering Japan's nuclear history, Tokyo has been historically sensitive to the issue of proliferation. While recent export control violations have shaken Japan's trust in its export control system, it has also provided Tokyo an opportunity for conducting a drastic revision of its relevant legislation.

Responding to the recent increase in investigations into illicit transfers the Japanese government established in April 2006 a panel of experts to strengthen and revise domestic trade law so as to assist Japanese authorities in preventing the illicit transfer of sensitive technologies. On June 13, 2007, the working group submitted recommendations to the Japanese Ministry of Economy, Trade and Industry (METI) on strengthening penalties for illegal exports. Based on these recommendations, METI announced planned changes to Japan's export control regulations that will significantly stiffen penalties for violations.

Under the new rules proposed by METI – which still need to be reviewed by a number of relevant government agencies and formally approved by Japan's parliament, the Diet – the levels of fines for export control violations would increase ten fold, with a new maximum fine of 20 million yen per item. The new rules would also increase the current maximum jail term for individuals involved with export control violations from five to ten years and make the falsifying of export applications a criminal offense. METI plans to submit the new rules to the Diet for its approval during the parliament's 2008 session.[24]

Assuming that these new rules are passed, the change will represent the first major overhaul of Japanese export control regulations since 1987, when the Diet responded to a high-profile export violation by the Toshiba Machinery Company. In 1982, Toshiba Machinery exported computer guided multi-axis milling machines to the Soviet Union in violation of COCOM rules; as a result of the sale, the Soviet Union was reportedly able to mass produce significantly improved propellers for their submarine fleet. Details of the case only surfaced in 1987 and highlighted how export control violations could have a significant impact on national and international security.

Learning from the Toshiba Machine experience, the Japanese government took a number of bold initiatives to cope with the deficiencies that had become evident from the Toshiba Machinery case. The 1987 reforms led to the creation of an organization now known as Center for Information on Strategic Trade Control, or CISTEC, and the legislation dealing with internal compliance programs (ICPs) within domestic companies. CISTEC, which is a quasi-governmental organization, was mandated with establishing an effective export control system in part by working in cooperation with industry.[25] Japan's focus on ICPs has been at the forefront of efforts to raise industry awareness about the threat of proliferation and about individual company's responsibilities under the law.

Japan's reforms after the Toshiba Machinery case, though significant, were taken largely in the context of the Cold War. The more recent reforms proposed in the aftermath of the Mitutoyo case are in reaction to the current security environment. How these increases in penalties ultimately affect the actions of companies considering export violations remains to be seen.

Conclusion

The Mitutoyo case highlights friction created when security and economics intersect. The case also points to an export control system in Japan that is at a crossroads. Japan has been and will remain a key supplier in high-tech goods, many of which are dual-use in nature, and thus in need of control. However the Mitutoyo case shows that Japan's ability to control could not keep up with a company's initiative to circumvent the law.

Making companies aware of the dangers proliferation and how it impacts national and international security is an important tool to stemming the flow of technology. But sometimes more forceful actions on the part of government may be needed – it is unlikely that Mitutoyo, with its distinctive corporate culture, would have been swayed by greater "awareness" at the dangers of proliferation, but it may have been deterred if the threat of punishment by Japanese authorities had been more severe.

Japan's efforts to strengthen its export controls are important and may work to deter those tempted to attempt illicit transfers. However, the leniency that the Japanese legal system and government gave to Mitutoyo may act to lessen the disincentive for the most determined companies.

