Japan
Report on the Observance of Standards and Codes: FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

This paper focuses on observance of standards and codes on the Financial Action Task Force (FATF) recommendations for antimoney laundering and combating the financing of terrorism (AML/CFT) measures in Japan. The paper describes and analyzes such measures and provides recommendations on how certain aspects of the system could be strengthened. It also sets out the levels of compliance of Japan with FATF recommendations and also provides recommendations on how certain aspects of the system could be strengthened.

Abstract

This paper focuses on observance of standards and codes on the Financial Action Task Force (FATF) recommendations for antimoney laundering and combating the financing of terrorism (AML/CFT) measures in Japan. The paper describes and analyzes such measures and provides recommendations on how certain aspects of the system could be strengthened. It also sets out the levels of compliance of Japan with FATF recommendations and also provides recommendations on how certain aspects of the system could be strengthened.

I. Introduction

1. This Report on the Observance of Standards and Codes for the FATF 40 + 9 Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism was prepared by the Financial Action Task Force (FATF). It summarises the anti-money laundering (AML)/combating the financing of terrorism (CFT) measures in place in Japan as of the time of the on-site visit from 5 to 21 March 2008 and shortly thereafter. The report describes and analyses those measures and provides recommendations on how certain aspects of the system could be strengthened. It also sets out the levels of compliance of Japan with the Financial Action Task Force (FATF) 40 + 9 Recommendations and provides recommendations on how certain aspects of the system could be strengthened (see the attached tables). The views expressed in this document are the views of the FATF, but do not necessarily reflect the views of the Boards of the IMF or World Bank.

II. Key findings

2. In general, the domestic crime rate is very low in Japan and the Police are well aware of the money laundering (ML) schemes used in Japan. The statistics held by the Japanese authorities reveal that for the last three years there were three major sources of criminal proceeds: drug offences, fraud and “loan-sharking” (i.e. illegal money lending). According to the National Police Agency (NPA), most of the drugs abused are smuggled in from overseas and then often distributed by criminal organizations, organized crime groups according to the Japanese designation, or Boryokudan, commonly known in the English-speaking world as “yakuza”. In 2006, organized crime groups were involved in around 40% of the money laundering cases. The origin of the laundered funds is prostitution, illicit gambling and “loan-sharking”. Recently, remittance frauds have been discovered, some of them also involve organized crime groups.

3. Four major types of frauds are used: i) “Ore-ore fraud” where phone calls are made to victims by swindlers pretending to be a relative, police officer, or practicing attorney under the pretext that they immediately need money to pay for something such as an automobile accident, and convince victims to transfer the money to a certain savings account; ii) fictitious billing fraud uses postal services or the Internet to send documents or e-mails demanding money and valuables based on fictitious bills, by which the general public is sometimes persuaded to transfer money to designated accounts; iii) loan-guarantee fraud is a method of fraud where a letter supposedly meant as a proposal is sent to the victim, persuading the victim to transfer money to designated accounts under the pretext of a guarantee deposit for loans and iv) refund fraud where swindlers pretending to be tax officers instruct people on the procedure for tax refunds and have victims use ATMs to transfer money to designated accounts. Another significant trend consists of the repeated loans of small amounts, around JPY 50 000 (EUR 300 / USD 475) at a higher interest rate than is legally permitted. Since 2003, the total amount of this kind of loan ranges between JPY 20 and 35 billion.

4. At the date of this report, Japan has not been the victim of terrorist actions committed in the country by individual terrorists or terrorist organisations listed by the United Nations. However, some groups, which committed terrorist acts are based in and have been active in Japan. The Japanese Communist League’s Red Army Faction, from which the Japanese Red Army (JRA), a Marxist-Leninist revolutionary organisation, later broke away, committed felonious crimes in Japan and the JRA has been responsible for major terrorist attacks in the 1970’s. Aum Shinrikyo, the cult organisation that was responsible for the Tokyo subway gas attack in 1995, is still active and recently committed crimes related to drug selling and fraud such as fund-raising activities.

