The FSA’s Hiroshi Ozaki and Daisuke Mamba look back at the last four and a half years in the fight against money laundering and terrorist financing in Japan.
During the four and a half years since February 2018, JFSA’s (Financial Services Agency, Japan) AML/CFT Policy Office has published and revised its guidelines on a Risk-Based Approach to AML/CFT, published and edited multiple FAQs (Frequently Asked Questions), published three reports called “Current Status and Challenges,” conducted numerous outreach activities under a public-private partnership framework, and conducted targeted AML/CFT examinations together with Local Finance Bureaus.
It has been a very eventful four and a half years for us. We completed the Fourth Mutual Evaluation of Japan by the FATF (Financial Action Task Force) and implemented the Government Action Plan. We started and still are working on the follow-up to the FATF MER (Mutual Evaluation Report) of Japan. FSA and the Japanese Bankers Association also developed and launched a shared AML transaction monitoring and screening system with machine learning technology.
With the globalization of the economy and financial services, and technological innovations such as the spread of crypto assets, we have seen how funds flow become more diversified and cross-border transactions become more accessible. Under such circumstances, money laundering, terrorist financing, and proliferation finance have become increasingly complex and sophisticated, and the source of proceeds obtained through crime has become increasingly unclear.
Suppose the flow of such funds is left unchecked. In that case, illicit funds may be used for future criminal activities or to maintain and strengthen criminal organizations, thereby encouraging more organized crime and terrorism. At the same time, illicit financial activities interfere with businesses and seriously affect sound economic activities. In addition, promoting the proliferation of weapons of mass destruction through financing such activities poses a severe threat to Japan and the international community.
The international community shares the recognition that illicit financial transfers take place across borders, exploiting gaps in weak regulations and inadequate countermeasures. Thus, the international community is cooperating in the development and implementation of international standards to improve the effectiveness of AML/CFT/CPF measures worldwide through the multilateral framework of the FATF.
Efforts by the Government of Japan for Safety and Security Since 2013
As a member of the FATF and the international community, Japan has likewise been working to improve the effectiveness of global AML/CFT/CPF measures. Japan has the world’s third-largest economy and one of the world’s most highly developed economic and financial sectors. Given our role as a global financial center, strengthening AML measures is our international commitment and a significant international contribution by Japan.
Since 2013, Japan has been promoting counterterrorism and fighting organized crime based on the “Strategy to Create the World’s Safest Japan.” There have been no acts in Japan by terrorists designated by the United Nations Security Council. However, internationally designated persons have had repeated access to Japan.
Therefore, we need to take necessary measures against terrorist financing, considering the risk that a network of extremist organizations could try to extend their reach to our country. While there have been no large-scale terrorist incidents in Japan since the 1995 sarin gas attack on the subway by the Aum Shinrikyo cult, who can confidently say that cults, extremists, or terrorist groups will not commit such acts in the future?
Moreover, when the world’s economies are closely interconnected, it is impossible to say that incidents occurring abroad will not impact the domestic economy, especially in light of Russia’s invasion of Ukraine. With these circumstances, we are not immune to the risks associated with terrorism financing and financial proliferation occurring in other jurisdictions.
We must strengthen the measures against money laundering, terrorism financing, and proliferation financing in Japan. This effort will not only contribute to ensuring the safety and security of our citizens and the sound development of our domestic economic activities, but it will also contribute to realizing the “open international financial center” that Japan aims to become.
FATF MER of Japan and Working Together as ONE Japan
The FATF’s Fourth MER of Japan, released in August 2021, assessed Japan’s measures against money laundering, terrorist financing, and proliferation financing as successful overall. However, it pointed out that Japan has to prioritize FIs’ supervision and preventive measures, the prevention of misuse of legal entities, and the investigation and prosecution of money laundering.
