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INTERNATIONAL > East Asia & Pacific

Companies turn to OSINT to detect hidden shareholders of business partners

  • December 31, 2021
  • , Mainichi , Lead
  • JMH Translation

By Matsuoka Daichi


“The antagonistic relationship between the United States and China is constantly changing and regulatory regimes along with it. We won’t be able to conduct business without frequent information updates,” said a man who works in the export management division at a middle-sized trading company. “‘China risk’ is a matter of life and death.” He was just finishing a mid-December online seminar entitled “”China risk’ Japanese corporations should be aware of.”


The seminar was hosted by FRONTEO, an IT company in Tokyo’s Minato Ward. The company has developed a system that collects financial disclosures, PR bulletins, and other public information of about 300 million firms around the world and analyzes this data using artificial intelligence (AI) to uncover risks hidden in supply chains.


It is generally regarded as difficult to detect risks associated with second-tier suppliers. But FRONTEO claims that its system can visualize risks of tenth-tier suppliers. FRONTEO expects the system to garner the interest of Japanese corporations, which are increasingly edgy about operational risks incurred by the accelerating pace of sanctions and retaliation the United States and China impose on each other. Approximately one hundred firms attended the December seminar.


The system also allows corporations to determine in their supply chains shareholders, such as the Chinese government, that exercise de facto control of corporations. In an increasing number of cases, deep analysis of shareholders reveals that corporations seemingly unrelated to the Chinese government are actually controlled by it, operating as “hidden shareholders” and exerting influence indirectly through state enterprises.


According to FRONTEO, in 2016, 39 Japanese companies were under the de facto control of the Chinese government through indirect holdings. In 2021, the number rose to 60. Inside China, the number of firms indirectly controlled by the government rose from 6,588 to 63,739 over the same period. The number also rose significantly, from 225 to 703, in the United States as well.


A senior employee of a major transportation firm who attended the seminar said that his company once considered expanding in China by purchasing a Chinese air-cargo company. His firm hired an agency to investigate the target company because a close relationship between its founder and the Chinese government had been rumored. Nothing of note came back after a thorough investigation, but his firm decided to forgo the deal. “We felt it was too odd that nothing at all turned up.”


“When purchasing a corporation, it is extremely important to study and judge risks that are not prominent,” says the man, commenting on the usefulness of seminars of this kind.


Morimoto Masahiro, President and CEO of FRONTEO, is a graduate of the National Defense Academy and a former member of the Maritime Self-Defense Force, an unusual background for an IT founder. With demands for analysis of economic security and geopolitical risks increasing, the company launched a support business for corporations using OSINT, open-source intelligence, which utilizes public information for analysis.


“We must employ various technologies to analyze the increasingly complex global economy,” Morimoto says.


Japanese corporations are already entangled in the U.S.-China conflict, which is often called the “New Cold War.” In September 2020, the U.S. enacted a ban on the export of semiconductors containing American technology to Huawei, a major Chinese communications device maker. Kioxia (former Toshiba Memory Holdings), a large semi-conductor manufacturer, halted exports to Huawei, even though it was one of the company’s main customers. Likewise, the U.S.’s enacting a ban on imports of items originating in the Xinjiang Uyghur Autonomous Region, where the use of forced labor has been exposed, has forced Japanese corporations to take urgent measures.


“China is catching up with the United States in advanced technology, while embracing civil-military integration,” says Sato Ryo, an assistant professor at the University of Tokyo who specializes in international politics and the U.S.-China relations. “[Considering this,] political developments will continue to affect global economic activities for the foreseeable future,” he said, adding, “It is crucial for corporations hoping to avoid shrinking back from business opportunities to strengthen intelligence on economic security, including accurately understanding regulatory frameworks.” (Slightly Abridged)


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