Sources:

[*] The authors would like to thank Peter Crail and Jing-dong Yuan for their reviews and comments on this paper.
[1] Numerous analysts have written detailed accounts of the AQ Khan network and its dealings with Libya; see Gordon Corera, Shopping for Bombs: Nuclear Proliferation, Global Insecurity, and the Rise and Fall of AQ Khan's Nuclear Network (New York: Oxford University Press, 2006); William Langewiesche, The Atomic Bazaar: The Rise of the Nuclear Poor (New York: Farrer, Straus and Giroux, 2007); and Mark Fitzpatrick ed., Nuclear Black Markets: Pakistan, A.Q. Khan and the Rise of Proliferation Networks. A net assessment, International Institute for Strategic Studies, May 2007.
[2] Peter Crail, "Evading Export Controls: Mitutoyo Corporation as a Case Study in Determined Proliferation." WMD Insights, October 2006, www.wmdinsights.com.
[3] "Gaikoku Kawase Gaikoku Bouekihou ni Motozuku Gyouseishobun ni tsuite" (Administrative sanction (export ban) under the Foreign Exchange and Foreign Trade Law), Japan's Ministry of Economy, Trade and Industry (METI), June 26, 2007, www.meti.go.jp.
[4] Tadao Arai, The 50-Year History of Mitutoyo, (Tokyo: Mitutoyo Mfg. Co., 1986)
[5] Mitutoyo Corporation homepage, Company Overview, www.mitutoyo.co.jp.
[6] "Fusei Yushutsu: Kunino Anzen wo Obiyakasu Akushitsushouhou (Illegal Exports: Threats to National Security)," August 26, 2006, Yomiuri Shimbun.
[7] Author's interview with export control manager for a major Japanese manufacturer, March 13, 2007.
[8] "Japan Mulling Overhaul of Export Control Laws to Curb Weapons-Related Trade," International Herald Tribune, September 13, 2006, www.iht.com.
[9] "Mitutoyo Schemes Systematic/Executives Aware of Illegality of Exporting Sensitive Devices," Daily Yomiuri, August 27, 2006.
[10] "Mitutoyo Probed Over Fudged Data/Performance Info on Devices said Altered," Daily Yomiuri, August 26, 2006.
[11] "Mainichi: Tainted Japanese Firm Also Sold Software for Illegally Exported Nuclear Instruments," Tokyo Daily Mainichi News, February 16, 2006, OSC Document JPP20060216969038.
[12] "Mitutoyo Used Software to Make 3D Machines Appear Less Accurate," Tokyo Kyodo World Service, August 28, 2006
[13] COCOM ended in 1994 and has been succeeded by the Wassenaar Arrangement.
[14] "Mitutoyo, Iraq tono Sensou chu Iran ni Sokuteki Yushutsu (Mitutoyo exported 3D Machines to Iran during the Iran Iraq war)" Sankei Web, September 29, 2006.
[15] Ibid.
[16] "Mitutoyo Fusei Yushutsu, Vietnam nadonimo, Singapore kara Ukai (Mitutoyo's illegal export: Transshipped from Singapore to Vietnam)," Sankei Web, October 12, 2006.
[17] Ibid.
[18] "4 Mitutoyo Execs Plead Guilty to Illegal Nuclear-Linked Exports," Tokyo Kyodo World Service, December 4, 2006.
[19] Sophie Kernon and Brian McGee, "Renishaw Says Japan Ruling on Nuclear Parts Case May Clip Sales," Bloomberg.com, June 11, 2007, www.bloomberg.com.
[20] "Japanese Court Sentences 4 Ex-Mitutoyo Officials for Illegal Exports," International Herald Tribune, June 25, 2007, www.iht.com.
[21] Jun Hongo, "Mitutoyo Execs Receive Suspended Terms," Japan Times, June 26, 2007, https://search.japantimes.co.jp.
[22] Ibid.
[23] "Japanese Government Places Record Export Ban on Seishin for Illegal Exports to Iran," International Export Control Observer, March/April 2007 https://cns.miis.edu.
[24] "Stiffer Penalty Eyed for Illegal Exports," Asahi Shimbun, June 15, 2007, www.asahi.com.
[25] Bates Gill, et al, "Japan's Export Control Initiatives: Meeting New Nonproliferation Challenges," Nonproliferation Review, Fall 1996, pp. 30-42.