Legal System and Related Institutional Measures

5. Japan has criminalised the concealment of drug crime proceeds through article 6 of the Anti-Drug Special Provisions Law of 1992. In 2000, the definition of “crime proceeds” was enlarged to the commission and the concealment of the proceeds of offences other than drug-related offences and includes offences contained in a list annexed to the Act on the Punishment of Organized Crime, which covers each of the designated categories of offences. The Japanese criminal law does not require a previous conviction for one of the predicate offences which generated the proceeds of crime. Attempt and self-laundering are punishable under both laws. Aiding, facilitating and counselling are criminalised in Article 62 of the Penal Code and abetting the commission of criminal acts is criminalised in Article 61 of the same code. The money laundering offence extends to any type of property by reference to the expression “proceeds of crime” with the exception of the Act on the Punishment of Financing of Offences of Public Intimidation which uses the term “funds”, the meaning of which does not meet the requirements of the Special Recommendation II.

6. Article 38 of the Penal Code provides for the punishment of offenders who wilfully and intentionally commit offences. This general rule therefore also applies to the money laundering offence. Under the Japanese legal system, criminal procedures are separate from civil and administrative procedures, so pursuit of criminal liability does not prevent civil or administrative procedures from being carried out as well. Japanese law does not impede civil or administrative sanctions when the factual situation is already the basis of criminal sanctions. Article 17 of the Act on the Punishment of Organized Crime and Article 15 of the Anti-Drug Special Provisions Law provide for punishment of the representative of a legal entity or any agent, employee or person engaged in the business of the legal entity who performs an act of money laundering in connection with the business of the legal entity. The offender shall be punished and a fine shall also be imposed upon the legal entity. Depending on the law, the amount of the fine varies between JPY 1 million and JPY 3 million (approximately EUR 6 000 / USD 9 450 and EUR 18 000 / USD 28 300), thus sanctions against legal persons cannot be regarded as dissuasive. From 2003 to 2007, only five legal persons have been convicted of money laundering and the amount of fines applied varied between JPY 1 million and 2.5 million.

7. The number of prosecutions regarding money laundering cases is steeply increasing (105 in 2003, 111 in 2004, 164 in 2005, and 225 in 2006) but remains low, especially in light of the problems related to drug consumption and organised crime organisations located in Japan. These figures can partially be understood by the decision to prosecute; public prosecutors only prosecute when they are almost certain of the conviction. The low number of conviction in money laundering cases, including prosecutions of legal persons, has a negative effect on the overall effectiveness of the criminalisation of money laundering.

8. Japan criminalises the activities enumerated in the Terrorist Financing Convention through the Act on the Punishment of Financing of Offences of Public Intimidation of 2002. The Act punishes any person who knowingly provides or collects funds for the purpose of facilitating the commission of an offence of public intimidation. However, the Japanese law only criminalises funds collection by terrorists and it is unclear in the law that indirect funds provision and collection are covered and that funds provision and collection for terrorist organisations and individual terrorists for any other purpose than committing a terrorist act is covered. The word “funds” is not defined in this law, but on the basis of its use in other laws, the Japanese term “shikin” signifies “funds, capital” and relates to cash and things easily convertible into cash. Therefore the word “funds” in the Act on the Punishment of Financing of Offences of Public Intimidation inadequately covers all aspects of SR. II which involves “assets of every kind” not only consisting of or easily convertible into cash.

9. Attempts are punishable and terrorist financing is a predicate offence for money laundering, with the exception of the attempt of terrorist financing offence (i.e. provision and collection of funds) and where funds provided or collected are legitimate. The common rules of the Penal Code are applicable to the intention, the criminal, civil and administrative sanctions, and the liability of legal persons. The offences of provision and collection of funds as well as the attempt to commit these offences are sanctioned with 10 years of imprisonment or a fine of not more than JPY 10 million (approximately EUR 60 000 / USD 94 500). This fine, when applied to legal persons, is not proportionate to the threat and too low to be considered as dissuasive. In addition, the number of investigations is very low, but the compliance and adherence to the law reality in Japan does not make the fact of no indictment itself a negative finding.

10. Japan has established a comprehensive and effective mechanism to confiscate, freeze and seize the proceeds of crime. It has also set up a collection procedure. This mechanism allows the collection of the equivalent amount of the property that is not confiscated. A significant disparity appears between the number of confiscation and collection procedures revealing that courts prefer the latter. The small number of confiscation orders as compared to collection orders indicates that the regime is not fully and effectively implemented.

