At a KDDI subsidiary, 99.7% of an entire division's revenue was fake. On March 31, 2026, an investigation report revealed that ¥246.1 billion (about $1.6 billion) in fictitious transactions had gone undetected for seven years at one of Japan's largest telecom companies. Only two employees were involved. How did that happen, and what does it say about the gap between Japan's governance reforms and reality?

KDDI: A Telecom Giant You May Not Know

KDDI is Japan's third-largest telecommunications company, operating the popular "au" mobile brand with annual revenues of roughly $40 billion. Alongside NTT Docomo and SoftBank, KDDI forms the backbone of Japan's communications infrastructure.

The fraud occurred within BIGLOBE, a KDDI subsidiary that originated as an internet provider under NEC before KDDI acquired it in 2017, and G-Plan, a grandchild company under BIGLOBE that ran an internet advertising agency business.

What Happened: ¥246.1 Billion in Phantom Transactions

On March 31, 2026, KDDI released the findings of a Special Investigation Committee chaired by attorney Toshiya Natori and composed of external lawyers and certified public accountants. A department head at G-Plan, identified as Employee A, along with a subordinate, Employee B, had been conducting "fictitious circular transactions" (kakū junkan torihiki) continuously from at least August 2018 through December 2025.

Circular transactions are a type of fraud where nonexistent goods or services are traded among multiple companies in a loop, artificially inflating revenue. In this case, Employee A fabricated advertising orders from clients that did not exist, routing them through advertising agencies in an elaborate loop that created the appearance of legitimate business activity. Of the 218 trading partners on the books between April 2017 and December 2025, 21 were drawn into that loop.

The cumulative fictitious revenue totaled ¥246.1 billion (roughly $1.6 billion), along with ¥150.8 billion in fictitious operating profit. Of that, ¥32.9 billion (about $220 million) actually leaked out of the KDDI group to external parties. An astonishing 99.7% of the advertising agency division's reported revenue was completely fabricated. The entire business was, for all practical purposes, a fiction sustained only by numbers on paper.

How It Started: A Small Loss That Snowballed

The motive behind the fraud was remarkably trivial. Employee A had launched the advertising agency business but failed to generate the expected results, facing losses of just a few hundred thousand yen (a few thousand dollars) and millions of yen in unmet sales targets. Fearing the business would be shut down, Employee A began fabricating transactions to cover the shortfall.

Initially, Employee A planned to generate legitimate profits to offset the fake ones. That never happened. Because each turn of the circular transaction generated fees for intermediary agencies, the losses compounded like a snowball rolling downhill.

In a bitter irony, Employee A was recognized and awarded within KDDI for the division's seemingly outstanding performance. The investigation also revealed that Employee A received approximately ¥30 million ($200,000) in dining expenses from certain upstream agencies between September 2023 and December 2025. The committee noted this may have been a factor in Employee A's decision to continue the scheme.

Why It Went Undetected for Seven Years: A Triple Failure of Controls

The Special Investigation Committee concluded that internal controls failed at every level of the corporate hierarchy.

At G-Plan, only Employees A and B had expertise in the advertising business. The authority to order, verify, and approve payments was concentrated entirely in these two individuals, a dangerous condition the Japanese call zokujinka (over-reliance on specific personnel). In Japanese corporate culture, specialized work tends to cluster around individuals with domain expertise, making it structurally difficult for others to perform oversight.

At BIGLOBE, there was a critical lack of "risk sensitivity." When revenue from the advertising business surged, no one questioned whether the numbers were real. Payments worth enormous sums were approved based solely on internal spreadsheets prepared by Employee A, with no independent verification of whether advertisements were actually placed.

At KDDI headquarters, subsidiary performance was evaluated primarily through profit-and-loss statements, with insufficient scrutiny of cash flows. Ironically, KDDI's own "group finance" system, where the parent company lends working capital to subsidiaries, provided the very funds that fueled the fraudulent transactions.

Experts quoted by the Nikkei business newspaper described KDDI's internal controls as "e ni kaita mochi", a Japanese expression meaning "a rice cake drawn in a picture." It looks perfect on paper, but you cannot eat it. The controls existed in form but not in substance.

The Moment of Discovery: The CEO's Gut Feeling

The person who first flagged the problem was Makoto Takahashi, then KDDI's president and now its chairman. At a management strategy meeting on February 19, 2025, reviewing BIGLOBE's annual plan, Takahashi questioned the advertising division's explosive growth. According to the investigation report, he said the business was growing so fast it was frightening and asked whether it was sound from a compliance standpoint, adding that it had become larger than the telecom business and that something might eventually go wrong.

