The international fight against financial crime, money laundering and terrorist financing is unlikely to ever end; criminals are endlessly adaptable and will always look for weak points and new opportunities. Jurisdictions with less robust anti money laundering (AML) and counter terrorist financing (CFT) controls are particularly vulnerable – and for the moment, Japan’s institutions are seen as a potential weak point in the global defences against financial crime.
A Mutual Evaluation report published by the Financial Action Task Force (FATF) – the international body that sets and oversees measures to combat money laundering and terrorism financing – has found shortfalls in Japan’s anti-money laundering (AML) and counter terrorist financing (CFT) measures.
The FATF concluded that while ‘Japan has a good understanding of the main elements of money laundering (ML) and terrorism financing (TF) risks…there are…a number of areas where the national risk assessment and other assessments could be further improved.’
In particular, the report said that while some financial institutions (typically larger banks) have a ‘reasonable understanding’ of their ML/TF risks, others have a ‘limited understanding’, and this has a direct impact on the application of the risk-based approach to money laundering recommended by the FATF. Designated non-financial businesses and professions (DNFBPs), it added, ‘have a low level of understanding of ML/TF risks and of their AML/CFT obligations’, while virtual asset service providers apply only basic AML/CFT requirements.
The FATF noted that some issues arise from a lack of coordination between various government agencies. ‘There is generally good interagency co-operation amongst most law enforcement agencies on AML/CFT operational matters,’ it said, ‘but more coordination is needed for the development of AML/CFT policies.’ The Japanese government intends to set up a cross-agency team, which will include the Financial Services Agency (FSA) and the Justice Ministry, to target money laundering and will submit proposed legislation to parliament in 2022 that will introduce tougher penalties for money laundering offences and deficiencies in controls.
But as the FATF’s report highlights, there are also challenges at an organizational level. Financial institutions in Japan face specific challenges around anti-money laundering processes. Many struggles with ongoing due diligence – the monitoring of existing customers and their transactions in order to detect suspicious activity – as well as assessing the risks involved in new digital transaction services such as payment service providers, peer to peer lenders, and mobile money transfers.
The FATF warning means that financial institutions in Japan, as well as DNFPBs such as casinos, real estate professionals and law firms, will inevitably face greater scrutiny around their AML/CFT controls in the coming months and years. So how can firms and companies in Japan protect themselves and ensure that they meet their compliance obligations, today and in the future?
The FATF and Japanese Financial Services Agency (JFSA) agree that technology and intelligent use of data are the key to efficient and effective AML processes. Our experience working with clients across the world has identified four essential elements of best practice:
Make use of technology. A recent FATF report argues that new digital technologies, which make use of artificial intelligence and machine learning, ‘have the potential to make AML and CFT measures faster, cheaper and more effective’. The benefits to private organizations, says the FATF, include:
Adopt a risk-based approach. The FATF points out that the majority of current risk management efforts are based on automated but static analyses of a pre-determined set of risk factors, overlayed with human judgment. Legacy systems tend to be updated with new algorithms and manually inputted information, but overall this approach does not offer a real time overview of customer or transactional risk.
Many jurisdictions continue to apply a rules-based system for AML/CFT, rather than the risk-based approach that the FATF recommends. Companies also struggle to adopt the risk-based approach for various reasons (often related to legacy systems). The fact remains that a risk-based approach, combined with the right technology, offers more effective and efficient, less disruptive protection, at a lower cost.
Update and upgrade. It is essential to keep software up to date, by upgrading when necessary and updating regularly. Screening capabilities are continually being improved and the latest software will offer the most comprehensive protection.
Get the most out of your data. Financial institutions have access to huge amounts of structured and unstructured data, which is invaluable in the fight against financial crime. A recent FATF study argued for greater use of data pooling and collaborative analytics to help financial institutions better understand and mitigate the risks they face, and to help prevent criminals from exploiting information gaps.
In an effective AML/CFT solution, accurate, timely data from both internal and trusted external sources combine to provide the institution instantly with the latest data they need to verify identity and accounts and manage their risks effectively. Our data solution, WorldCompliance™ Data, , gives institutions access to a wide range of lists covering sanctions, politically exposed persons (PEPs), beneficial ownership, vessels and adverse news. Data is comprehensive – the PEP database includes more than 1.5 million entities across 240 jurisdictions – and is updated regulatory from sources around the world.
Innovative technology and intelligent analysis of quality data are a powerful weapon in the fight against financial crime worldwide. Organisations in Japan have much to gain from adopting advances solutions, helping to protect not only themselves but Japan’s reputation as a leading financial centre.
LexisNexis® Risk Solutions offers advanced financial crime screening solutions and dependable watch list data. If you would like to review your current process to achieve greater effectiveness in complying with regulations and better operational efficiency, please contact us for more information.