Report on the investigation by the external investigation team comprised of external experts, and initiatives based on their recommendations on measures to prevent reoccurrence

We apologize sincerely once more to all stakeholders, including customers, business partners, shareholders and investors, for any inconvenience and concern caused due to the matter in which two people, a former officer of AIN HOLDINGS INC. (the “Company”) and a former officer of a subsidiary of the Company, were arrested and indicted on August 31, 2023 while employed at the companies, and subsequently convicted. 

The Company has undertaken investigations of the facts and causes since the day of the arrests, and worked to formulate measures to prevent reoccurrence. We have put together concrete measures to prevent reoccurrence, and future initiatives based on the report on the investigation by the investigation team comprised of external experts (hereinafter, External Investigation Team) that we received on May 9, 2024, and the recommendations on measures to prevent reoccurrence in that report.

We will strive to regain the trust of stakeholders at an early stage by working together as a whole company to implement measures to prevent reoccurrence in the future. 

Compiled as the understanding of the Company based on the report on the investigation by the External Investigation Team.

Two people, a former officer of the Company and a former officer of a subsidiary of the Company, were arrested on August 31, 2023 while employed at the companies, on charges of Obstruction of Auctions Related to Public Contracts (Article 96-6(1) of the Penal Code) in relation to an auction at KKR Sapporo Medical Center. The Company sincerely acknowledged the fact that AIN Group's business activities had raised suspicions of violations of the law. To thoroughly investigate these issues, analyze their causes, and implement preventive measures for robust compliance management and accountability to their stakeholders, the Company established the Investigation Team composed of independent experts with no vested interests in AIN Group, to investigate the specific facts, to the extent necessary to meet such objectives above.

• To clarify facts regarding the KKR Sapporo Matter
• To clarify the existence of matters similar to the KKR Sapporo Matter and if such matters exist, provide the relevant facts regarding such matters
• To analyze the root causes of the Criminal Case and any similar matters if any, and provide recommendations for measures to prevent their recurrence
• Any other matters that the Investigation Team considers necessary to fulfill the Investigation's objectives

None of the organizations to which the members of the Investigation Team belong has any advisory engagement contracts or other interests with the Company or its group companies.
Also, from the viewpoint of effectiveness and feasibility of the Investigation, foxcale Inc. was selected to conduct the digital forensic investigation because of its professional knowledge and experience, as well as its independence and neutrality from the Company and its group companies.

• Period During Which the Investigation was Conducted: from October 5, 2023, the date the Investigation Team was established, to May 1, 2024
• Period Covered by the Investigation: from September 27, 2017 to May 1, 2024, the last day of the Investigation

• Review of Relevant Documents
• Interviews with Executives and Employees（31 executives and employees of Ain Group）
• Digital Forensic Investigation（a total of 682,620 pieces of data）

40 cases in which contractors were National and/or Public Hospitals etc. (which means, in addition to hospitals established by KKR as in the KKR Sapporo Matter, hospitals such as national university corporations, public university corporations, local public entities and local independent administrative institutions.), among the bidding cases for On-site Pharmacies, including those involving the public solicitation proposal method, where the the Company or its group companies obtained preferential negotiation rights by October 5, 2023 - the date when the Investigation Team was established.

This Report was compiled for Ain Group to clarify the facts concerning the Criminal Case and similar cases, investigate the causes of these cases, and formulate measures to prevent recurrence. This Report was submitted to Ain Group as the report on May 9, 2024, in consideration of the fact that, as described below, an appeal has been filed against the first instance judgment in the Criminal Case on May 1, 2024 and additional time will be required before the judgment is finalized. Although the Investigation covers the facts concerning the Criminal Case to the extent necessary to achieve the objectives of the Investigation mentioned above, the responsibility for fact-finding and legal evaluation of the Criminal Case lies with the criminal justice system and is not within the remit of the Investigation Team. Therefore, these aspects are not covered by the scope of the Investigation.

Of 40 cases within the scope of the investigation, there were the three following cases, (1) to (3), including the KKR Sapporo Medical Center case, in which the  the facts of the replacement of the proposals with changes in proposal content were acknowledged.

Around April 2020, sales activities for the matter, such as information gathering, were started. On the morning of December 18, 2020, a proposal was submitted to KKR Sapporo Medical Center. This proposal included a monthly rent of 4.5 million yen for the land; provided, however, that the second floor of the building, which houses the On-site Pharmacy, would be leased back to KKR Sapporo Medical Center at a monthly rent of 500,000 yen, effectively reducing the net monthly rent to 4 million yen.  The hospital parties concerned told that there was a competitor who proposed a higher monthly rent, and that AP might not be selected as the preferred bidder under the current terms and told that he would like AP to replace the proposal. On December 21, 2020, Ain Group replaced its original proposal to KKR Sapporo Medical Center with a proposal for a monthly rent of 7.5 million yen for the land, with the second floor of the building including the On-site Pharmacy leased back to KKR Sapporo Medical Center at a monthly rent of 500,000 yen, making a total proposal of 7 million yen per month (the first replacement). In response to the request by the hospital parties concerned, Ain Group revised the portion concerning the monthly rent and clarified the free proposal’s content. They made corresponding changes to the proposal and made a replacement again on December 23, 2020 (the second replacement).

