Financial Crime World

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Japan’s Financial Institutions Struggle with Anti-Money Laundering Measures

A recent assessment by the Financial Action Task Force (FATF) has highlighted concerns over Japan’s financial institutions’ compliance with anti-money laundering (AML) and counter-terrorist financing (CFT) measures.

Inadequate Risk Assessments and Mitigation Measures

The report found that some systemically important banks and virtual currency exchange providers (VCEPs) are higher risk institutions that lack a thorough understanding of their ML/TF risks. While some financial institutions have begun conducting their own risk assessments, others fail to apply mitigation measures based on identified risks.

Gaps in Knowledge and Implementation

Many institutions have not fully grasped the recently introduced or modified obligations, such as ongoing customer due diligence (CDD), transaction monitoring, and beneficial ownership (BO) identification and verification. The report also noted that DNFBPs, such as real estate agents and lawyers, struggle with AML/CFT compliance.

Virtual Currency Exchange Providers

VCEPs, which have been regulated and supervised for AML/CFT purposes since 2017, generally lack a clear understanding of terrorist financing risks. While they apply basic AML/CFT requirements, few have specific policies to tailor mitigation measures to their risks or apply enhanced due diligence (EDD) or CDD measures.

DNFBPs

DNFBPs tend to apply basic preventive measures, but many lack a clear understanding of the BO concept. Furthermore, not all DNFBPs are covered by STR reporting obligations, and those that are often fail to report suspicious transactions.

Supervisors’ Challenges

The report praised Japan’s financial supervisors for conducting standard “fit and proper” reviews for major shareholders and managers of financial institutions. However, it noted that supervisors face challenges in screening beneficial owners and detecting unregistered or unlicensed financial institutions.

Progress and Recommendations

The JFSA has made progress in upgrading its risk understanding and supervision with the establishment of a dedicated AML/CFT team and adoption of enforceable guidelines. However, other supervisory authorities are at an earlier stage in their implementation of a risk-based approach to supervision.

Recommendations

  • Financial institutions should conduct regular risk assessments and apply mitigation measures based on identified risks.
  • Supervisors should improve their understanding of ML/TF risks and take targeted and timely action against non-compliant institutions.
  • Sanctions should be more efficient and dissuasive, and there should be clearer deadlines for financial institutions to comply with AML/CFT obligations.
  • DNFBPs should improve their understanding of BO concepts and apply CDD measures.
  • VCEPs should develop specific policies to tailor mitigation measures to their risks.

Source

Financial Action Task Force (FATF). (2023). Japan Mutual Evaluation Report.