Mizutani Kensetsu Co., an engineering company suspected of tax evasion, is believed to have hidden some 2 billion yen in income in the two business years to the end of August 2004, sources said Monday.

Shigeyuki Nakamura, 55, a Mizutani Kensetsu board member, and Fumio Obi, 58, a board member at Obi Kensetsu K.K., a Mizutani business partner, were arrested by Tokyo prosecutors Saturday on suspicion of evading 230 million yen in corporate taxes by concealing 760 million yen in income at Mizutani Kensetsu for the year to Aug. 31, 2003.

They allegedly hid the income by booking a bogus loss related to a land deal in Iwaki, Fukushima Prefecture.

The company is also believed to have reported a bogus loss in the year to Aug. 31, 2004, over a land transaction in Kuwana, Mie Prefecture, the sources said.

In addition to the fake land deals, Mizutani Kensetsu is suspected of booking losses on loans it never made, they said.

Prosecutors on Monday raided the office of Maeda Corp. in connection with the case. Maeda is a listed construction company that has been a subcontractor for Mizutani Kensetsu on work related to nuclear power plants.

On Sunday, prosecutors searched the office of Rainbow Bridge, a Tokyo-based nongovernmental organization engaged in humanitarian aid for North Korea, to investigate the organization’s ties to Mizutani.

The NGO said after the raid that Mizutani Kensetsu gave it heavy machinery worth 300 million yen to 400 million yen several years ago, apparently as an “up-front investment” for the construction company to do business with North Korea once it normalized diplomatic ties with Japan.

The investigation has also targeted Tokyo-based publisher Gyosei Mondai Kenkyu-sho (Research Institute for Administrative Issues), which is suspected of receiving 120 million yen in fictitious consulting fees from Mizutani Kensetsu, the sources said.

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