Re-amendments to Japanese AML Regulations

Transcription

1 Re-amendments to Japanese AML Regulations Miyake & Partners Masayuki Watanabe If you have any questions, please contact below: Masayuki Watanabe Attorney at Law Miyake & Partners TEL: FAX:

2 Masayuki Watanabe Tel: (direct) Website: Attorney at Law admitted, 2001, Japan. Practice Focus: Banking, securities, insurance, capital markets, anti money laudering regulations, general corporates, litigations (defendants for financial institutions) Education: Tokyo University (LLB, 1995); Legal Training and Research Institute of the Supreme Court of Japan (Diploma, 2001), Columbia Law School (LL.M., 2007). Professional Experience: Prime Minister's Office ( ) External Director of Osho Food Service, Co (2014-present) Exnernal Director of Nittoku Co., Ltd (2016-present) 2

3 What is Money Laundering? Clean Money Dirty Money Used for Criminal Money Integration acquiring wealth generated from the transactions of the illicit funds Clean Money Gambling Billing Fraud Prostitution Placement introducing cash into the financial system by some means Criminal Proceeds Layering Carrying out complex financial transactions to camouflage the illegal source of the cash Resale Real Estate cash transfer Purchase 3

4 History of Anti-Money Laundering Measures Global Events December 1988 Adoption of "UN New Narcotics Convention" (Criminalization of money laundering activities) July 1989 Arch Summit (Adoption of the Establishment of FATF (Financial Action Task Force on Money Laundering)) April 1990 FATF issued "the 40 Recommendations" - Customer identification by financial institutions - Reporting of suspicious transactions to financial regulatory authorities May 1998 Birmingham Summit (Agreement on establishment of FIU) Events in Japan June 1990 Notices issued on the requirement of customer identification, etc. (by the Director-General of the Banking Bureau, Ministry of Finance) July 1992 Enforcement of "the Anti-Drug Special Provisions Law " (Creation of the " Suspicious transaction report" system relating to drug crime proceeds) February 2000 Enforcement of "the Act on the Punishment of Organized Crime" (Extension of the scope of predicate offences to certain serious crimes, establishment of the Japan FIU, etc.) 4

5 Global Events September 2001 Terrorist attacks in the US October 2001 FATF issued "the Special Recommendations on terrorist financing" - Criminalization of terrorist financing, Reporting of suspicious transactions related to terrorism. June 2003 FATF re-revised "the 40 Recommendations" -Application of Recommendations to non-financial businesses (real estate agents, dealers in precious metals, dealers in precious stones, etc.) and professions (lawyers, accountants, etc.) October 2008 Third Mutual Evaluation Report of Japan (With regard to CDD under the 40 Recommendations, Japan received NC for 10 items and PC for 15 items.) October 2012 FATF New Recommendation (4th Recommendation) June 2014 FATF expressed great concern over customer due diligence of Japan. Events in Japan July 2002 With the enforcement of "the Act on the Punishment of Financing to Offences of Public Intimidation" and "the revised Act on the Punishment of Organized Crime", terrorist financing offence was added to predicate offences. January 2003 Enforcement of "the Customer Identification Act" (Obligation of identification of customers etc. by financial institutions etc. is legislated.) March 2008 Enforcement of "the Act on Prevention of Transfer of Criminal Proceeds" (Enforcement of the customer identification obligation to non-financial business operator. ) April 2011 Amendments of "the Act on Prevention of Transfer of Criminal Proceeds (Effective on April 2013) November 2014 Re-amendments of "the Act on Prevention of Transfer of Criminal Proceeds (Effective on October 2016) 5

