This story was NOT a surprise; the fuller story is at Japan Still Calculating Cost of Defense Firm’s Padded Bills, but ever since NEC Corp. in 1998 was found with its hands in the till, I have been wondering who would be fingered next, and when, and why when, and why.

I say this because when I chatted to people back in 1998, the practice of padding contracts with surplus labor costs was widespread in the space and defense sectors and this was commonly known. At the time the questions were Why NEC? And Why Now? Below my initial October story is NEC SCANDAL SHEDS LIGHT ON JAPANESE PROCUREMENTS, a more fruity web version of a story that I originally wrote for Space News back in the day.

The timing for the original NEC story was also interesting as NEC was strongly pushing for its version of what was to become Japan’s IGS spy satellite system that was provoked by the Teapodon Trigger– an analysis that Saadia and I wrote about in In Defense of Japan (thank you Google Books!)

At the time NEC’s version of what was to become the IGS would have featured smaller satellites and cost less than Melco’s system. But with NEC suddenly out of the picture, Melco, with Ichiro Taniguchi at the helm, managed to personally lobby Japan’s Cabinet in the weeks after the Taepondon launch, and Japan’ got the IGS.

Here is a nice picture from Space Safety Magazine of Japan’s 1,200-Kilogram IGS 1B Satellite re-entered Earth’s Atmosphere on Thursday, July 26, 2012 after spending nearly 9.5 years in space.  Another more detailed article about this can be found at Spaceflight.101.com.

Eventually, NEC’s small-bus and higher resolution system has  been re-emerging in the ASNARO system, which is now being pushed as an alternative and complementary system to the expensive and relatively lower performance IGS, and also as the linchpin of a satellite-based, pan-Asian disaster monitoring network that is now a major part of Japan’s emerging regional space diplomacy and security strategy.  At least the Vietnamese have bought into it, and while customers don’t seem to be forming a line yet, there is still a lot of hope out there.

Here is the initial story for Defense News:

NEC SCANDAL SHEDS LIGHT ON

JAPANESE PROCUREMENTS.

By Paul Kallender in Tokyo

When, in September 1998, an investigation into the Japanese Defense Agency (JDA) discovered that Japanese technology giant NEC Corp had systematically defrauded the taxpayer on 33 space contracts over the course of five years, it looked as though Japan’s obviously abused government procurement system was about to get a major overhaul.

The investigation began promisingly enough. On September 3, Tokyo prosecutors raided the JDA and arrested Kenichi Ueno, deputy head of the Procurement Office, and a clutch of executives from NEC subsidiary Toyo Communications.

This followed discoveries that not only had Toyo overcharged the JDA some $21m over dozens of equipment contracts, but that Ueno and others had conspired to prevent Toyo, NEC and other subsidiaries from repaying the money. NEC was raided the next day and by September 10, nine senior NEC and JDA executives were in jail.

It came to light that Ueno and others had lifted incriminating paperwork out of the Agency’s filing cabinets and put them into incinerators and even the homes of friends. NEC’s SuperTower headquarters was soon besieged by the Japanese phenomenon of ‘sound trucks,’ driven by right-wing extremists screaming abuse and demanding mass resignations.

But instead of resulting in the punishment of protagonists and the start of reforms, the scandal collapsed into a desultory cover-up. NEC’s initial response was to deny everything, with a bemused VP Masakatsu Miwa telling the media on September 10 that he did not expect top NEC executives to resign because of the scandal, going on to explain that he “wondered why” NEC officials were being implicated. Unfortunately for Miwa, on September 29, NEC’s overcharging was upscaled to $2.5bn, while, on the same day, a Parliamentary committee reported that the JDA had hired no less than 44 NEC executives in senior positions in just two years. By October 10, former NEC VP Hiroaki Shimayama and Takenori Yanase, VP of NEC’s Space Systems Division, had both been arrested.

Thieves charter

The National Space Development Agency (NASDA) launched an inquiry and on November 9, NEC admitted overcharging by at least $19m. Meanwhile on October 14, the JDA revealed that 225 of its officials had been hired by 20 suppliers in the past five years, shedding some dim light on a corner of Japan’s Amadudari (Descent from Heaven) career kickback system.

At the heart of the issue, according to NASDA’s former executive director Akira Kubozono, is the flawed government contract system which encourages corruption through a combination of legendary meanness and bureaucratic incompetence.

“There are two points about this affair,” he said. “One is that NEC is just a scapegoat. The second is that the governmental contract system is the cause of this scandal. When the defense contract revelations began, I thought it was only a matter of time before it spread into NEC’s space systems division as both defense and space procurement are conducted under similar systems.”

Under the Japanese government contract system, the co ntractor is obliged to repay any unused budget if the delivery price falls below the contract amount, and the contractor must also incur any costs if the project overshoots the agreed estimate — a thieves charter if ever there was one.

Furthermore NASDA, the Science and Technology Agency and the Ministry of Finance lack the technical expertise to evaluate bids and tend to just accept company estimates, says Kubozono. “The system needs to be reformed but I doubt this is possible as long as NASDA and the corporations are controlled by STA administrators (who also often retire to executive positions in NASDA) and not by engineers,” he says.

No mettle Kubozono, it seems, was right.

By November 12, the space scandal seemed to have been wrapped up, with NASDA saying it was satisfied that only NEC had abused the system. “The system has worked well for 30 years. We believe that a little devil whispered into NEC’s ear. We do not think it will happen again,” said Yasuyuki Fukumuro, NASDA PR deputy director. Fukumuro quickly admitted that NEC would be allowed to bid for Japan’s new spy satellite system, after a token contract moratorium.

Back at the JDA, a grand total of six senior officials will take up to 10% pay cuts for one to three months plus one official will receive a 10-day suspension, JDA chief Fukushiro Nukuga told the media at his November 20 resignation press conference.

The speech followed a report, which admitted that there had been “some incidents that could be regarded as a systematic cover-up,” perhaps referring to the 31 officials suspected of Berlin-bunker style burning of documentation that might have provided evidence.

But the worst thing about the affair, according to observers, has been the brazen arrogance of NEC. In his October 23 resignation speech, NEC Chairman Tadahiro Sekimoto, now under personal investigation for his role in the affair, denied any involvement but resigned out of “social responsibility” for the affair, astonishing Kubozono in particular.

“Sekimoto’s act was spineless. If he had honor he would have resigned to take responsibility, not quibbled. He showed no mettle and is a very poor example for younger business leaders. I fear for Japan’s future.”

An even poorer analysis comes from Youichi Teraishi, Editor of Japan’s ‘scandaru’ [scandal] daily, the Nikkan Gendai. He says that Sekimoto’s act compared unfavorably with Yakuza (the Japanese Mafia) standards of conduct. “This Oyabun [Japanese gang boss] showed a lack of chivalry. Captains of industry are supposed to be able to demonstrate this, but Sekimoto lacked the class,” he says.

Lastly, the scandal has left NEC seething that it was singled out for a brutal slap on the wrist. “Everyone is doing it, why should we be the scapegoat?” admitted one NEC official. “Our top management just stuck their heads in the sand and got shafted,” complained another.

This article first appeared in Global Technology News.