That remark set KDDI's standing auditors and internal audit department in motion. Combined with questions from the external auditor, it led to an investigation team being formed in October 2025. In December, KDDI told BIGLOBE to rein in the size of the transactions, the circular flow of money stalled, payments from the upstream agency were late, and Employee A confessed. Seven years of meticulously crafted false documentation collapsed under the most primitive of realities: the money simply was not there.

Japan's Governance Reform: Impressive Form, Questionable Substance

The KDDI scandal exposes the limitations of Japan's corporate governance reform movement, widely seen as one of the most ambitious in Asia.

Japan introduced its Corporate Governance Code in 2015, and the Tokyo Stock Exchange (TSE) has since driven significant structural changes. In April 2022, the TSE reorganized its market segments, requiring companies on the top-tier "Prime Market" to have independent outside directors comprising at least one-third of the board. Today, over 98% of Prime Market companies meet this standard.

In March 2023, the TSE went further, urging listed companies to implement management practices conscious of their cost of capital and stock prices. This sparked a wave of share buybacks, dividend increases, and cross-shareholding reductions. On paper, Japanese corporate governance has never looked better.

But the KDDI case demonstrates that form does not equal function. Having more outside directors on the board does not automatically mean better oversight of subsidiary operations three layers down. When documents are in order, formal compliance checks pass without friction, but that very smoothness can mask fundamental problems.

Toyo Keizai, a leading Japanese business publisher, annually ranks companies by the number of internal whistleblowing reports they receive. In their 2025 edition, 783 companies disclosed their whistleblowing data. The top-ranked company, Nissan Motor, recorded 2,424 reports, equivalent to 1.8 per 100 employees, well above the rule-of-thumb benchmark of 1 per 100 that suggests a healthy reporting culture. However, many companies still resist disclosing their numbers at all, revealing a transparency gap that persists across corporate Japan.

Global Comparisons: Different Structures, Same Core Problem

Comparing KDDI's scandal with international corporate fraud cases reveals telling similarities and differences.

Enron (2001, USA): Top management used special purpose entities to keep enormous debts off the balance sheet. The company held roughly $63 billion in assets when it collapsed, the largest US bankruptcy at the time. The scandal destroyed Arthur Andersen, one of the "Big Five" audit firms, and led to the Sarbanes-Oxley Act (SOX), which requires CEOs and CFOs to personally certify the accuracy of financial reports.

Wirecard (2020, Germany): The payments company fabricated approximately €1.9 billion in fictitious assets. Auditor EY failed to detect the fraud for years, shaking confidence in Germany's entire financial regulatory framework.

The KDDI fraud differs from Enron in that it was not directed by top management, it was driven by two employees at a grandchild subsidiary. But this distinction actually makes the problem more alarming, not less. As large corporations diversify and add layers of subsidiaries, fraud can emerge in blind spots that even well-intentioned oversight cannot easily reach.

What all three cases share is that documentation appeared impeccable. Contracts, invoices, and payment records were all in order. This "paper perfection" neutralized the very audit mechanisms designed to catch fraud. Formal compliance became a trap, providing a false sense of security that discouraged deeper investigation.

KDDI's Response and What Comes Next

KDDI CEO Koji Matsuda apologized at a press conference, calling the situation "the height of regret." Both Chairman Takahashi and Matsuda returned 30% of their monthly compensation for three months. Six executives at BIGLOBE and G-Plan, including both presidents, resigned, and Employees A and B were dismissed for cause. KDDI is weighing civil damage claims and criminal complaints against those involved. The company is exiting the advertising agency business.

Announced reforms include strengthened vendor management, separation of authorization duties, enhanced risk analysis for new businesses, stricter monthly cash flow monitoring, and the establishment of a new "Group Governance Strengthening Council."

In financial terms, the ¥246.1 billion in fictitious revenue is an accounting correction. What actually left the company was ¥32.9 billion, plus ¥64.6 billion in additional losses including goodwill impairment. For a company generating over ¥1 trillion ($6.7 billion) in annual operating profit, this is absorbable. But the damage to trust cannot be quantified.

Can Japanese Corporate Governance Truly Change?

The fundamental question this scandal raises is whether adding more rules can prevent fraud, or whether something deeper must shift.

CEO Matsuda acknowledged at the press conference that "as our business diversified, dialogue about understanding new businesses and the kind of talent they require was insufficient." This confession applies not just to KDDI but to many Japanese conglomerates navigating the tension between growth through diversification and maintaining meaningful oversight.

Japan's governance reforms since 2015 have achieved remarkable progress in structural terms. But the KDDI scandal is a stark reminder that the transition from "form to substance", a phrase often used in Japan's own reform documents, remains very much a work in progress. True reform requires not just better paperwork, but a cultural shift toward actively verifying what is happening on the ground.

How does your country handle corporate fraud and internal controls? Should governance be enforced through legislation like the post-Enron SOX Act, or is changing corporate culture the more important priority? We'd love to hear your perspective.

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