In addition, to enhance the effectiveness of AML/CFT/CPF measures, the FATF has revised its standards for the Fifth round of Mutual Evaluation, scheduled to begin in 2025. Japan needs to consider how to respond to these revisions. Before long, the next assessment will be upon us.
In light of this, a new “Policy Council on Anti-Money Laundering, Terrorist Financing, and Proliferation Finance” was established in August 2021, co-chaired by the National Police Agency and the Ministry of Finance, for the government to work together as one to take strong measures.
This “Policy Council” aims to plan and draft national policies and activities to counter money laundering, terrorist financing, and proliferation financing threats, promote them comprehensively, and ensure close coordination among relevant administrative agencies. The FSA is also co-chairing the subcommittee conducting this work.
A Changing Risk Landscape
The risk landscape has changed in several ways in recent years, requiring us to take further action in the future.
First, Japan’s international activity has increased our exposure to money laundering and geopolitical risks. For instance, we must continue to monitor threats from terrorism in Afghanistan and elsewhere and missiles that continue to be launched by North Korea.
Second, cyber-attacks targeting government agencies and businesses are occurring globally, prompting concerns about cyber-terrorism. Cyber and ransomware attacks threaten to paralyze the functioning of companies and society. Meanwhile, the number of phishing attacks is also increasing. According to the August monthly report by the Council of Anti-Phishing Japan, the number of phishing reports received in July 2022 was 107,948, surpassing 100,000 for the first time.
Third, technological advances such as social media and payment methods have created new CTF vulnerabilities. Even countries with a low risk of terrorism may still face the risk of terrorist financing, as funds may be raised and held within the country concerned. We should consider this possibility and note that the terrorist financing risk can exist in countries and regions where terrorist organizations may not even operate physically.
UN Security Council Resolution No. 2462, adopted in March 2019, states that terrorists may exploit legitimate companies, non-profit organizations (NPOs), and other entities to raise and transfer funds to finance their operations. It also pointed out that new financial technologies, such as crypto-assets, may be used to finance terrorism.
Fourth, regarding proliferation finance, the FATF urges countries to implement targeted economic and financial sanctions to comply with UN Security Council resolutions on preventing the proliferation of weapons of mass destruction and financing thereof. However, the reality is that there is always the unfortunate possibility that weapons of mass destruction and related goods and technologies are being transferred across borders even when the international community, including Japan, is cooperating in imposing sanctions.
North Korea has repeatedly launched ballistic missiles, and the US Defense Intelligence Agency has reported that the country has been exporting ballistic missiles and other weapons for several decades. The Panel of Experts of the UNSC Sanctions Committee on North Korea has also reported that North Korea has illegally acquired crypto assets as a result ofdue to cyber-attacks. It also pointed out that North Korea has become more sophisticated in importing and exporting sanctioned goods through so-called “ship-to-ship transfers” to evade or bypass sanctions.
Fifth, in response to Russia’s aggression against Ukraine since February 2022, the G7 and other members of the international community, including Japan, have coordinated closely and taken various measures to impose maximum costs on Russia. These include asset freezes on Russian individuals and entities, including President Vladimir Putin, the exclusion of Russian banks from SWIFT, and measures to prevent sanctions from being circumvented through the use of crypto assets.
The G7 and other major countries have established the “Russian Ruling Class, Proxy Forces, and Oligarchies” (REPO) Task Force to promote cooperation and information exchange among authorities and put more pressure on the Russian ruling class through financial sanctions. In this context, other countries are also reviewing their relevant systems and making their obligations to the international community known to the public.
Sixth, the FATF’s June 2020 report highlighted concerns about the billions of dollars in illicit proceeds generated yearly by transnational organized crime groups through illegal trade in wild plants and animals. The report noted that these activities contribute to corruption, threaten biodiversity, and significantly impact public health and the economy.
