Japan’s Financial Services Agency Publishes Revised FAQs on Risk-Based Approach to AML/CFT Compliance

Enhancing AML/CFT Regulations in Japan

In a move aimed at enhancing the sophistication of its anti-money laundering and combating the financing of terrorism (AML/CFT) regulations, Japan’s Financial Services Agency (FSA) has published revised frequently asked questions (FAQs) on its AML/CFT Guidelines. The updated FAQs, which came into effect on April 2, 2024, are designed to promote improved effectiveness and efficiency in financial institutions’ (FIs) systems for managing AML/CFT risks.

Streamlining Customer Due Diligence

• Key change: The revised FAQs clarify customer due diligence (CDD) processes, allowing FIs to select customers for simplified due diligence (SDD) based on risk assessments.
• Benefits:
  • Low-risk customers and transactions can undergo continuous or ongoing CDD at a frequency corresponding to their risk rating.
  • This approach enables financial institutions to allocate resources more efficiently and focus on higher-risk areas.

Enhanced Risk-Based Compliance

• Continuous CDD: Financial institutions must ensure that their risk assessments and transaction monitoring systems are effective in identifying potential money laundering risks.
• Domestic and foreign sanctions: FIs are expected to promptly update their lists of sanctioned persons and entities and complete screening checks within a “reasonable” timeframe after receiving new sanctions-related notifications from the Ministry of Foreign Affairs (MFA).

Strengthening System Governance

To ensure that financial institutions can perform perpetual KYC and ongoing CDD in a more systematic and efficient manner, it is essential for them to strengthen system governance, validate the effectiveness of their systems, and take measures appropriate to the risks they face. For small and medium-sized financial institutions with limited management resources, cooperation with industry associations or using collaborative systems may be an option.

Expert Insights

Hiroshi Ozaki, Executive Advisor for KPMG AZSA LLC and a former Chief Financial Inspector and Director of the FSA’s AML/CFT Policy Office, notes that the revised FAQs will enable financial institutions to focus on higher-risk areas while streamlining their CDD processes. “This is an opportunity for FIs to enhance their risk-based approach to AML/CFT compliance and improve their overall effectiveness in preventing financial crimes,” he says.

As Japan’s financial sector continues to evolve, the revised FAQs provide a clearer understanding of the expectations surrounding AML/CFT compliance. Financial institutions must prioritize strengthening system governance and implementing effective risk-based approaches to remain compliant with the updated guidelines.