11. As to the freezing of terrorist assets, Japan has established a mechanism based on a licensing system prior to carrying out certain transactions. This process does not cover (i) the potential for domestic funds being available, unless attempted transactions in foreign currency, with a non-resident in Japan, or overseas transactions are undertaken or (ii) other support by residents for listed terrorist entities and individuals; and does not allow Japan to freeze terrorist funds without delay. In addition, there is no express obligation for financial institutions to screen their customers’ databases, permitting the verification of the nature of assets already located in Japan at the time of designation of new terrorists, whether they will be individual or legal persons. Japanese officials however told the team, which is not satisfied with this explanation, that financial institutions have to screen their customers’ databases to properly implement the licensing obligation. The duration of securance orders issued to freeze terrorist assets and the obligation to undertake prosecution within 30 days does not allow Japan to freeze terrorist assets without delay. Finally, the absence of a broad definition of the word “funds” limits the assets that can be frozen by the Japanese authorities.

12. In April 2007, according to the provisions of the Act on the Prevention of Transfer of Criminal Proceeds, the Japanese FIU, then called JAFIO (Japan Financial Intelligence Office), was transferred from the Financial Services Agency to the NPA and became the Japan Financial Intelligence Centre (JAFIC) and its staff were increased. JAFIC receives a constantly increasing number of STRs (around 99 000 in 2005, 114 000 in 2006 and more than 158 000 in 2007). It undertakes a primary analysis, that involves automatic cross-matching between the STR data and holdings of its databases, and then passes around 60% of the STRs received to law enforcement agencies, including the Police, public prosecutors, customs, coast guards and the SESC (Securities and Exchange Surveillance Commission), within the FSA. An in-depth analysis involving the development of a comprehensive intelligence file derived from STR and including cross-matching police, administrative and open source databases, is undertaken on an increasing number of STRs. JAFIC has good access to law enforcement and other information to undertake STRs analysis. It has a sound information technology for matching information across Police databases. However more analysis should be made with regard to the typologies of money laundering and terrorist financing. STRs are sent by financial institutions to the supervisory agencies, which forward them to the FIU. Since 1 March 2008, a new electronic reporting system has been implemented. This system permits financial institutions and DNFBPs subject to the declaration of suspicious transactions obligation to submit STRs directly to the FIU. At the time of the onsite visit, both systems were available; 25% of the STRs were submitted electronically, 75% were submitted on paper and floppy disk.

13. JAFIC had at the time of the on-site visit a very small number of analysts. Considering the large and increasing number of STRs received and to be received in the coming years due to the subjection of some categories of DNFBPs to the declaration of suspicious transactions obligation under the new AML law, there are some concerns about the extent and the quality of the analyses undertaken.

14. In less than 12 months since its establishment, JAFIC has become a member of the Egmont group and has established an information exchange network with the FIUs of 12 foreign countries.

15. The main law enforcement bodies involved in the fight against money laundering and terrorist financing are the Prefectural Police and the Public Prosecutor’s Office. Both are responsible for AML/CFT investigations and have adequate powers to do so. However, more training and investigatory resources are needed for AML/CFT law enforcement authorities.

16. Regarding Special Recommendation IX1, Japanese Customs is responsible for AML/CFT enforcement. But it appeared during the on-site visit that Customs only focuses on smuggling and trafficking control and does not have AML/CFT enforcement capabilities. As a consequence, no report on cross-border currencies movements has been made to JAFIC.

Preventive measures–Financial Institutions (FIs)

17. The legal framework for customer due diligence is set out in the Act on the Prevention of Transfer of Criminal Proceeds, implemented by a Cabinet Order and an Ordinance. The Act came into force on 1 April 2007, and on 1 March 2008 for the provisions regarding DNFBPs. The Act covers the full range of financial institutions. A document entitled “Comprehensive Supervisory Guidelines” for the various categories of financial institutions have been issued by the FSA. Among other things, it deals with AML/CFT. Although, these guidelines cannot be considered as other enforceable means according to the FATF’s definition, the financial institutions interviewed by the assessment team told the team that in practice they comply with this non-binding guidance. All financial institutions listed by the FATF Recommendations are covered by the Japanese AML/CFT system.

