Financial Crime World

Japan Fails to Meet FATF’s Risk-Based Approach to Financial Crime Compliance Standards

Introduction

A recent report by the Financial Action Task Force (FATF) has highlighted that Japan still needs to improve its understanding of money laundering (ML) and terrorism financing (TF) risks. The Japanese government has been urged to enhance its national risk assessment, interagency coordination, and compliance with anti-money laundering (AML)/countering the financing of terrorism (CFT) regulations.

Current State of Financial Crime Compliance in Japan

The FATF report noted that some financial institutions in Japan have a reasonable understanding of their ML/TF risks, but others lack this understanding. Designated non-financial businesses and professions (DNFBPs), such as casinos and real estate professionals, also have limited knowledge of AML/CFT obligations. Virtual asset service providers in Japan only apply basic AML/CFT requirements.

Challenges and Proposed Solutions

The Japanese government intends to set up a cross-agency team to target money laundering and will submit proposed legislation to parliament in 2022 that will introduce tougher penalties for ML/TF offenses and deficiencies in controls. However, challenges at the organizational level still need to be addressed. Financial institutions in Japan face difficulties with ongoing due diligence, assessing risks involved in new digital transaction services, and adopting a risk-based approach to AML/CFT.

Best Practices for Enhancing Financial Crime Compliance

To protect themselves from greater scrutiny and ensure compliance with regulations, financial institutions in Japan can benefit from technology and intelligent use of data. Four essential elements of best practice are:

  • Make Use of Technology: New digital technologies, such as artificial intelligence and machine learning, have the potential to make AML/CFT measures faster, cheaper, and more effective.
  • Adopt a Risk-Based Approach: This involves combining automated but static analyses with human judgment and adopting an approach that offers real-time oversight of customer or transactional risk.
  • Update and Upgrade: Financial institutions should keep software up to date by upgrading when necessary and updating regularly to ensure comprehensive protection.
  • Get the Most Out of Your Data: Accurate, timely data from both internal and external sources can provide financial institutions with the latest information needed to verify identity and manage risks effectively.

Conclusion

By adopting these best practices, organizations in Japan can protect themselves and enhance their reputation as a leading financial center. LexisNexis Risk Solutions offers advanced financial crime screening solutions and dependable watch list data to help financial institutions achieve greater effectiveness in complying with regulations and improving operational efficiency.