6 Act on Prevention of Transfer of Criminal Proceeds STR Competent Administrative Authority Supervisory Measures (e.g. Rectification Order) Notification of STR Statement of Opinion on Supervision JAFIC (Japan Financial Intelligence Center) National Public Safety Commission (National Police Agency) Collection & Analysis of STR Information Exchange Foreign FIUs Dissemination of STR Consfiscation of Criminal Proceeds Investigative Authority Terrorist etc. Investigation Specified Business Operator Financial Institutions (e.g. Banks, Securities Firms, Insurance Companies), Financial Leasing Company, Credit Card Company, Real Estate Agent, Dealer in Precious Metals & Stones, Mail Box Operator, Telephone Service Operator Customer Due Diligence Record Keeping Suspicious Transaction Report (STR) Judicial Scrivener, Administrative Scrivener, Certified Pubic Accountant, Certified Tax Accountant Lawyer 6

7 Customer Due Diligence under Act on Prevention of Transfer of Criminal Proceeds Specified Business Operator - Bank - Insurance Company - Financial Instruments Operator - Money Lender - Credit Card Operator - Real Estate Agent - Dealers in Precious Metals and Stones, etc. Preparation and Preservation of Customer Identification Records and Transaction Records Specified Transactions - Contracts for acceptance of deposit - Cash remittance exceeding JPY 100,000 - Insurance Agreement - Derivatives and Securities Transactions - Credit Card Agreement - Transaction of Real Estate - Transaction of Precious Metal and Stones exceeding JPY 2,000,000 Customer Due Diligence Customer -When Enhancing Business Relationship -- Occasional Transactions over JPY 2 million (in case of cash remittance, JPY 100,000) Individual - Name - Address - Birth Date Corporation - Name - Address of headquarter or Main Office - Identification of the person in charge of transaction - Agency power of the person in charge of transaction 7

8 Specified Business Operator Non Specified Business Operator Non Specified Business Specified Business Not Applicable Not Applicable Draft and Preservation of Transaction Record* Notification of STR Specified Transactions Verification of Identity Draft and Preservation of Identity Verification Record *Other than small amount transactions 8

9 FATF Third Round Mutual Evaluation FATF Members Evaluation for all members completed from 2007 to 2011 Evaluation Report for Japan is issued in October rd round MER (FATF member countries and regions mutually evaluate the compliance of Recommendations) (i) Response to Questionnaire, (ii) on-site investigation and (iii) face-to face meeting, (iv) plenary meeting (i) Does the country receive PC or NC for important recommendations? Regular follow-up Two years after the MER is discussed, the assessed country would report back to the Plenary and provide information on the actions it has taken or is taking to address the deficiencies underlying any of the Recommendations that are rated PC or NC. FATF members are encouraged to seek removal from the follow-up process within three years after the adoption of the MER, or very soon thereafter. Yes No Evaluation C: Compliant LC: Largely Compliant PC: Partially Compliant NC: Non Compliant Biennial Update must provide succinct updates for Recommendation rated PC or NC. Yes, but not enough. The country shall submit follow-up letter in the next plenary again. Are the measures taken for the Deficiencies that are rated PC or NC enough in light of the Recommendations? No Yes Enhanced Follow-Up (i) Letter sent from FATF Chairman, (ii) High level mission, (iii) Application of Recommendation 21, (iv) Suspension or Termination of FATF membership 9

10 Mutual Evaluation Results of Japan Japan received 15 PCs and 10 NCs at 3 rd round in Mutual Evaluation Report. NC (Non Compliant) 5 Customer due diligence (financial institutions) 6 Individuals who are or have been entrusted with prominent public function in a foreign Country 7 Correspondent Banking 12 Customer due diligence by DNFBP (designated non financial businesses and professions) 15 Obligation to maintain internal control 21 Special attention for higher risk countries 22 Foreign Branches and Subsidiaries 33 Legal person-beneficial owner 34 Legal arrangements (trust) - beneficial owner SR9 Cross border declaration & disclosure (Cash courier) *Regular follow-up will apply where the mutual evaluation report shows there are significant deficiencies in the country s AML/CFT system. significant deficiencies include the case where Recommendations 1, 5, 10, 13 or SR II or IV are rated either PC or NC. In case of Japan, Regular follow-up applies to Recommendation 5 and SR5. PC (Partially Compliant) 8 Misuse of new technologies & non face-to-face business 16 Suspicious Transaction Report by DNFBP 18 Shell bank (bank incorporated in a jurisdiction in which it has no physical presence) 24 Supervisory obligation for DNFB 35 Convention 36 Mutual Legal Assistance 37 Dual Criminality 39 Extradition SR1 SR2 SR3 SR5 SR6 SR8 Implement United Nation instrument Criminalise terrorist financing Freeze and confiscate terrorist assets International cooperation for terrorism Money/value transfer service Non profit organization 10

