© 2011 Corgentum Consulting, LLC

The Developing Story of AIJ Proves the

Importance of Operational Due Diligence

Posted on March 5, 2012 by admin

As recent developments of Japan’s AIJ scandal unfold, it becomes more and more apparent that

much of the problems AIJ’s investors may face could have most likely been prevented through

some basic operational due diligence. According to Bloomberg, as of February 24, AIJ is under

investigation by the FSA because they were not able to account for 185.3 billion yen or 2.3

billion US dollars in assets. If AIJ is found guilty, it could be one of the largest frauds in Japan’s

history.

Bloomberg also reported that some investors who had been interested in allocating their assets

with AIJ have come forth to say that AIJ would not allow operational due diligence to be

performed on their firm or funds. When a fund manager rebukes an investor’s attempts to even

perform due diligence this is perhaps the reddest of the red flags and should have halted all

thoughts of further investor due diligence. For the many that did not attempt to perform due

diligence, they will now have larger issues than simply finding the right due diligence provider.

This is a perfect example of why transparency between an investor and a fund is a key. If a fund

refuses to allow due diligence, operational or otherwise, to commence, investors should be leery

of investing capital with them.

In addition to apparently refusing investor due diligence requests, AIJ was reportedly producing

unusually high returns while providing very little information about their purportedly blackbox

strategy. Often relegated to the past are notions are such purely blackbox strategies. Investors are

increasingly, perhaps willing to sacrifice such unusually high returns for more transparent

investment strategies. Such total blackbox strategies are perhaps another red flag for investors

and something that operational due diligence could have picked up on right away during sanity

checks of fund performance as well as having an understanding of risk management processes

and procedures. Operational checks and balances also would have likely yielded more questions

than answers and raised yellow flag alarms which would have required further due diligence.

This developing AIJ story also perhaps highlights the faults in Japan’s continuing focus on

regulatory isolationism. Japan’s insular focus on pension system asset management has not

apparently expanded beyond its traditional isolationist roots. The Japanese investment

community apparently is still struggling to unravel itself from the belief that supposed better

performance trumps a lack of transparency. The Japanese investment industry will not improve

until Japanese investors realize that applying neutral operational risk reviews of fund managers is

not only appropriate but certainly essential for the Japanese financial systems to evolve beyond

the old world Keiretsu trust and do not verify paradigm, once shattered by Commodore Perry.

© 2011 Corgentum Consulting, LLC

The emerging AIJ story is a vital example of how important operational due diligence is, and a

story which likely contains many more plot twists to come, including recent revelations that

Japanese government officials assisted in marketing the AIJ funds.

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