Japanese authorities have a good understanding of money laundering and terrorism financing risks, but certain areas of their AML/CFT framework could be further improved, according to an evaluation report published Monday by the Financial Action Task Force (FATF) and Asia-Pacific Group on Money Laundering.
According to the report, Japan’s key money laundering risks relate to activities of organized crime groups. These activities include drug trafficking, theft, loan sharking, gambling, and prostitution; illegal remittances and transfers involving foreigners; and specialized types of fraud, including extortion. Japan’s terrorist financing risks, while low, relate to activities of Islamic extremists associated with the Islamic State of Iraq and the Levant, Al Qaida, and other groups.
Overall, “Japan is delivering good results in the collection and use of financial intelligence to investigate and prosecute money laundering and terrorist financing,” the FATF stated. “It also demonstrated that it is providing constructive cooperation with counterparts in other countries.”
The report addressed a handful of areas in need of improvement, including the following:
Improved preventative AML/CFT compliance measures. Not all financial institutions in Japan have a reasonable understanding of their ML/TF risks or apply risk-based mitigation measures. Nor do they have an adequate understanding of their obligations concerning ongoing customer due diligence, transaction monitoring, and beneficial ownership identification/verification. “They have a general awareness of the need to enhance their AML/CFT frameworks and practices, but have no clear deadlines to meet the new obligations,” the report stated.
Improved access to beneficial ownership information. “Accurate and up-to-date beneficial ownership information is not yet consistently available on legal persons,” the report stated. “There are challenges in relation to the transparency of domestic and foreign trusts, in particular trusts that are not created by or administered by trust companies.” Also, according to the report, law enforcement agencies don’t seem to have the necessary tools to establish beneficial ownership associated with more complex legal structures, “and the risks associated with legal persons and arrangements are not well understood.”
Stronger investigative focus on complex ML crimes. Law enforcement agencies demonstrate a strong investigative focus on organized crime groups but do not appear to sufficiently focus on money flow, “including on the profit-taking levels involving complex fraud, large-scale foreign predicate offenses, and proceeds from drug-related crimes,” the report stated.
Improved efforts in the confiscation of criminal proceeds. Despite its cross-border cash smuggling risks, “Japan has yet to demonstrate effective detection and confiscation of falsely/not declared cross-border movements of currency,” the report stated.
Improved TF enforcement. According to the report, a conservative approach to prosecution “constrain[s] Japan’s ability to prosecute potential TF and punish such conduct dissuasively.” The report added Japan’s limited understanding of at-risk nonprofit organizations (NPOs) “has impeded competent authorities’ ability to conduct targeted outreach to bolster NPOs’ CFT preventive measures. This has placed Japanese NPOs at risk of being unwittingly involved in TF activity.”
Stronger implementation of targeted financial sanctions. The FATF recommended Japan improve its implementation of financial sanctions against financial institutions (FIs), virtual currency exchange providers, and designated nonfinancial businesses and professions. Financial supervisors, including the Japanese Financial Services Agency, the main financial sector regulator and supervisor, “have not made use of their range of sanctions to take efficient and dissuasive actions against FIs, including banks,” the report stated.
In response to the report, Japan has created a council, jointly chaired by the Finance Ministry and the National Police Agency, drawing up a three-year action plan to enhance its AML/CFT framework.