Japan Strengthens Regulations Against Money Laundering in Response to Globalization and Financial Crime

Enhancing Anti-Money Laundering Environment

In a bid to meet international standards and combat sophisticated financial crime, Japan’s Financial Services Agency (FSA) has published proposed guidelines on money laundering and terrorist financing measures for certified public accountants and audit firms. The new rules aim to enhance the country’s anti-money laundering environment in line with Financial Action Task Force (FATF) standards.

Background

The FSA’s move comes as cross-border transactions increase due to globalization, presenting opportunities and challenges for market participants. Criminality within the global financial system is becoming more complex, making it essential for countries to strengthen their regulations against money laundering and terrorist financing.

FATF Recommendations

According to FATF, Japan was found to be underperforming in its anti-money laundering environment in 2021, requiring “enhanced follow-up.” In response, the Japanese government drafted proposed revisions to the Act on the Prevention of Transfer of Criminal Proceeds. The revised rules are expected to become effective as of April 2024.

Proposed Guidelines

The new guidelines require certified public accountants and audit firms to take a risk-based approach when providing services. They must frequently examine risks and compile facts detailing customers’ risk profiles, including:

• Geographic Risk: Transactions originating from high-risk countries or regions
• Nature of the Business: Industries or sectors vulnerable to money laundering and terrorist financing
• Political Exposure: Transactions involving Politically Exposed Persons (PEPs)

Additionally, administrative scriveners, certified public accountants, and tax accountants will be required to report suspicious transactions where they suspect proceeds from criminally connected activities.

Enhanced Due Diligence

High-risk transactions above 2 million yen will require verification of clients’ assets and income. Enhanced due diligence will also be necessary in cases involving PEPs.

Record Keeping

Records of the verification process must be kept for seven years, including the name of the individual who completed the verification. Failure to adhere to these requirements may result in regulatory penalties from the FSA and damage to reputation.

Conclusion

The proposed changes signal Japan’s commitment to meeting FATF expectations and reducing risks associated with money laundering and terrorist financing. The regulations aim to combat exploitation of corporate structures, shell companies, special purpose vehicles (SPVs), and nominee director arrangements used to facilitate criminal activities.

Financial institutions should pay closer attention to their clients’ activities to ensure compliance with the FSA requirements applicable to them. For more information on implementing AML/CFT programmes, procedures, training, or remediation of inadequate client identification files, contact Philippa Allen or Manabu Nagano.