Auctions Booming, But So Are The Crooks

Back to Contents of Issue: April 2002


It's time for Japan's online auctioneers to get their house in order or face having the authorities step in.

by Daniel Scuka
Japan's online auction sites have been doing a roaring trade. Yahoo! Japan has more than 90 percent of the market, with some 1.3 million of its 23 million users actively using the auction service, and there are several others vying for second place. The wannabes include Rakuten (which posted JPY6.78 billion in sales last year, slashing its losses to JPY4.16 billion -- half of 2000's shortfall) and DeNA's Bidders site. Daily transactions have reached the hundreds of millions of yen, and participating in online auctions is now one of the most popular Web activities for PC users in Japan. Yet, all is not well in this e-commerce paradise -- a few rotten apples are spoiling the barrel by selling both stolen and illegal goods, raising the specter of tighter regulation.

Competition in the online auction business has recently intensified and industry watchers have begun to question whether anyone really has a chance to catch up to Yahoo. EBay decided in late February to close its Japan business, citing the country's economic problems and competition from Yahoo. But almost from the beginning, online auction sites have been dogged by fraud and the fencing of stolen goods. In October 2000, the Anti-Counterfeiting Association of Japan (comprised of major corporations and intellectual property rights organizations) asked Yahoo! to take steps to promote fair trading among buyers and sellers, including making clear the identity of the exhibitor and preventing the sale of illegal products.

So what sort of hot products can fencers sell on Japanese online auction sites? How about M29 air guns, which haven't been produced legally in this country for 16 years. The Yomiuri Shimbun reported in February that the guns, which use plastic bullets but can be modified to fire live ammunition, were being sold via Internet auction sites and that Tokyo police had seized several lots of these weapons.

At one time, all you needed to sell something on Yahoo!'s auction site, for example, was an email address. Coverage of fraud and fencing in the media has forced all sites to start requiring positive ID, and in March 2001, Yahoo! even went so far as to establish a fixed ID registry for all sellers, for which it charged a monthly fee by credit card. EBay established an insurance system to ensure that any buyer who failed to receive the product purchased could be compensated.

But lately, Japanese police have seen a steep increase in complaints, particularly in the November-December 2001 period and neither the police themselves nor the online auction owners seem able to cope under the existing regulations and laws. "Even after Yahoo! cracked down," says Taro Takahashi, a pseudonym for one local expert who advises the National Police Agency on Internet-related issues, "fraud was only reduced by about one-third." The current law predates the Internet, and police here have not applied its provisions as stringently as they do to off-line auction companies. For example, only off-line auctions must be licensed. Also, online auctions are relieved of the obligation to identify the seller, although they now try to do so and this would be one of the central requirements under the NPA proposals. But in many cases of fraud, the seller's information turns out to be fake or the ID belongs to an innocent third party.

In February, Japanese and US media including the Nihon Keizai Shimbun and New York Times carried reports of a proposed shakeup in Japan's online auction industry initiated by the NPA. The controversy focused on a package of legislative proposals floated by the agency late in December that would require operators of online auction sites to obtain licenses, post their contact information and license numbers on their auction sites, inform police if they discover any stolen goods being offered for sale via their site, maintain transaction records, and submit to supervision by prefectural public safety commissions, which would have the power to suspend a Net auction operator found to be in violation of the rules.

With public opinion in mind, several online auction sites have endorsed the proposed NPA regulations. Yahoo! has posted supporting commentary on its site, and one spokesperson for DeNA says customers could "participate in online auctions with more confidence and feel safe under the regulations," adding that "they might help prevent bad sellers from selling stolen goods."

Admittedly, there are a lot of holes in the NPA proposals. They do not make clear which sites would be deemed 'official' (and hence be obligated to obtain licenses and submit to supervision by prefectural public safety commissions), nor is it explicitly clear whether they would apply to foreign-owned online auction sites.

Takahashi says he was told by the NPA that the proposals would not apply to foreign sites (although they would be 'eligible' to apply to be governed by them), and that the package was actually animated by a desire to help site owners crack down on fraud.

But some, like Gohsuke Takama, an expert on Internet security, aren't mollified, and point to potential technical problems with implementing the regulations. "Applying one country's local laws to any Internet industry will cause problems -- especially international jurisdiction issues -- and the people who put this legislation together clearly didn't consider that. How can a used-goods broker law in Japan be applied to an Internet auction company which is registered outside of Japan, owned by non-Japanese, has transactions processed through a credit card company located outside of Japan, operates on Web servers located outside of Japan, but has Japanese pages," asks Takama.

The auction sites are also worried. "We strongly hope these regulations don't over-control us and will not be an obstruction for free competition in a free Internet market," says the DeNA spokesperson.

Ultimately, the regulations themselves may be inadequate to really put a dent in the incidence of fraud, and online auction sites are likely taking the NPA proposals as a signal that they'd better get serious about policing their sites -- before the police try to do it for them. Perhaps the only certain thing is that all that online buying and selling is likely to remain a juicy target for crooks and con artists of all stripes. @

Daniel Scuka,
daniel@japaninc.com,
is senior contributing editor to J@pan Inc and a freelance technology writer. Sign up for his weekly Wireless Watch email and video newsletter at www.japaninc.com/ newsletters/index.html?list=ww.

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