Japan refines anti-money laundering regime

By Philippa Allen, Managing Director, Regulatory Compliance, APAC, and Manabu Nagano, Director, Japan

Japan’s Financial Services Agency has recently published proposed Guidelines on Money Laundering and Terrorist Financing Measures for Certified Public Accountants and Audit Firms.

The new rules respond to increasing globalisation within the world of financial services, which has brought alongside it, significant technological innovation such as cryptocurrencies and an increasing diversification of fund flows. Cross-border transactions are on the rise and this presents opportunities and challenges for market participants.

Criminality within the global financial system is becoming increasingly sophisticated, making efforts to combat money laundering and other financial crime all the more urgent. In 2021, the Financial Action Task Force (FATF) reviewed the anti-money laundering environment in Japan, determining that the country is underperforming international standards and required “enhanced follow-up”.

Consequently, the Japanese government drafted new proposed revisions for the Act on the Prevention of Transfer of Criminal Proceeds to be more closely in line with FATF Standards. Japanese regulatory officials outlined obligations and supervisory expectations for certified public accountants and audit firms with changes expected to become effective as of April, 2024.

The new proposed guidelines specify further requirements for administrative scriveners (a type of Japanese procedural law firm), certified public accountants and tax accountants. Previously, only customers’ names, residential addresses and date of births required verification.

Additionally, certain transactions will be subject to more extensive verification checks, including pinpointing the purpose of transactions, the identity of client and the nature of their businesses, as well as identities of any beneficial ownership and in some cases substantial controllers. For “high-risk” transactions above 2 million yen, clients’ assets and income will also need verification.

Professional firms are expected to take a risk-based approach and should frequently examine risks for services they provide. They should also compile facts detailing customers’ risk profiles such as geographic risk, nature of the business and political exposure, for example.

Additionally, administrative scriveners, certified public accountants, and tax accountants will be required to report on suspicious transactions where they suspect proceeds to be criminally connected activities. Where necessary, accounts may be frozen. Enhanced due diligence will also be required in high-risk cases such as transactions undertaken by Politically Exposed Persons. Lawyers and legal scriveners are already subject to these AML/CFT measures.

Records of the verification process must be kept for seven years following the date of the transaction or termination of the contract relating to the transaction and must include the name of the individual who completed the verification.

It is crucial for certified public accountants and audit firms to familiarize themselves with these proposed guidelines and ensure their compliance with the prescribed measures. Failure to adhere to these requirements may result in regulatory penalties from the FSA and damage to reputation.

The proposed changes signal that the Japanese government is committed to meeting FATF’s expectations in relation to anti money laundering and countering terrorist financing. In so doing, Japan appears to be following the lead of other international financial centres, which are increasingly scrutinizing how ancillary service providers meet the financial sector’s need for reducing risks. Exploitation of corporate structures, shell companies, SPVs and nominee director arrangements to facilitate criminal activities are all key challenges that the new regulations intend to combat. Financial institutions should also pay closer attention to the activities of their clients to ensure that they meet the FSA requirements applicable to them.

For more information, please refer to the draft guidelines published by the FSA here (Japanese only).

If you would like to find out more or require assistance in implementing AML / CTF programmes, procedures, AML /CTF training or remediation of inadequate client identification files, please do contact Philippa Allen or Manabu Nagano.