Japan FSA Publishes Revised Version of AML/CFT FAQs

The revisions were made to improve the sophistication of the risk-based approach and reduce prescriptive requirements.

On 2 April 2024, Japan’s Financial Services Agency (FSA) published updated FAQs on the AML/CFT Guidelines.

The FAQs are positioned as guidance for the AML/CFT Guidelines and describe the purpose, specific examples, and interpretation of all items addressed by the Guidelines.

The Guidelines, which require financial institutions (FIs) to manage AML/CFT in a risk-based manner, were first published in February 2018 and revised twice since, in April 2019 and February 2021.

FIs were asked in 2021 to ensure full compliance with the Guidelines by end-March 2024. The FAQ revisions were made to promote improved effectiveness of the systems FIs should now have in place.

The new FAQs, revised for the third time since 2018, are aimed at improving the sophistication of the risk-based approach and reducing the prescriptiveness of requirements.

On customer due diligence (CDD) process, the FAQs say the selection process for customers to undergo simplified due diligence (SDD) should be based on risk. Specifically, FIs can carry out continuous or ongoing CDD at a frequency corresponding to the customer’s risk rating.

For low-risk customers and transactions, FIs can review the customer’s risk rating using event-driven risk assessments without having to undertake periodic reviews. This is intended to allow FIs to focus their resources on areas of higher risk and improve the effectiveness and efficiency of their AML/CFT measures.

The FAQs also highlight that continuous CDD based on the risk-based approach must be premised on the effectiveness of risk assessments and transaction monitoring systems.

In addition, the FAQs clarify requirements regarding risk-based compliance with laws and regulations related to domestic and foreign sanctions, in transaction monitoring and screening.

Specifically, FIs are required to promptly update their lists of sanctioned persons and entities and complete screening checks within a “reasonable” timeframe after the issuance of new sanctions-related notifications by the Ministry of Foreign Affairs (MFA). This is in line with the approach set out by the Ministry of Finance in June 2021, the FAQs say.

The FAQ revision also clarifies that PEPs of international organisations must be treated in accordance with their risks, just like other customers.

The revisions of the FAQs will enable FIs to perform Perpetual KYC and Ongoing CDD in a more systematic and efficient manner, provided they can ensure the effectiveness and validations of transaction monitoring and filtering systems.

To this end, it is necessary for FIs to strengthen system governance, validate the effectiveness of their systems, and take measures appropriate to the risks they face.

For small and medium-sized financial institutions that may not have sufficient management resources, cooperation with industry associations or using collaborative systems may be an option.

Hiroshi Ozaki is Executive Advisor for KPMG AZSA LLC; and a Former Chief Financial Inspector and Former Director of the FSA’s AML/CFT Policy Office.

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