Financial Crime World

JAPAN: AML/KYC Compliance for Small Businesses Gets a Boost

The Japanese Financial Services Agency (FSA) has recently issued updated FAQs on anti-money laundering and combating the financing of terrorism (AML/CFT) guidelines to help small businesses improve their compliance. These revised guidelines aim to enhance the risk-based approach and reduce prescriptive requirements for financial institutions.

Key Changes in the Revised Guidelines

  • The selection process for customers requiring simplified due diligence (SDD) is based on risk assessments, allowing continuous or ongoing customer due diligence at a frequency corresponding to the customer’s risk rating.
  • Financial institutions can review low-risk customers and transactions using event-driven risk assessments without conducting periodic reviews, enabling them to focus resources on areas of higher risk.

Risk-Based Approach Emphasis

The FAQs emphasize that continuous Customer Due Diligence (CDD) based on the risk-based approach must be premised on the effectiveness of risk assessments and transaction monitoring systems. This means that financial institutions should:

  • Conduct thorough risk assessments for all customers
  • Implement effective transaction monitoring systems
  • Continuously review and update their risk assessments

Sanctions Compliance Requirements

The guidelines clarify requirements regarding risk-based compliance with laws and regulations related to domestic and foreign sanctions. Financial institutions are required to:

  • Promptly update their lists of sanctioned persons and entities
  • Complete screening checks within a “reasonable” timeframe after the issuance of new sanctions-related notifications by the Ministry of Foreign Affairs

Treatment of Public Officials and Employees of International Organizations

The revised FAQs confirm that public officials or employees of international organizations must be treated in accordance with their risks, just like other customers.

Impact on Small and Medium-Sized Financial Institutions

For small and medium-sized financial institutions that may not have sufficient management resources, cooperation with industry associations or using collaborative systems may be an option. This can help them perform perpetual KYC and ongoing CDD in a more systematic and efficient manner.

Expert Insights

Hiroshi Ozaki, executive advisor at KPMG AZSA LLC and a former chief financial inspector and director of the FSA’s AML/CFT Policy Office, noted that the revisions will promote improved effectiveness of AML/CFT measures.

Conclusion

The revised FAQs are expected to enable financial institutions to perform perpetual KYC and ongoing CDD in a more systematic and efficient manner. However, it is crucial for them to ensure the effectiveness and validation of transaction monitoring and filtering systems. By implementing these guidelines, financial institutions can improve their AML/CFT measures and reduce the risk of non-compliance.