11 Summary of CDD measures required under Third Mutual Evaluation to Japan Customer Due Diligence required by FATF Recommendations Specified Business Operator Japanese Regulation Deficiencies Transaction Verification of Customer Identification Data Natural Person - Name - Address - Date of Birth Legal Person Verification of additional customer Information - Purpose of Transactions - Beneficial Owner - Confirmation of agency power - Legal status, directors, Articles of Incorporation of legal person - Nationality, Occupation, Assets, Source of Assets - PEPs (Politically Exposed Persons) Customer - Name - Address On-going Due Diligence Risk-based Internal Management 11

12 Required Customer Due Diligence (CDD) Items Individual Customer Corporate Customer 1 Customer Identification Data (Name, Address, and Date of Birth) 2 Purpose of Transaction Customer Identification Data (Name, Address of head office) 3 Occupation Type of Business 4 Customer Identification Data of Beneficial Owner 5 Status of Asset and Revenue (higher risk transactions in case where the transaction value exceeds JPY 2million) 6 Confirmation of Personal Identification Data of the person in charge of the transaction 7 Confirmation of Agency Power for the person in charge of the transaction 12

13 Customer Due Diligence (CDD) Items Individual Customer Customer Identification Data (name, address, birth date) (Presentation or Delivery of Customer Identification document, supplemental document or its copy) Occupation (Declaration) Corporate Customer (other than listed companies) Customer Identification Data of Corporation (Corporate Name, address of head office or principle office) Purpose of Transactions (Declaration) Business Nature (ID) Customer Identification Data of Beneficial Owner (Declaration, but ID is required in case of higher risk transaction) Country, Local Government, Listed Company, etc. Customer Identification Data of the person in charge of the transaction(presentation or delivery of customer Identification document, supplemental document, or its copy) Agency Rights of person in charge of transaction (Personal status, power of attorney, telephone etc.) Agency Rights of Person in charge of Transaction (power of attorney, employee ID card, telephone etc.) (Higher Risk Transactions in case where the transaction value exceeds JPY 2million) Information concerning Assets and Revenue (ID) 13

14 Customer Identification Measures for individual customer For Individual Customer Confirm Customer Identification Data (the name, address, and birth date of the customer). In addition, in case of proxy, identification of the person who actually carries out the transaction is required. Face-to face Transactions FATF criticizes no secondary confirmation measure for health insurance certificate. Presentation of a driver s license, heath Insurance certificate, pension book, etc. Presentation of a copy of a certificate of residence or a non-photographic government-issued document + Send the documents related to the transaction to the address by non-forwarding postal mail. Non Face-to face Transactions (Website, Mailing Service, etc.) Send the personal Identification document or its copy + Japan s unique risk reduced measures Send the documents related to the transaction to the address by non-forwarding postal mail. Identification is Complete 14

15 Identification Measures for corporate customer For Corporate Customer Confirm Customer Identification Data (the name of the Corporation, address of head quarters or main office). In addition, confirmation of the person in charge of the transaction is required. Face-to face Transactions Presentation of a certified copy of register of the corporation, seal registration certificate, etc. + Non Face-to face Transactions (Website, Mailing Service, etc.) Send a certified copy of register of the corporation, seal registration certificate, etc. + Verification of agency power of a natural person in charge of transaction via Proxy, employee ID card, TEL, clear relationship Verification of agency power of a natural person in charge of transaction via Proxy, employee ID card, TEL, clear relationship + + Send copies of personal identification documents of a natural person in charge of the transaction Japan s unique risk-reduced measures Verification of a natural person in charge of the transaction in accordance of the identification method used for individual customer (i.e. Presentation of a driver s license, heath Insurance certificate, etc.) Japan s unique risk-reduced measures + Send documents related to the transaction to both addresses of the corporation and the natural person in charge of the transaction by nonforwarding postal mail. Identification is Complete 15