The selection method of the operator in this case is a two-step method involving bidding for the fixed-term lease of the On-site Pharmacy building and general competitive bidding using the comprehensive evaluation bidding method for the operator of the On-site Pharmacy. In this matter, after submitting a proposal with a monthly rent, the Company replaced the proposal with a revised proposal with an increased monthly rent on the bid submission date, which was set for the day after the proposal submission deadline. They were told that the official rent amount in the bid was only the rent amount of the fixed-term building lease in the bidding procedure conducted on the next day, and consequently, any discrepancies between the monthly rent stated in the proposal submitted the day before the bidding and the bid price were not considered problematic. Even within the company, employees were aware in advance that the proposal would be replaced after the original submission deadline, they did not raise any questions about this action. It was not acknowledged that the replacement of the bid submission itself had been conducted.

In this case, after submitting a proposal that included the monthly rent, etc., the company reworked the proposal to increase the monthly rent in exchange for dropping the additional condition, and at a presentation on the following day, the Company replaced the proposal with a revised proposal that increased the monthly rent, rather than the previously submitted proposal, by distributing the revised proposal to the attendees.

During the Investigation, it was discovered that, In addition to (2) and (3) above, there were other matters, at one of which modifications to the format of the proposal occurred after the submission deadline. However, the modifications made were specifically to prevent the identification of the company names involved in the submission.  

• On-site Pharmacy system
  Insured pharmacies are under regulations, which prohibits them from having an integrated structure with insured medical institutions. Therefore, On-site Pharmacies that were located on the premise of an insured medical institution and could be accessed without going through a public road or equivalent road etc. were not permitted. However, based on the comment that this restriction posed undue difficulties for patients using wheelchairs or the elderly, the requirement for a public road etc. between the insured medical institution and insured pharmacy was eliminated, allowing for the establishment of On-site Pharmacies directly within the premises of insured medical institutions from October 1, 2016. Furthermore, the amendment of the National University Corporation Act, which took effect on April 1, 2017, have encouraged national universities to more actively utilize their lands and other assets. This amendment has also facilitated the opening of On-site Pharmacies within national university hospitals.
• Public solicitation proposal method
  The public solicitation proposal method involves a process where the contractor publicly solicits planning proposals, and the contractor selects the preferred bidder from the bidders which submitted the planning proposals based on the contents of their proposal. Following this selection, the contractor negotiates with the preferred bidder to finalize and execute a contract.In the actual procurement of On-site Pharmacy matters through the public solicitation proposal method, the typical sequence was as follows: First, a public solicitation proposal was issued, and interested operating companies were required to submit a declaration of participation by a specified deadline. Once a preferred bidder was selected based on their proposals and/or presentations, then the contractor and the preferred bidder negotiated the terms and conditions for the conclusion of the contract based on the contents of the proposal. Depending on the matter, during the negotiation process, the final contract terms may change from those at the time of the planning proposal or in some cases, the contract may not be concluded at all.

Aside from the presence of general provisions in some regulations and guidelines, it is acknowledged that there was minimal specific consideration, management, or supervision of legal and compliance risks related to sales activities for the opening of new pharmacies in the On-site Pharmacy business. Additionally, it is acknowledged that the internal control and internal audit functions are concentrated on risk management, efficiency, compliance, etc. of operations at each store and on audits of those operations. It is also acknowledged that the management division, which functions as the head office, has not been able to ensure the effectiveness of management and supervision of sales activities for opening new pharmacies in the On-site Pharmacy business, nor has it been able to conduct audits of these activities. Moreover, it is acknowledged that the employee side appear to be conscious that the directors were confirming decision-making and business execution in individual matters, including the replacement of proposals, and gave their de facto or implicit approval to these actions. On the other hand, it is also acknowledged that the directors’ side were not explicitly requested to confirm, approve, or provide directions, and there was a lack of clear awareness that failing to respond to these threads could be interpreted as giving confirmation or approval. Consequently, it is considered that the responsibility for these decisions remained ambiguous.

It is considered that Mr. Otani's basic philosophy of "no tolerance for crookedness" seems to have taken root within Ain Group, reflecting an awareness that goes beyond mere the level of compliance. Additionally, it is acknowledged that the anti-bribery and anti-corruption efforts are taken seriously by Ain Group and adherence to these policies is strictly enforced, in connection with the Ain Group businesses which frequently interacts with public officials such as doctors of National and/or Public Hospitals etc. With regard to the basic rules, policies and regulations concerning the On-site Pharmacy business, Ain Group has established general provisions for compliance and maintaining fair relationships with business partners. However, these are not more than somewhat abstract. This omission makes it challenging for these guidelines to be effectively operational in the front-line sales environment. Meanwhlle, at the Compliance Committee, matters such as the investigation of the KKR Sapporo Matter  were not included in the agenda, and instead the committee focused solely on examining and addressing regarding the whistleblowing system.  Moreover, it should be pointed out that there may have been a lack of sufficient awareness or a misperception among executives or supervisors, and that awareness efforts and training from the perspective of carrying out compliance were insufficient.

