Japan’s Financial Services Agency Rolls Out Revised AML/CFT Guidelines

TOKYO - The Japanese Financial Services Agency (FSA) has published updated FAQs on its Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) guidelines, aimed at improving the effectiveness of financial institutions’ risk-based approaches to managing these risks.

Revised Guidelines Take Effect

The revised guidelines, which took effect on April 2, are designed to reduce prescriptive requirements and enhance the sophistication of the risk-based approach. Financial institutions (FIs) were required to ensure full compliance with the guidelines by March 31, 2024.

Key Changes

• Continuous Customer Due Diligence: FIs are now allowed to carry out continuous or ongoing customer due diligence (CDD) at a frequency corresponding to the customer’s risk rating. This means that low-risk customers and transactions can be reviewed using event-driven risk assessments without requiring periodic reviews.
• Transaction Monitoring and Screening: The FAQs clarify requirements for transaction monitoring and screening, including the need for FIs to promptly update their lists of sanctioned persons and entities and complete screening checks within a “reasonable” timeframe after new sanctions-related notifications are issued by the Ministry of Foreign Affairs (MFA).
• Politically Exposed Persons: The revised guidelines treat Politically Exposed Persons (PEPs) of international organizations in accordance with their risks, just like other customers.

Aims and Requirements

The FSA’s revised FAQs aim to enable financial institutions to perform perpetual Know Your Customer (KYC) and ongoing CDD in a more systematic and efficient manner. To achieve this, FIs are required to:

• Strengthen System Governance: Implement robust governance structures to manage risk and ensure compliance.
• Validate Effectiveness: Validate the effectiveness of their systems and processes through regular testing and monitoring.
• Take Appropriate Measures: Take measures appropriate to the risks they face, including implementing controls and procedures to mitigate those risks.

Options for Smaller Financial Institutions

For smaller financial institutions that may lack sufficient management resources, cooperation with industry associations or using collaborative systems may be an option.

Expert Insights

According to Hiroshi Ozaki, Executive Advisor for KPMG AZSA LLC and a former Chief Financial Inspector and Director of the FSA’s AML/CFT Policy Office, the revised guidelines will enable FIs to improve their risk-based approaches and reduce prescriptive requirements. “The revisions are designed to promote improved effectiveness of the systems FIs should now have in place,” Ozaki said.