16 FATF expressed concerns over Japanese AML regulations June 2014 FATF calls on Japan to enact adequate anti-money laundering and counter terrorist financing legislation The FATF is concerned by Japan s continued failure to remedy the numerous and serious deficiencies identified in its third mutual evaluation report adopted in October 2008, despite Japan s high-level political commitment. The most important deficiencies deal with: the incomplete criminalisation of terrorist financing the lack of satisfactory customer due diligence requirements and other obligations in the area of preventive measures applicable to the financial and non-financial sectors the incomplete mechanism for the freezing of terrorist assets, and the failure to ratify and fully implement the Palermo Convention. The FATF encourages Japan to promptly address these AML/CFT deficiencies, including through the adoption of the necessary legislation. The FATF will continue to monitor Japan s progress. 16

17 Re-amendment to the Act and the Response from FATF In response to the FATF concern, re-amendment to the Act on Prevention of Transfer of Criminal Proceeds was enacted in the Diet in November FATF welcomed Japanese government s efforts. Welcoming Japan s important progress in its legislative actions, and encouraging Japan to continue to address deficiencies, including through the adoption of relevant bills. The re-amendment act will become effective on October

18 4 Important Amendments You must know Risk-reduced measures will be required when an individual customer or the person in charge of the transaction for a corporate customer presents non-photographic ID (i.e. health insurance card, pension book). Measures for confirmation of agency power of the person in charge of transaction for a corporate customer will be limited. Measures for confirming ultimate beneficial owner will be drastically changed. Most Important Amendment If a customer is a Foreign PEP, a specified operator will be required to implement enhanced due diligence. 18

19 Deficiencies in Customer Identification Document and Measures Face-to-Face transaction FATF Non face-to-face transaction (internet and mail) Sending secondary documents etc. 1. Individual Customer => verify customer s name, address and birth date by customer identification documents Presentation of driver s license, health insurance certificate, Pension Book, passport, documents with photographic issued by government No photograph FATF Risk-reduced measures required Sending customer Identification document or its copy + Send the documents related to the transaction by non-forwarding postal mail. Presentation of copy of residence and documents issued by government without photograph + Send the documents related to the by non-forwarding postal mail. 2. Corporate Customer=> verify customer s name and principle office + verify customer identification of natural person acting for transaction Presentation of Certificate of registration, seal registration certificate, Documents issued by governments Send identification document or its copy + Send identification documents of the person in charge of the actual transaction or their copies. FATF Standards for issuance is unclear Concern about quality of information + Send documents related to the transaction to both Addresses of the corporation and the person in charge of the actual transaction by non-forwarding postal mail.

20 Risk-reduced measures for non-photographic ID Prior to October 2016 Presentation of health insurance card, pension book etc. Presentation of a copy of a certificate of residence or a non-photographic governmentissued document + Send the documents related to the transaction to by non-forwarding postal mail. Identification Complete After October Presentation of another Identification Document or receipt of public utilities Presentation of health insurance card, pension book etc. Presentation of a copy of a certificate of residence or a non-photographic governmentissued document Send the copy of another Identification Document or receipt of public utilities Send the documents related to the transaction by non-forwarding postal mail Send the documents related to the transaction by non-forwarding postal mail Identification Complete There will be no amendment to non-face to face verification measures for natural person and confirmation measures for corporation. 20