18. Financial institutions are not explicitly prohibited from opening anonymous accounts. However, the Act on the Prevention of the Transfer of Criminal Proceeds requires financial institutions to identify and verify the customer’s identification data. Japan relies on an a contrario reading of this obligation and on the prohibition on customers providing false identification information. These requirements in effect prohibit the opening of anonymous accounts.

19. The Act on the Prevention of Transfer of Criminal Proceeds requires financial institutions to identify their customers and verify the customers’ identification data (i.e. name, date of birth and address or head office for legal persons). These obligations apply when establishing a business relationships; carrying out occasional transactions over JPY 2 million or wire transfers over 100 000 JPY and when the financial institution has doubt about the veracity or adequacy of previously obtained identification data. Thus, CDD is limited to the identification of the customer and the verification of the identification data, and not all acceptable identification documents have a photograph or unique identification number. The CDD obligation does not cover cases where several transactions below the threshold appear to be linked or where there is a suspicion of money laundering or terrorist financing. In addition, there are exemptions to the identification obligation on the grounds that the customer or transaction poses no or little risk of being used as a tool for ML or TF. These exemptions, which are not acceptable under the FATF Methodology, include, for instance, certain securities transactions and transactions with state or public entities.

20. The CDD framework does not fully address the issue of authorised persons, representatives and beneficiaries or of beneficial ownership. There is no requirement for financial institutions to gather information on the purpose and intended nature of the business relationship or to conduct ongoing due diligence on these relationships.

21. Japan is not implementing an AML/CFT risk-based approach, thus there is no provision mandating enhanced due diligence for higher risk customers, business relationships and transactions nor authorized simplified due diligence.

22. Japan has not yet implemented Recommendations 6 and 7 on politically exposed persons and cross-border correspondent banking and the measures in relation to Recommendation 8 dealing with technological developments are not sufficient to be satisfactory, especially on the identification and verification of the identity in cases of non-face-to-face transactions.

23. Japan does not allow financial institutions to rely on a third party to perform CDD.

24. There are several gaps in the record keeping requirements: small transactions are exempted and financial institutions are not required to keep records on the beneficiary of a transaction nor of business correspondence files and account files. No legal or regulatory provision requires financial institutions to make recorded information available to the competent authorities on a timely basis. With regard to domestic wire transfers, financial institutions of the payer are not required to maintain or transmit originator account number or unique reference number. Beneficiary institutions are not obliged to verify that incoming wire transfers contain complete originator information nor are they required to consider filing STRs or terminating the business relationship in case of repeated failure of a financial institution.

25. The mechanism of monitoring of unusual transactions relies entirely on the STR system. There is no requirement to pay special attention to the transactions covered by Recommendation 11 or to examine such transactions, but the “Reference cases of suspicious transactions”, issued as a list of examples, provide a number of red flag scenarios related to complex transactions. Similar findings are also applicable to Recommendation 21. In addition, financial institutions are not required to implement counter-measures to mitigate risks associated with jurisdictions that do not or insufficiently apply the FATF Recommendations and Japan has no mechanism to decide and apply countermeasures against these countries.

26. The Japanese AML/CFT law requires the reporting of suspicious transactions in ML and TF cases, except for credit guarantee corporations. Competent authorities have taken some actions to promote the filing of STRs by financial institutions. The banking sector increasingly files most STRs, other sectors, including insurance and securities, have submitted over the past years an extremely limited number of STRs. Therefore, in relation to the insurance and securities sectors, more guidance and outreach needs to be undertaken. Protection from civil and criminal liability for disclosure of financial information is provided by means of provisions of the Act on the Protection of Personal Information, the Penal Code and the Civil Code to financial institutions, their directors, officers and employees when they submit, in good faith, STRs to the FIU. There are two sets of provisions relating to tipping off. The first set deals with tipping off customers and relevant parties. Directors, officers and employees of financial institutions are not sanctioned in law for commission of a tipping off offence. They are only sanctioned after violation of the administrative order applied to the financial institution for this offence. The second set deals with all third persons but does not sanction the disclosure of information by natural persons, whether directors, officers or employees of financial institutions. The sanctions applicable to financial institutions for tipping off third parties are not dissuasive.

