Financial Crime World

JAPAN NEEDS TO STEP UP FINANCIAL CRIME COMPLIANCE EFFORTS, EXPERTS SAY

Financial Institutions Face Growing Pressure for AML/CTF Compliance in Japan

Tokyo - The recent report by the Financial Action Task Force (FATF) has highlighted weaknesses in Japan’s financial crime controls, putting pressure on financial institutions to improve their anti-money laundering (AML) and counter-terrorism financing (CTF) compliance.

Weaknesses Identified in National Risk Assessment and Assessments of Financial Institutions

While Japan has made significant progress in understanding the risks associated with money laundering and terrorism financing, there are still many areas where the national risk assessment and other assessments could be improved. The report noted that some financial institutions have a “reasonable understanding” of their AML/CTF risks, but others have only a “limited understanding,” which has an impact on the application of the risk-based approach to money laundering recommended by the FATF.

Designated Non-Financial Businesses and Professions (DNFBPs) Face Challenges in AML/CTF Compliance

Designated non-financial businesses and professions, such as casinos, real estate professionals, and law firms, were found to have a low level of understanding of AML/CTF risks and obligations. Virtual asset service providers in Japan were also noted to only apply basic AML/CTF requirements.

Government Response: Cross-Agency Team and Proposed Legislation

The Japanese government plans to set up a cross-agency team to target money laundering and submit proposed legislation to parliament in 2022 that will introduce tougher penalties for money laundering offenses and deficiencies in controls.

Challenges Faced by Financial Institutions in Japan

Financial institutions in Japan face specific challenges around anti-money laundering processes, including:

  • Ongoing due diligence
  • Assessing the risks involved in new digital transaction services such as payment service providers, peer-to-peer lenders, and mobile money transfers

Best Practices for AML/CFT Compliance

To protect themselves from increased scrutiny, financial institutions and DNFBPs in Japan need to adopt best practices for AML/CFT compliance. Experts agree that technology and intelligent use of data are key to efficient and effective AML processes.

Four Essential Elements of Best Practice:

  • Making Use of Technology: New digital technologies, such as artificial intelligence and machine learning, can make AML/CTF measures faster, cheaper, and more effective.
  • Adopting a Risk-Based Approach: This approach allows for real-time analysis of customer or transactional risk, rather than relying on automated but static analyses.
  • Updating and Upgrading: Keeping software up to date with the latest screening capabilities is essential for comprehensive protection.
  • Getting the Most Out of Data: Accurate, timely data from internal and trusted external sources can provide institutions with the latest information needed to verify identity and accounts and manage risks effectively.

Conclusion

Organizations in Japan have much to gain from adopting advanced solutions that help protect not only themselves but also Japan’s reputation as a leading financial centre. By implementing best practices for AML/CFT compliance, financial institutions and DNFBPs can ensure they are meeting their regulatory obligations and protecting themselves from the risks associated with non-compliance.