The G7 2030 Nature Compact, adopted at the G7 Summit in June 2021, considers the illegal trade in wild plants and animals to be a severe form of organized crime and includes a commitment to strengthen AML measures to combat these activities. In a July 2021 report, the FATF called for more robust AML measures to combat environmental crimes such as illegal trade in wildlife, forest resources, and minerals, as well as malicious waste dumping – areas it said we should address as a priority.
Seventh, the environment surrounding crypto assets is also changing rapidly. The FATF issued its first guidance on crypto assets in June 2015. Then in October 2018, it revised its 40 Recommendations and requested countries to introduce AML regulations for crypto asset exchanges and licensing or registration systems. The FATF has since produced further revisions, an interpretive note, and other guidance on applying a risk-based approach to crypto-assets, and has repeatedly urged governments and the relevant sectors to implement the FATF standards in this area.
The FATF guidance issued in October 2021 also included new standards to address risks from stablecoins, wallets controlled by individuals, decentralized finance (DeFi), and non-fungible tokens (NFTs). The FATF and the FSB (Financial Stability Board) are continuing to monitor the changing risk landscape for crypto assets, including stablecoins.
Eighth, the FATF calls for increased transparency on the beneficial ownership of legal entities and arrangements. To prevent the misuse of companies and businesses for money laundering, terrorist financing, and proliferation financing, the FATF requires accurate identification of the beneficial owners of legal entities and trusts.
Ninth is the issue of law enforcement. In strengthening AML and other measures, confiscation of criminal proceeds and asset recovery is critical. During the Fourth FATF Mutual Examination, it became clear that many countries face challenges in conducting effective seizure and recovery of assets. The FATF has been urging governments to improve the effectiveness of these processes, including through greater international cooperation.
Four Major Issues
Against this backdrop, we believe it is crucial to take concrete measures based on the following four significant issues to implement effective countermeasures against money laundering, terrorist financing, and proliferation finance.
First, we must thoroughly implement a risk-based approach. Given that the domestic and international risk landscape is changing dramatically, it is essential to analyze and understand the risks promptly and accurately. Then we must use this risk awareness to strengthen Japan’s AML measures, including those applied by financial and non-financial businesses.
Our actions include an analysis of the risk of sanctions evasion to establish a process to reduce such risks. Along with taking a risk-based approach to detect suspicious transactions, FIs have to screen and filter designated persons or entities subject to sanctions from transactions with zero tolerance.
Second, we need to respond quickly to new technologies. With the spread of new technologies such as crypto assets, AI, and deepfake videos, domestic and international economic and financial activities are changing drastically. We must respond promptly to new and emerging risks. What is particularly important is to leverage digital transformation to improve the effectiveness and efficiency of countermeasures taken by authorities and FIs.
Third, we need to strengthen international coordination and collaboration. As crimes become more globalized and complex and the global geopolitical environment becomes increasingly tense, it is essential to strengthen cooperation with international organizations like the ICPO and UNODC, as well as with other countries bilaterally, to enhance the effectiveness of Japan’s policies.
We must see countries promptly and appropriately respond to requests for investigative assistance, greater international cooperation among supervisory authorities, active participation in FATF discussions, and more support extended to FATF-style regional bodies. Japan has participated in these efforts to raise global AML/CFT/CPF awareness and controls.
Fourth, we must strengthen cooperation among relevant ministries and agencies and between the public and private sectors. To do this, we will vigorously promote countermeasures by utilizing the “Policy Council” established in August. However, the efforts to combat money laundering will not proceed only through intra-governmental and inter-governmental cooperation. Cooperation with the private sector is essential.
Industry associations exist in most industries that handle products and services that pose a risk of money laundering, and they provide support to businesses and formulate self-regulatory rules. The efforts of these associations create a synergistic effect with the government and contribute to improving the effectiveness of AML/CFT/CPF measures. Therefore, the government must strengthen cooperation with industry associations and actively conduct outreach and public relations activities with regulated businesses and the public.
Government’s Efforts Now and in the Future
Specifically, the following efforts by the government are essential.
