Financial Crime World

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Banking Compliance Regulations in Japan: A Comprehensive Overview

Japan’s banking sector operates within a complex web of regulations aimed at ensuring the stability and integrity of the financial system. At the heart of these regulations lies the Banking Act, which outlines the scope of banking business, capital adequacy requirements, accounting and disclosure provisions, and supervision of banks.

Categories of Banking Business in Japan

The Banking Act divides the scope of banking business into six main categories:

  • Typical banking businesses
    • Deposit taking
    • Lending
    • Payment services
  • Ancillary businesses
    • Securities underwriting
    • Investment advisory services
  • Securities businesses
    • Issuance and trading of securities
  • Insurance businesses
    • Life insurance and non-life insurance
  • Peripheral businesses
    • Real estate investment trust (REIT) business
    • Asset management
  • Trust businesses
    • Trust services for individuals and corporations

Regulatory Authorities in Japan

In Japan, the Financial Services Agency (JFSA) serves as a regulatory authority for financial institutions based on the Banking Act. Banks are corporations established in accordance with the Commercial Code and have obtained a license to conduct banking business under the Banking Act. The JFSA has the power to:

  • Request reports and materials concerning a bank’s business or financial conditions
  • Conduct on-site inspections at bank premises
  • Penalize misconduct
  • Order a bank to hold a part of its assets within Japan

The Bank of Japan (BOJ) is not a regulatory authority per se under the Banking Act but conducts on-site examinations in accordance with bilateral agreements between the BOJ and financial institutions that have current accounts with it. This includes all city banks, regional banks, trust banks, foreign banks in Japan, shinkin banks, securities firms, and money market dealers.

Other Relevant Laws in Japan

In addition to the Banking Act, banks are subject to various other laws, including:

  • The Anti-Monopoly Act: prohibits banks or other companies engaged in financial business from acquiring or holding more than 5% of voting rights in another company in Japan
  • The Act on Limitation on Shareholding by Banks and Other Financial Institutions: restricts the shares that may be owned by a bank to an amount equivalent to its equity capital (Tier 1)
  • The Deposit Insurance Act: provides protection for deposits up to a certain amount in the event of a bank’s failure
  • The Financial Instruments and Exchange Act: regulates investment-type financial products and sales and solicitation rules for user protection
  • The Act on Prevention of Transfer of Criminal Proceeds: requires financial institutions to verify customer identity at the time of a transaction and report suspicious transactions
  • The Depositor Protection Act: provides compensation for damages suffered by depositors in cases where cash cards are counterfeited or stolen

These regulations aim to ensure the stability and integrity of Japan’s financial system while also providing protection for depositors and promoting fair competition among financial institutions.