FATF Upgrades Japan on Six Recommendations

Japan is now rated compliant on 4 Recommendations, largely compliant on 35 and has no Recommendations rated partially compliant.

The Financial Action Task Force (FATF) has re-rated Japan on 6 Recommendations to reflect its progress in tackling money laundering and terrorist financing (ML/TF).

Japan’s last mutual evaluation was published in August 2021. In its first follow-up report in September 2022, the country was re-rated on one recommendation. In the second follow-up report in October 2023, it was re-rated on five recommendations.

In a statement on Thursday (10 August), the FATF said Japan has made further progress on its efforts to combat ML/TF.

To reflect this progress, in the new third follow-up report, the FATF has re-rated Japan from partially compliant to largely compliant on 6 Recommendations:

Recommendation 7 (Targeted financial sanctions related to proliferation)

• Japan revised its administrative procedures to implement PF-TFS within 24 hours via three communication channels

• Japan has enabled asset freezing of domestic transactions of PF-designated persons

• Japan extended asset-freezing obligations to virtual assets and stablecoins.

Recommendation 8 (Non-profit organisations)

• Japan appointed an external organisation to research NPOs and found that they handle relatively small amounts and have a good understanding of TF risks

• Japan updated its National Risk Assessment (NRA) in 2023, addressing previous deficiencies

• Japan clarified policies for NPOs within the FATF definition and expanded outreach and educational programs for NPOs

• Japan introduced risk-based monitoring flowcharts for each competent authority to identify high-risk NPOs

Recommendation 12 (Politically exposed persons)

• Japan issued binding policies and guidelines to include other FIs not supervised by the Financial Services Agency (FSA) in systems to determine whether a customer or the beneficial owner (BO) is a PEP

• Japan clarified requirements for obtaining approval from senior management to establish or continue business relationships with foreign PEPs and for conducting verification of the source of wealth and funds

• The FSA clarified through binding guidance that FIs must recognise domestic PEPs and persons entrusted with a prominent function by an international organisation as a specific category of customers

Recommendation 22 (DNFBPs: customer due diligence)

• Japan developed and published binding guidelines strengthening the application of CDD requirements to include ongoing monitoring of customers among DNFBPs

• Japan expanded CDD obligations for legal professionals and other specified business operators to include verifying the purpose of conducting transactions and the intended nature of the business relationship

• Japan requires DNFBPs, except lawyers, to comply with record-keeping requirements similar to FIs.

Recommendation 23 (DNFBPs: Other measures)

• The Japan Financial Intelligence Center (JAFIC) issued binding interpretative guidance clarifying the explicit requirement to report STRs even if obliged entities refuse a transaction because of ML/TF risk

• Japan now requires specified business operators, except for lawyers and judicial scriveners, to file STRs

• Japan has taken steps to improve information sharing on NPOs, although minor gaps remain in the prompt passing of STRs to the FIU.

Recommendation 25 (Transparency and beneficial ownership of legal arrangements)

• Japan has created an explicit duty on trustees to disclose their status to FIs when forming a business relationship or carrying out an occasional transaction above the threshold.

• The FSA has clarified to trustees that they should disclose their status to DNFBPs, although this is not yet enforceable.

Japan is now compliant on 4 Recommendations and largely compliant on 35. The country has no Recommendations rated partially compliant. Japan will next report back on remaining deficiencies in its 5th round mutual evaluation. Japan has demonstrated significant progress in enhancing its anti-money laundering and counter-terrorist financing measures.

The country's efforts have been recognized by the Financial Action Task Force (FATF), which has re-rated Japan on several key recommendations. The recent re-ratings reflect Japan's commitment to strengthening its financial regulations and combating illicit financial activities. In the latest follow-up reports, Japan has shown improvements in various areas. For instance, in Recommendation 7 concerning targeted financial sanctions related to proliferation, Japan has implemented administrative procedures to swiftly apply sanctions and extended asset-freezing obligations to cover virtual assets and stablecoins. These actions demonstrate Japan's proactive approach to addressing emerging risks in the financial sector.

Furthermore, in Recommendation 8 focusing on non-profit organizations (NPOs), Japan has taken steps to enhance its oversight and understanding of the risks associated with these entities. By appointing an external organization to research NPOs and updating its National Risk Assessment, Japan has shown a commitment to mitigating potential vulnerabilities in this sector. In Recommendation 12, which pertains to politically exposed persons (PEPs), Japan has issued binding policies and guidelines to ensure thorough due diligence processes.

The country has also clarified requirements for dealing with foreign PEPs and domestic individuals entrusted with prominent functions, highlighting its efforts to prevent abuse of the financial system for illicit purposes. Moreover, Japan has made significant strides in improving customer due diligence among designated non-financial businesses and professions (DNFBPs) as outlined in Recommendation 22. By strengthening the application of CDD requirements and expanding obligations for legal professionals, Japan is enhancing the overall integrity of its financial system.

In Recommendation 23, Japan has focused on enhancing reporting mechanisms and information sharing among DNFBPs. The issuance of interpretative guidance by the Japan Financial Intelligence Center underscores Japan's commitment to combatting money laundering and terrorist financing activities effectively.

Additionally, Japan's emphasis on transparency and beneficial ownership of legal arrangements, as highlighted in Recommendation 25, reflects its dedication to ensuring accountability and preventing financial crimes. By creating explicit duties for trustees and clarifying disclosure requirements, Japan is taking proactive steps to enhance transparency in its financial sector. Overall, Japan's re-ratings by the FATF underscore the country's continued efforts to strengthen its anti-money laundering and counter-terrorist financing frameworks. By addressing key recommendations and implementing robust measures, Japan is positioning itself as a leader in combating financial crimes on the global stage.