Japan compliance identity verification

For most of us in the Western world, Japan remains something of an enigma. Having lived in isolation for centuries, Japan underwent a major political and economic upheaval in the mid-nineteenth century that would change its course forever. In order to quickly catch up with advanced Western technology and systems, Japan adopted many European and American concepts, but not without putting their own spin on them. Following the end of World War II, Japan experienced yet another metamorphosis that solidified its reputation as both a technological and economic powerhouse.

Although Japan now looms in China’s economic shadow, it still has the world’s fourth largest economy, China being second. Much like its society, Japan’s anti-money laundering (AML) and countering the funding of terrorism (CFT) regulatory environment is very complex. For foreign businesses seeking to do business in Japan, it pays to do your homework before taking the plunge.

What is the current AML/CFT policy landscape in Japan?

Japan enforced the Act on Prevention of Transfer of Criminal Proceeds in 2007, and recent amendments from 2011 became fully effective in April 2013. The Financial Services Agency (FSA) acts as the central financial regulation agency in Japan, although there are additional regulatory agencies for several specific industries. The central authority for reporting suspicious transactions is the Japan Financial Intelligence Center (JAFIC).

In addition to financial institutions, industries and professions subject to AML/CFT regulations include lawyers, real estate agents, postal service providers, certified public accountants, and antique dealers. Even though there are minimum thresholds for customer identification, many businesses are required to verify the customer’s identity at the beginning of card-not-present financial transactions.

Mobile telecommunications is another sector where identity verification is required by law in Japan. The Act of the Prevention of Illegal Mobile Phone Use, which came into effect in 2006, requires all service operators to verify the identity of mobile phone users by examining a government-issued identity document, such as a passport or driver’s license. As a result of this requirement, Japanese mobile network operators such as NTT and KDDI have leveraged their extensive user databases as data sources that can be used to authenticate user logins with other applications and portals that subscribe to their service.

However, despite having a very developed and elaborate AML/CFT system in place, Japan has been criticized by the Financial Action Task Force (FATF) because its existing legislation lacks teeth when it comes to freezing transfers of terrorist funds within the country and cracking down on the act of conspiracy. The key deficiencies listed by the FATF include the incomplete criminalization of terrorist financing, a lack of sufficient customer due diligence requirements, and an incomplete mechanism for freezing terrorist assets.

How does compliance impact Japan’s economy?

The FATF’s list of high-risk and non-cooperative jurisdictions includes countries such as Iran and North Korea on a “black list” of serious offenders, and others like Algeria and Ecuador on a “gray list” of countries that have not made sufficient progress. If Japan is added to the gray list, it may result in a recommendation by the FATF for its member countries to consider imposing countermeasures to protect themselves from money laundering and terrorist financing risks. Some examples of countermeasures are requiring enhanced due diligence measures when dealing with Japanese clients, refusing to set up business offices in Japan, and limiting business and financial transactions with the country and its people. Additionally, failure to comply could result in American regulators imposing hefty fines on Japanese banks, as they have with other foreign banks operating in the U.S.

What efforts has Japan made to improve its compliance standards?

In early October 2014, Japan’s cabinet approved proposed legislation to address the shortcomings listed by the FATF, in the hopes of avoiding being added to the list of high-risk and non-cooperative jurisdictions. Much to the country’s relief, Japan was not added to the dreaded list and earned positive recognition during the FATF’s regular meeting held a few weeks later.

Japan is making serious strides to combat money laundering and terrorist financing. However, they are still faced with challenges, such as resistance from lawmakers and special interest groups concerned about the implications of tougher legislation. The current government appears to be committed to taking the necessary corrective actions, which should help improve the nation’s business climate as international confidence in the regulatory system grows.

What opportunities do you see for Japan as it strengthens its compliance regime?