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STR Report: Japan’s AML/CFT Supervision Falls Short in Several Areas

Tokyo, [Date] - The Financial Action Task Force (FATF) has released a report highlighting several shortcomings in Japan’s anti-money laundering and counter-terrorism financing (AML/CFT) supervision.

Lack of Transparency and Understanding of Money Laundering Risks

Financial supervisors in Japan have not been conducting thorough “fit and proper” reviews of major shareholders and managers of financial institutions (FIs), particularly when it comes to screening beneficial owners. This has resulted in a lack of transparency and understanding of money laundering and terrorist financing risks across various sectors.

Detection of Unregistered/Unlicensed FIs

The report notes that the detection of unregistered/unlicensed FIs is based on information gathered from competent authorities and third parties, rather than proactive measures. While detected entities are forced to shut down their business and publicize the measures taken against them, there appears to be a lack of clear deadlines for financial institutions to comply with AML/CFT obligations.

Progress in Upgrading Risk Understanding and Supervision

The Japanese Financial Services Agency (JFSA), which plays a leading role in AML/CFT supervision, has made some progress in upgrading its risk understanding and supervision. However, the report finds that the agency’s AML/CFT risk-based approach is still at an early stage and that other supervisory authorities are even further behind.

Targeted Onsite Inspections and Sanctions

The JFSA’s focus on bigger banks and virtual currency exchange providers (VCEPs) is appropriate from a risk-based approach perspective, but the number of targeted onsite inspections of FIs is limited. The agency also conducts periodic submission of information and specific onsite/offsite activities when necessary for other FIs. Furthermore, the report notes that JFSA has not made use of its range of sanctions to take efficient and dissuasive actions against financial institutions, including banks.

Positive Developments

On a positive note, Japan has successfully identified and taken action against unregistered service providers, and JFSA’s dedicated team for VCEP supervision has a sophisticated understanding of the virtual currency ecosystem and ML/TF risks.

Recommendations for DNFBPs

The report also highlights the need for Designated Non-Financial Businesses and Professions (DNFBP) supervisors to conduct more thorough AML/CFT supervision on a risk-based approach, particularly in sectors identified as facing specific money laundering and terrorist financing risks.

Conclusion

Overall, the report concludes that Japan’s AML/CFT supervision falls short in several areas, including transparency, beneficial ownership, and sanctions. The country is urged to take immediate action to address these shortcomings and improve its overall AML/CFT framework.