27. Under the Japanese law, there is no requirement for financial institutions to establish and maintain procedures, policies, and internal controls to prevent ML and FT; to designate an AML/CFT compliance officer; to maintain an independent audit function or to adopt screening procedures to ensure high standards when hiring employees. Only the Comprehensive Supervisory Guidelines, which are not enforceable, deal with these requirements. As to branches and subsidiaries located abroad, the situation is quite similar: absence of legal or regulatory requirements. The guidelines only demand supervisors assess the internal controls that banks develop to manage and supervise their foreign branches and whether banks have persons with adequate knowledge and experience of the business situation in foreign branches and the local legal system. However the guidelines do not specifically deal with implementation of AML/CFT measures by foreign branches and subsidiaries.

28. There is no explicit prohibition on financial institutions from entering into or continuing correspondent banking relationships with shell banks and financial institutions are not required to satisfy themselves that correspondent banks do not permit their accounts to be used by shell banks.

29. The supervisory authorities are, in general, properly resourced, staffed and trained in relation to AML/CFT. They have adequate powers to monitor and ensure compliance by financial institutions with laws and regulations, including conducting inspections and obtaining access to all information, documents and records. There are, however, concerns with regard to the low number of inspections carried out in financial institutions, other than in the core sectors of banking, securities and insurance, and cooperative sector, and the limited number and type of sanctions applied. Moreover, the dissuasive nature of the criminal monetary penalties for ML/TF is doubtful.

30. Financial institutions in Japan are adequately regulated and supervised. However, fit and proper tests should be extended to all senior management staff, and for securities and insurance sectors, should include requirements in relation to professional expertise, in order to prevent criminals and their associates from holding or controlling financial institutions. In addition, money exchangers and leasing companies are not required to be licensed or registered.

31. In Japan, money or value transfer services (MVT) are required to get a banking license, hence the concerns in the report regarding effective implementation of applicable FATF 40 + 9 Recommendations to banks also apply to MVT services. The monetary penalties for underground banking seem too low in comparison with the potential criminal proceeds involved in this illegal activity.

Preventive Measures–Designated Non-Financial Businesses and Professions (DNFBPs)

32. The Act on the Prevention of Transfer of Criminal Proceeds is applicable to various categories of designated non-financial businesses and professions (DNFBPs): real estate agents, precious metals and stones dealers, postal service providers, legal professionals such as attorneys, judicial scriveners and certified administrative procedures specialists, and accountants, including certified public accountants and certified public tax accountants. However the relevant provisions entered into force on 1 March 2008, a week before the on-site visit started. As a consequence, the evaluation team was not in a position to properly assess the effectiveness of the newly implemented system. The AML/CFT requirements as applicable to financial institutions also apply to DNFBPs with some exceptions, especially for legal professionals and accountants. These professions are not subject to the STR obligation. Moreover, there are CDD exemptions in the JFBA Regulation on CDD for attorneys that are not provided for in the FATF Recommendations; they are unclear and could be interpreted as exempting a large number of situations. Besides these specific comments, what has been noted for financial institutions is also valid for DNFBPs.

Legal Persons and Arrangements & Non-Profit Organisations

33. There are four types of companies authorised under the Japanese Companies Act. All have to be registered to be legally formed. Registration requires various documents, including the articles of incorporation, along with the names and addresses of the incorporators or partners. Changes in the registered matters have also to be notified and registered. However there is no obligation to gather information on the beneficial ownership and control of the legal person. Any person can obtain the extract of the registered matters, but there is no specific provision granting access by the competent authorities to the shareholders’ registers, which have to rely on the Code of Criminal Procedure in order to do so.

34. Despite the prohibition of anonymous bearer shares issuance since the amendment of the Commercial Code in 1990, there may still be such shares in circulation. The Japanese authorities estimate that they are very limited, but do not have any statistics. Besides anonymous bearer shares, bearer shares holders are not identified or their identity verified.

35. In Japan, trusts companies are regulated by the FSA and are subject to AML/CFT obligations under the Act on the Prevention of Transfer of Criminal Proceeds. The serious deficiencies in the CDD obligations also imply serious difficulties in transparency concerning beneficial ownership and control of trusts.