21 Confirmation of Agency Power Specified Business Operator Verification of Identity under Japanese Regulation transaction Person in charge of transaction Confirmation of agency power Appointment as Agent Proxy Employment ID Registered as Director TEL Clear Relationship Corporate Customer Neither Employment ID nor Registration as a director shows the agency power of the transaction. 21

22 Verification Measures for Agency Power of Corporation Prior to October 2016 After October 2016 Possession of Proxy No Change Possession of Identification issued by the corporate customer (e.g. employee ID card) Registered as an executive under the commercial register of the corporation Independent telephonic or other contact with the corporate customer (e.g. , fax) It is clear that the representative acts on behalf of the corporate customer for the reason that Specified Business Operator recognizes the relationship between an individual customer and the representative Abolished Registered as a representative under the commercial register of the corporation No Change No Change 22

23 Beneficial Owner under current regulations Specified Business Operator transaction Customer (Non Listing Company) - FATF criticized Japanese regulations under which a corporation can be BO. FATF requires Ultimate beneficial owner (UBO) to be a natural person. - FATF also criticized representative of the corporation cannot be a UBO. natural persons or corporations holding more than 25% voting rights for corporations which introduce majority voting system (e.g. stock corporations (kabushiki kaisha)) representative of the corporation for other corporations (e.g. healthcare company) Beneficial Owner 23

24 Beneficial Owner of Current Regulations Types of Corporations Objective for Verification Verification Measure In case the above company is controlled by voting right e.g. Joint Stock Corporation (kabushikikaisha) * Listed Companies are exempted from confirmation of beneficial owners. In case the above company is not controlled by voting right e.g. General Incorporated Associations and General Incorporated Association, Educational Corporation, Religious Corporation, Healthcare Corporation, Membership Company - Verification of Customer Identification Data of Person which hold more than 25% of the voting rights of the corporation - If the another person holds more than 50% of the voting rights of the corporation, the person who holds more than 25% but no more than 50% of the voting rights of the corporation will not become BO. - Indirect voting holder of a corporate customer will not become a BO. Verification of Customer Identification Data of the representative of the corporation -In case of medium risk transaction, declaration of the information by the person in charge of transaction - No identification document is required in case of medium risk transactions. - Identification document is required in case of high risk transaction 24

25 Pitfalls of Current Regulations Case 1 Case 2 BO of X Co A (individual) B Co 40% 30% 25 % C co A (Individual) C (Individual) 100% B Co 40% 60% BO of X Co X Co Bank Opening bank account X Co Bank Opening bank account 25

26 UBO under the New Regulations In case the above company is controlled by voting right (e.g. stock corporations) Is there a any shareholder who owns more than 50% of total voting rights of the above company? (*2) Yes This shareholder (*1) No Is there a any shareholder who owns more than 25% of total voting rights of the above company? (*2) Yes These shareholders (*1) No Are there any substantial controllers of the above company? Yes These shareholders No Representative Director (*1) Except the person who does not have an intention or ability to control the above company. (*2) In the case the person has more than 50% of the other company's voting rights, the person is deemed to control the voting rights of the other company. (*3) If the company is the State, government agency, local government, central bank, international organization, listed / registered company at stock exchange, or its subsidiary, such company is deemed to be a natural person in terms of judging UBO. 26

27 Direct / Indirect Ownership C 51% E 51% D Co B Co 26% A Co C is deemed to be the UBO. (26% indirect ownership) C Co 51% 51% B Co 26% E is deemed to be the UBO. (26% indirect ownership) A Co B Co 51% 20% C 20% C is deemed to be the UBO. (40% indirect ownership) B Co D 51% 51% 20% 20% D Co D is deemed to be the UBO. (40% indirect ownership) A Co A Co Please note that the definition of UBO is different from both EU members and US. 27

28 State, local governments, listed companies will be UBO If the company is the State, government agency, local government, central bank, international organization, listed / registered company at stock exchange, or its subsidiary, such company is deemed to be a natural person in terms of judging UBO. D Non-UBO 51% C Co (Listed company) 51% B Co (Non-listed company) UBO A Co 26% 28

