Photo/Illutration Kawasaki Heavy Industries Ltd.'s shipyard in Kobe, where it builds and repairs submarines for the Maritime Self-Defense Force (Nobuhiro Shirai)

Kawasaki Heavy Industries Ltd. is in deep waters for using slush funds to entertain and provide gifts to Maritime Self-Defense Force submarine crew members. 

The Osaka Regional Taxation Bureau has determined that approximately 1.2 billion yen ($7.6 million) in expenses related to this practice cannot be deemed legitimate business expenses eligible for tax exemption.

KHI is facing a significant tax penalty for the illicit practice.

The scandal sheds light on the long-standing, corrupt ties between defense officials and KHI, which builds and repairs submarines for the MSDF.

The investigation covers a six-year period ending in March 2023. Any alleged financial misreporting prior to that period no longer falls within the statute of limitations.

KHI has already set aside 600 million yen to cover the anticipated additional tax penalties. 

The company has confirmed plans to amend its tax filings by the end of the fiscal year but declined to provide further details on the investigation.

According to sources, KHI's Kobe shipyard had been utilizing slush funds for at least two decades by fabricating false invoices to subcontractors.

Part of the MSDF’s payment to KHI for submarine repairs and inspections was directed into these secret funds.

The investigation has found that the money was not only used for necessary items related to submarine operations but also for personal items gifted to crew members.

These include electronics, golf equipment, tablets, gaming consoles and gift vouchers.

Additionally, KHI wined and dined the crews before passing the bills to the subcontractors, who then paid them from the slush funds.

All 12 KHI submarines in the MSDF undergo regular inspections or repairs at the shipyard.

The Defense Ministry has launched a special investigation into the matter, as the scandal involves alleged bribery, potentially violating the Self-Defense Forces Personnel Ethics Law.

KHI has also established an investigative committee, headed by an outside lawyer, to conduct an investigation. 

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