The Financial Action Task Force (FATF) has published its mutual evaluation of Japan, which graded the country as in need of “enhanced follow-up.” 18 other countries share this designation including the US, China, South Korea, and Australia. Here, we explore some of the key findings and recommendations.
Overall, Japan was judged to have a “good understanding” of its key money laundering (ML) and terrorist financing (TF) risks. However, FATF argued Japan should ensure knowledge of TF risks extends to Japanese officials who may not be counter-terrorism experts. Higher risk areas like virtual assets are addressed, but greater coordination is needed. There are also “deficiencies” in Japan’s TF Act which, alongside a “conservative approach to prosecution”, limit the country’s ability to dissuade such activity.
While bigger banks have a “reasonable understanding” of ML/TF risks, other financial institutions (FIs) were less well regarded by FATF. In particular, many FIs did not fully understand recently introduced AML/CFT obligations and had not set deadlines for complying with these rules. Designated non-financial businesses and professions (DNFBPs) were judged to have a particularly low level of awareness of their ML/TF risks, and associated obligations.
The Japanese Financial Services Agency (JFSA), the national regulator, is at an “early stage” in implementing a risk-based approach, with the depth of its AML/CFT supervision “gradually improving”. However, FATF states that the JFSA has not made full use of its sanctions powers to dissuade FIs from non-compliance.
Limitations in Japan’s beneficial ownership (BO) structures were also noted. While all FIs and DNFBPs have to maintain BO information, this is not yet consistently available to all legal persons. Transparency issues remain with both domestic and foreign trusts.
Delays to the implementation of sanctions were also highlighted, though FATF noted these have been “significantly reduced as a result of recent administrative changes.” The report called out measures targeting weapons of mass destruction (WMD) in North Korea specifically, given their importance to the region. Weaknesses remain in the implementation of targeted financial sanctions by FIs and DNFBPs.
The key measures FATF listed that would enable Japan to strengthen its AML/CFT system include:
- Working to ensure FIs, virtual asset service providers (VASPs) and DNFBPs understand their AML/CFT obligations and “implement them in a timely and effective manner”. Enterprise risk assessments and the application of ongoing, risk-based customer due diligence and transaction monitoring were among the key specific recommendations.
- Improvements in the prioritization and investigation of “severe ML cases” as well as an increase in the statutory maximum sentence “to at least the same level as the serious predicate offenses most regularly generating proceeds of crime in Japan”.
- Criminalizing the financing of an individual terrorist or terrorist organization “in the absence of a link to a terrorist act.” Japan should also ensure non-profit organizations at risk of TF abuses are monitored, with a focus on those in higher-risk regions.
In response to the findings, it has been reported that Tokyo is establishing a policy panel to conduct an assessment of risk awareness at banks and other financial institutions. Legal changes – including a review of penalties and an expansion of investigatory powers – are also being considered.
The mutual evaluation of Japan follows FATF’s June 2021 plenary session, which included recommendations on new AML/CFT technologies, a review of progress implementing the Travel Rule, and a strengthening of standards on beneficial ownership. FATF plenaries are a good indicator of the issues that are likely to be raised in mutual evaluations, and the wider best practices that FATF expects governments and organizations to adopt. You can read more about the plenary session in our review.