From the perspective of fulfilling social responsibility through proper risk management,especially as the social responsibility of a company in a sector impacting human health, Ain Group has established related regulations. However, these regulations failed to include risks related to sales activities for opening new stores in the On-site Pharmacy business. Therefore, internal audits specifically focused on risk management regarding sales activities for opening new stores in the On-site Pharmacy business have not been conducted to date.

• Efforts to raise awareness among executives and managers (measures related to "awareness")
• Enhancement of the effectiveness of internal control and risk management initiatives (measures related to "system")

It is essential for executives to shift their mindset and continuously demonstrate this to the entire company. It is necessary for top management to accurately recognize the risks  and to convey a clear message acknowledging these risks and expressing determination to address them in the future. However, raising awareness cannot be solely the responsibility of top management; it must be promoted as a company-wide effort involving other members of the executives and the managers who oversee operations. These efforts to reform "awareness" should not be temporary measures in response to the criminal case but rather part of a medium- to long-term plan that is developed and implemented continuously.

Initiatives related to the "mechanisms" themselves in a more organizational and systemic sense involve the effective implementation of internal control and risk management measures. To prevent the recurrence of the Replacement, the following concrete measures may be considered:

• Enhancement of rules, policies, and manuals related to compliance and risk management
• Establishment of workflow related to the business (clarification of responsibilities)
• Undertakings in awareness efforts and training
• Strengthening of risk management function on sales activities for opening new pharmacies in the On-site Pharmacy business by the administrative division
• Strengthening internal audits on sales activities for opening new pharmacies in the On-site Pharmacy business
• Governance by outside directors and corporate auditors

• We revised the Compliance Committee Regulations for the Compliance Committee to more appropriately fulfill its roles and responsibilities of aiming at the achievement of the establishment, permeation and embedding of the compliance system.
•  We revised the Risk Management Regulations to resolve discrepancies between the Company’s current regulations and organizational structure, and reorganize the risks that each division’s head manages to strengthen risk management. 
•  We revised internal regulations aimed at building a system for Internal Audit Office to report directly, etc., to demonstrate the governance functions of the Board of Directors and the Board of Corporate Auditors. 
•  We prepared and distributed a practical manual for people in charge of sales (pocket manual on the handling of public medical institutions, etc., in sales activities) 

1. Consideration of candidates for new appointment to the Board of Directors so that it has a skills matrix able to demonstrate each skill to the full, including legal compliance 
2. Preparation of internal regulations regarding matters such as fair competition, prohibition of acts that may impede the fairness of auctions, bidding, etc.  
3. Establishment of work flow in business (clarification of whereabouts of responsibility) 
4. Enhancement of the internal audit system 
5. Enhancement of the anti-bribery and corruption policy by providing a manual and FAQ on the concept of civil servant and quasi-civil servant with concrete  examples, etc. 
6. Greater effectiveness of risk management by management divisions based on regulations on compliance and risk management, etc. 
7. Building of opportunities for the management team to exchange opinions and information with outside officers and external experts 
8. Notifications and training for officers and employees in all positions (officer and employee education with external experts invited as lecturers, e-learning, training and study meetings, circulation of related materials, questionnaires) 

• We will ensure the promotion of effective measures for the prevention of reoccurrence through the participation of outside officers in the continuous planning of initiatives for the prevention of reoccurrence. 
• Top management will take the lead in formulating and executing continuous plans with accurate understanding of the current situation and issues. 

I apologize sincerely to all stakeholders, including customers, business partners, shareholders and investors, for any inconvenience or concern in regard to the recent matter in which former officers of the Company and a subsidiary of the Company were arrested while employed at the companies. 
In dealing with this matter, we have once again etched into our hearts the AIN Group Behavioral Guidelines, which start with “We are mindful of corporate activities based on good sense and ethics, aware at all times that we are engaged in work concerned with people’s health.” Personally, and as the representative of the company group, I pledge that we will implement corporate activities sincerely and with this strong ethical sense, and unite the thoughts of everybody at all group companies. 
I promise firmly that by putting this into practice and continuing it, we will grow into a company that is trusted by stakeholders more than it has even been. 

President and Representative Director
AIN HOLDINGS INC.

2024/05/16 Notice Regarding the Correction in the English version of the Investigation Report by the External Investigation Team
2024/05/10 Notice Regarding the Establishment of Special Website for Recommendations on Measures to Prevent Recurrence and Voluntary Return of Officer Remuneration
2024/05/09 Notice Regarding the Receipt of the Investigation Report by the External  Investigation Team
2024/04/18 Notice Regarding the Judgment against Former Directors of the Company and its Subsidiary 
2023/11/13 Notice Regarding the Trial of Former Directors of the Company and Subsidiary 
2023/09/21 Notice Regarding the Prosecution of Officers of the Company and Subsidiary 
2023/08/31 Notice Regarding the Arrest of an Officer of the company and an Officer of Subsidiary of the Company