36. Terrorist financing risks in the Non-Profit Organisations sector are relatively low in Japan. NPOs are subject to a high degree of transparency and public accountability for their operations and there is a generally comprehensive regime of licensing, registration or oversight. While there is a wide range of national, regional and activity-specific regulators for NPOs, coordination between regulators and investigation agencies is overall effective. However, Japan has not yet conducted any specific outreach to the NPO sector to raise awareness about risks of abuse for terrorist financing and relevant AML/CFT preventive measures.

National and International Co-Operation

37. Japan utilizes a multi-agency AML/CFT strategy involving the FIU, law enforcement agencies, policy makers and supervisors. ML and TF are included in broader programmes against transnational organised crimes and international terrorism. This is led at a ministerial level by the “Ministerial Meeting Concerning Measures Against Crime” established in September 2003 and the “Headquarters for Promotion of Measures Against Transnational Organised Crime” created in July 2001, which was reorganized as the “Headquarters for Promotion of Measures Against Transnational Organized Crime and International Terrorism” in August 2004. Both initiatives comprise all the relevant agencies and ministries and have adopted Action Plans to combat ML/FT.

38. Japan has ratified the Vienna and the Terrorist Financing Conventions. The Palermo Convention has been signed and its ratification is in process. There are gaps in the implementation of the UNSCRs 1267, 1373 and successor resolutions.

39. Regarding mutual legal assistance (MLA), Japan has signed only two MLA treaties (with Korea and the United States), so the most utilised means for MLA is the Law for International Assistance in Investigation. In the absence of treaties, the law requires requesting assistance through diplomatic channels, which are potentially slow as the Ministry of Foreign Affairs, the central authority in the MLA process, is required to consider the request, develop an opinion and to forward both to the Ministry of Justice. In addition, the requesting state has to demonstrate that the evidence requested from Japan is indispensable before Japan can take any coercive measures and dual criminality is an inflexible condition in requests concerning conspiracy and prosecution of legal persons. As a party to various conventions, Japan has also multilateral obligations. However, as the Palermo Convention is not ratified yet, MLA related to the serious crimes considered under the Convention has to be treated under the general law.

40. Extradition is governed by the Law of Extradition which allows extradition where the conduct for which extradition is requested is punishable by a custodial sentence of three years or more in both Japan and the requesting state. It prohibits the extradition of Japanese nationals, but this can be and has been specifically included in Japan’s two extradition treaties. Japan has only signed two such treaties, with Korea and the United States. The minimum sentence precondition to an extradition request appears to be too high and Japan does not effectively prosecute its nationals in lieu of extradition.

41. As dual criminality is required to provide MLA or grant extradition, the limitation in the ML and TF offences reduces the extent and effectiveness of the MLA provided by Japan and Japan’s ability to grant extradition requests.

42. Japan has implemented some measures to facilitate and improve administrative cooperation between domestic authorities and foreign counterparts. However, the number of information exchanges by the FIU is very low.

Resources and Statistics

43. Overall Japan has dedicated appropriate financial, human and technical resources to the various areas of its AML/CFT regime. All competent authorities are required to maintain high professional standards. However, the FIU should increase its human resources involved in STRs analysis, particularly in relation to the recent entry into force of the STR obligation for certain categories of DNFPBs. More training and investigatory resources should be allocated to the AML/CFT law enforcement agencies.

44. The assessment team was unable to determine whether the statistics maintained by various agencies in Japan are comprehensive or systematically accumulated, because not all agencies appear to do so.

Table 1:

Ratings of Compliance with the FATF Recommendations

The rating of compliance vis-ä-vis the FATF Recommendations should be made according to the four levels of compliance mentioned in the 2004 Methodology (Compliant (C), Largely Compliant (LC), Partially Compliant (PC), Non-Compliant (NC)), or could, in exceptional cases, be marked as not applicable (NA).

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Table 2:

Recommended Action Plan to Improve the AML/CFT System

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1

Japan has implemented a new declaration system on 1 June 2008. It is not described in the report as the team was not provided with any written document presenting the future system at the time of the on-site visit and thus was not placed in a position to discuss it with the relevant Japanese authorities.

2

These factors are only required to be set out when the rating is less than Compliant.

Japan: Report on the Observance of Standards and Codes: FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Author: International Monetary Fund