The Force is coming to Japan
The Financial Action Task Force (FATF) that is. Japan has been a member of the FATF since 1990, and is also part of the Asia/Pacific Group on Money Laundering (APG), which became an Associate Member of the FATF in 2006. This year will mark the Fourth Round of Joint FATF/APG Mutual Evaluations of Japan, currently under way as a document-based examination, with an on-site visit scheduled for October/November this year, and the results discussed during the plenary session scheduled for June 2020.
Japan does not have a good track record with these examinations, so it is not a surprise that a concerted effort has been under way, directed by the FSA, to lift up the compliance standards and “pass the exam”. As a lawyer friend recently commented: “Everyone who has been living in Japan for a while knows that Japanese are very good at passing exams. Since all prior mutual evaluations from member countries are publicly available, the FSA has been studying those results and directing financial institutions towards remediation. This has been a pretty collaborative effort.”
Going back all the way to the second mutual evaluation report discussed at the June 1998 plenary meeting, it was concluded that the Japanese anti-money laundering system was not effective in practice, and the delegation of Japan had to report back to the FATF on the measures it had taken to improve its regime.
The FATF has since developed 40 recommendations which are used to grade the countries being examined. With the 2008 report on the third mutual evaluation, Japan was still marked non-compliant on the following recommendations:
- Customer due diligence
- Politically exposed persons
- Correspondent banking
- Designated non-financial business or profession (DNFBP)
- Internal controls, compliance & audit
- Special attention for higher risk countries
- Foreign branches & subsidiaries
- Beneficial owners — legal persons
- Beneficial owners — legal arrangements
In addition, Japan only got partially compliant marks on the following dimensions:
- New technologies & non-face-to-face business
- Unusual transactions
- Shell banks
- Conventions
- Mutual legal assistance (MLA)
- Dual criminality
- Extradition
So this constitutes 40% of the criteria where Japan has been missing the mark. In preparation for the fourth mutual evaluation, the FSA initially published “Guidelines on measures against money laundering and terrorism financing” in February 2018. This was intended as a minimum standard. In August 2018, “The current status and issues of measures against money laundering and terrorist financing” were announced, followed in September by “The status of Japanese financial institutions based on the 4th FATF-Japan Mutual Review.”
Everybody living in Japan certainly has experienced that opening a bank account has become much more difficult compared to ten years ago, an indication of the improved Anti-Money Laundering (AML) and Know-Your Customer (KYC) measures put in place that so often not only affect the crooks, but even more so the common people. So we will see how this year’s examination pans out.
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