First, we must further deepen our risk analysis as a country. To take adequate measures against money laundering in line with the risks, keeping abreast of domestic and international economic and social conditions, trends in new technologies and international discussions at fora like the FATF and G7/G20 meetings is vital. It is also necessary to identify and analyze Japan’s risks based on these factors.
The National Public Safety Commission has been enhancing the content of the “Risk Assessment Report on Transfer of Criminal Proceeds,” published yearly in light of changes in domestic and international circumstances. We will further deepen our analysis of risks related to money laundering by collecting and comprehensively analyzing a wide range of information, including information from suspicious transactions, money laundering crimes in Japan, and overseas analytical studies. In parallel with the money laundering risk assessments, FIs have to conduct proliferation finance risk assessments to improve the effectiveness of asset freezing measures.
Second, we will strengthen our supervision of FIs and reinforce preventive measures by such entities. The National Risk Assessment (NRA) states that deposit-taking FIs, fund transfer service providers, and VASPs are relatively riskier than other types of businesses. It also points out that certain products and services offered by FIs may present additional risks. FIs must adopt a more sophisticated risk-based approach to AML and implement mitigation measures to address these risks.
The FSA will conduct outreach to FIs to improve their understanding of the risks they face and support enhancements to their AML/CFT/CPF measures. In this regard, we are conducting targeted examinations to review whether FIs have appropriate frameworks in place to satisfy all the requirements of our AML/CFT Guidelines by the end of March 2024.
The FSA is also monitoring the status of FIs to develop a framework to strengthen our risk-based inspections and supervision, and conduct actual AML/CFT inspections. The FSA’s efforts and experience will be helpful information for other relevant ministries and agencies that have jurisdiction over different types of businesses in Japan. Above all, we will strengthen inter-ministerial cooperation to avoid any disparities regarding AML/CFT in relation to other kinds of companies.
Third, the FSA will conduct publicity activities to help users of FIs better understand the importance and necessity of AML/CFT measures and encourage them to cooperate with the efforts of FIs.
In addition, we will promote efforts to reduce money laundering risks in Japan by strongly supporting the practical application of shared systems for monitoring transactions and introducing notification requirements (the so-called Travel Rule) when VASPs transfer crypto assets.
Call to Action
In conclusion, the FSA would like to encourage FIs in Japan to enhance their risk-based AML/CFT measures further. FIs should continue to take firm steps to eliminate identity theft, the use of forged ID documents, anti-social forces, and sanctioned persons. FIs should take appropriate measures according to risk at the time of transaction confirmation, at the time of contract initiation, during continuous monitoring, and during regular reviews and risk assessment.
In addition, we ask FIs to read the FSA’s AML/CFT Guidelines, FAQs, and the “Current Status and Challenges” report as well as the National Risk Assessment, and take prompt action toward meeting the end-March 2024 deadline for full compliance with the required action in the Guidelines. In particular, FIs must monitor the transactions continuously and identify suspicious transactions based on the known occupation, business type, and behavioral patterns of customers.
But, FIs are not investigative agencies, so the FSA would like them to report suspicious or unusual transactions based on reference cases without being overly concerned with identifying and determining actual illegality. We would like to see the quality of suspicious transaction reports improved through proper verification.
As the transaction volumes increase, system-based monitoring becomes critical because the human eye is incapable of keeping up. With this in mind, the FSA will continue to support the development and implementation of the Shared AML Monitoring and Filtering System with AI, an initiative being led by the JBA (Japanese Bankers Association), which will be commercialized in the spring of 2024.
Given the constantly changing circumstances we face, it is essential for all parties concerned to fully understand Japan’s risks and take appropriate actions according to those risks.
By Hiroshi Ozaki, Chief Financial Inspector of AML/CFT; and Daisuke Mamba, Director and the Head of the AML/CFT Policy Office, Financial Services Agency, Japan.