TOKYO (Reuters) - The Osaka Securities Exchange is investigating how Universal Entertainment Corp 6425.OS accounted for millions of dollars paid in 2010 to advance the Japanese firm's casino project on Manila Bay, people with direct knowledge of the inquiry said.
The exchange's involvement is the first time the payments have drawn the attention of Japanese regulators. The FBI and Philippine authorities have been investigating $40 million in payments to a politically-connected consultant in Manila since last year.
The exchange, which oversees Universal's Jasdaq stock listing, has asked the company to explain how the payments were treated in Universal's financial statements for the fiscal year to March 2010, said people with knowledge of the request, who didn't want to be named as the investigation is ongoing.
Universal has said it carried out its business in the Philippines lawfully. The company, which also makes pachinko machines, announced in December it filed a defamation lawsuit against Reuters for reporting on its payments to Rodolfo Soriano, a former consultant to the gaming regulator in the Philippines. Universal declined to answer specific questions about its accounting.
In a statement last month, Universal said there was a "need to verify the suitability of accounting procedures", and it would revise its accounting if directed to do so by a panel of three outside experts it has commissioned to look into the payments.
One of the issues examined by the Osaka exchange involves a $10 million payment that was wired to Soriano from a Universal affiliate in Hong Kong and immediately circulated back to Universal by a former employee in May 2010, as the company was preparing to release its financial statements that June, said the people with knowledge of the investigation.
The exchange is focused on whether Universal improperly booked part of the payment as an asset on its balance sheet, inflating its profits, the people said.
A spokesman for the Japan Exchange Group, the OSE's holding company, said it did not comment on any investigation underway at a specific company. Soriano could not be reached for comment.
Reuters was first to report in December that the $10 million was wired to Soriano's firm and immediately circulated back to Universal's accounts with the objective of closing the books on a loan that Universal determined could not be recovered.
Universal has sued three former employees over the $10 million transfer, claiming they made the payment without authorization.
A Universal representative told a Philippine congressional hearing on the payments on November 28 that the transaction had been neutral to Universal's accounts because a bank cheque for $10 million from HSBC, made out to Universal, arrived on the same day $10 million was transferred to a firm registered in Soriano's name. The representative did not say who, if any individual, signed the cheque.
"Nothing lost, nothing gained. But, as Universal Entertainment, we don't know what is this transaction," Masahiro Terada, the president of Tiger Resort, Leisure and Entertainment, the company set up to operate the Manila casino, told the hearing. "It came back. Return, return."
But the exchange is questioning whether Universal sought to avoid taking a charge for the loan as well as other aspects of the accounting for the $30 million that remained with Soriano, people with knowledge of the matter said.
The $10 million payment was booked as the repayment of a loan to a firm called AZ Games International which had been dissolved for several months at the time of the transfer, according to people with knowledge of the transaction and records viewed by Reuters. Universal originally lent the money to AZ Games in 2008 to invest in Philippine casino clubs, said a person with direct knowledge of that deal.
One of the problems from an accounting perspective is that part of the $10 million was booked as a fixed asset related to its plot of land for the casino on Manila Bay, said people with knowledge of how the payments were accounted for.
That has raised questions over whether its profits were boosted by not fully accounting for what would have normally been a cost to dispose of a bad loan.
"It goes without saying, but if what's on the balance sheet does not represent a payment to a real counterparty - a real asset with value - then that's a problem," said Mitsuru Tagaya, a professor at Aoyama Gakuin, one of five outside accounting experts who reviewed Universal's accounting record at the request of Reuters.
The Philippines National Bureau of Investigation has been examining the payments to Soriano as a potential bribery case.
People interviewed by the FBI have said U.S. investigators have also indicated an interest in whether the payments violated the Foreign Corrupt Practices Act. The FBI has been involved as there is evidence that funds paid to Soriano originated at a U.S. bank account of a Universal affiliate.
Universal founder and chairman Kazuo Okada has been in a legal dispute since early 2012 with U.S. casino magnate Steve Wynn. Okada had been an investor in Wynn Resorts (WYNN.O) before the board voted to redeem his investment at a discount after finding his company paid $110,000 to entertain gaming regulators from South Korea and the Philippines. Wynn said that made Okada an unsuitable partner.
Okada has said he was singled out after raising questions about Wynn's operations in Macau. The two sides remain locked in a legal fight that is playing out in courts in the United States, Japan and the Philippines.
Investigators from the Nevada Gaming Control Board have also been looking into Universal's activity in the Philippines, people with direct knowledge of that investigation have said. Universal has a gaming license in Nevada as a maker of slot machines.
Reporting by Nathan Layne, Taro Fuse, Kevin Krolicki and Teppei Kasai; Editing by Ian Geoghegan