While the Japanese financial market has had a long-standing system in place to address anti-money laundering, over the past few years the rest of the world has begun to surpass them in terms of best practices for transaction monitoring, customer due diligence and watchlist screening. As a result, the Financial Services Agency (FSA), the Japanese regulator responsible for overseeing banking, securities and exchange, and insurance sectors, is reviewing and re-evaluating the approach it is taking to a range of rules and regulations.
New Rules & Virtual Currencies
One of the biggest events over the past few years was the rise and fall of Mt. Gox, a Tokyo–based leader in the emerging virtual currency market. At one time, Mt. Gox stood at the forefront of Bitcoin movement and controlled more than 70 percent of all Bitcoin transactions. Unfortunately, Mt. Gox also became a leading example of how the Japanese regulator system had not kept up with the rest of the world in terms of on boarding, screening and monitoring of customers. Famously, Mt. Gox collapsed in 2014 and was portrayed as a haven for criminal activities -- including basic money laundering and tax evasion.
When Mt. Gox fell, the Japanese authorities conducted a very thorough investigation to determine what processes and procedures were (or were not) followed. Due to this investigation, the FSA will begin implementing new rules governing virtual and digital currencies to help prevent the types of abuses which occurred during Mt. Gox’s short history.
The Japanese government itself this week noted that it will ask exchanges to officially register, while designating the Financial Services Agency as the official regulator. This move should help improve the protection that users of these exchanges expect, while reducing money laundering.
These upcoming rules are expected to emulate what has already been published by the state of New York in the United States, which largely deem virtual currency businesses as money transmitters, requiring them to be licensed by the appropriate agency and regulated to follow basic anti-money laundering and counter-terrorism financing protocols.
Screening for sanctioned and criminal organizations has always been top of mind for the Japanese financial system. Ensuring that these globally sanctioned individuals, along with criminal organizations like the Yakuza, were denied access to financial institutions has always been a priority of its regulators. However, seemingly in a secondary position, was the approach used to screen for Politically Exposed Persons. (“PEPs”)
PEPs, for the most part, were never considered an issue within the Japanese financial system. Whilst there are certainly foreign investors and international money being saved and invested in Japan, generally high net worth individuals were storing their funds in more “attractive” markets such as Singapore or Hong Kong, due to their “tax haven” status and their considered position as global financial centres for the wealthy.
But this situation is changing. The Financial Action Task Force (“FATF”) has been very adamant about countries having stringent guidelines around PEP screenings for many reasons beyond basic AML concerns. With new emphasis on anti-bribery and corruption, trade finance and virtual currencies, FATF is pressing on countries to actively implement, review and screen for PEPs to help identify where these monies are entering financial systems.
Due to this increased focus, the FSA has been actively looking to implement stronger and stricter guidelines for PEPs to ensure that Japan stays consistent with the rest of the world. In 2016, we will see more regulations and rules around screening for PEPs at onboarding but also throughout the entire life cycle of being a customer.
Another high-profile regulation focuses on the concept of the “ultimate beneficial owner” which was identified in the FATF 2012 recommendations. This is important because individuals engaging in financial crime have been able to hide a lot of their activities and money movements behind a series of anonymous corporate holding structures. By doing this, it made it difficult for banks to identify where and to whom money was being sent.
To fight this, FATF published a recommendation for financial institutions to perform due diligence on their corporate customers to a 25% ownership level (from the existing 50% level today) and to expose ownership all the way down to an individual who owns these corporates. Further, countries were also being asked to also identify, to an individual, who has a “controlling interest” in the corporation. This refers to an individual who may not own 25% of the company, but who makes all the day-to-day decisions for the company – like a CEO, CFO or COO.
The global regulatory community has embraced tighter beneficial ownership guidelines and has begun to formalize these in their regulatory frameworks. The EU’s 4th AML Directive, Singapore’s MAS 626, FinCen’s Guidance in the US, and Austrac in Australia, and others, have all put forth these ideas. The FSA in Japan is looking to implement these changes as well this year which will have a significant impact on how Japanese financial institutions work with, and perform due diligence on, their corporate customers.
So, what can a Japanese financial institution do today to meet these new and impending guidelines?
- Work with an AML technology provider that has both the ability to meet the guidelines being distributed by the FSA and an eye on the global regulatory framework.
- Ensure that said technology provider not only executes customer risk assessment at the point of onboarding, but also continues to provide ongoing monitoring of the customer throughout the customer life cycle. Customer risk does change over time.
- Implement transaction monitoring technology that meets today’s challenges with AML regulations and that also addresses future needs to find new, AML schemes within their transaction monitoring process.
By adhering to these guidelines, and arming themselves with the right tools to enforce and monitor them, Japanese financial institutions can obtain the security that regulators are demanding today, while possessing the flexibility to meet the challenges certain to be on the horizon tomorrow.