29 EDD is introduced when UBO is Foreign PEP If UBO is a Foreign PEP, Enhanced Due Diligence (EDD) will be required. CDD for Medium Risk Transactions EDD for High Risk Transactions Customer Identification 1 copy of identification document 2 copies of identification document Data (Name, address, Date of Birth) Purpose of Transactions / Occupation Business Beneficial Owner of Corporation Declaration-Basis (No document required) Same as Left Column Confirmation of original Same as copy Left or Column duplicated copy of Articles of Incorporations, Annual Securities Report, Certificate Copy of Register and other similar documents. Declaration for customer identification data (i.e. name, address, date of birth ) of UBO from person in charge of the transaction (No document required) Declaration for customer identificatio date of birth ) of UBO from person in (No document required) + [Joint Stock kabushikikaisha Corporation )] Confirmation ( of l shareholders, annual securities report [Membership company] confirmation of certificate copy of re Status of assets and revenues in case where the transaction value exceeds JPY 2 million Supervisor s confirmation for suspicious transaction Supervisor s approval for executing transaction [Individual Customer] tax withholding passbook deposit, payment record, paym document [Corporate Customer] B/S, P/L, Annual other similar documents Required 29

30 UBO under the New Regulations In case the above company is not controlled by voting right (e.g. Healthcare Corporation Is there any person who receives more than 50% of total dividend of the above company? Yes This Person (*1) No Is there any person who receives more than 25% of total dividend of the above company? Yes These Persons (*1) and Are there any substantial controllers of the above company? Yes These Persons No Representative of the above company (*1) Except the person who does not have an intention or ability to control the above company. (*2) If the company is the State, government agency, local government, central bank, international organization, listed / registered company at stock exchange, or its subsidiary, such company is deemed to be a natural person in terms of judging UBO. 30

31 Declaration Form of Ultimate Beneficial Owner In case the above company is controlled by voting right in case the above company is not controlled by voting right Is there a any shareholder who owns more than 50% of total voting rights of the above company? (*2) Yes This shareholder (*1) (A) Is there any person who receives more than 50% of total dividend of the above company? Yes This Person (*1) (a) No No Is there a any shareholder who owns more than 25% of total voting rights of the above company? (*2) Yes These shareholders (*1) (B) Is there any person who receives more than 25% of total dividend of the above company? Yes These Persons (*1) (b) No and Are there any substantial controllers of the above company? Yes These shareholders (C) Are there any substantial controllers of the above company? Yes These Persons (c) No No Representative Director (D) Representative Director (d) (*1) Except the person who does not have an intention or ability to control the above company. (*2) In the case the person has more than 50% of the other company's voting rights, the person is deemed to control the voting rights of the other company. (see the attached sheet 1) (*3) If the company is the State, government agency, local government, central bank, international organization, listed / registered company at stock exchange, or its subsidiary, such company is deemed to be a natural person in terms of judging UBO. (see the attached sheet 2) Q1 Following the above charts, please identify if there is/are any substantial controller (individual). If there is/are please write Name, Address, and Date of Birth on the list. And also please write Relation choosing from (A)~(D) or (a)~(d), and details. Q2 Is/Was this substantial controller PEP or its relative? Please fill the list below. (see the attached sheet 3) (If the company is the State, government agency, local government, central bank, international organization, listed / registered company at stock exchange, or its subsidiary, please write its Name, Address, Name of listed Exchange as UBO.) Name Address Birth Date Relation PEP Emilio Vengor Nishiazabu, Minato-ku, Tokyo (B) indirect ownership of 30% 〇 Ex-ambassador of 31

32 (Sheet 1) Direct / Indirect Ownership Case 1 Case 2 C 51% E 51% D Co B Co 26% A Co C is deemed to be the UBO. (26% indirect ownership) C Co 51% 51% B Co 26% E is deemed to be the UBO. (26% indirect ownership) A Co Case 3 B Co 51% 20% C 20% C is deemed to be the UBO. (40% indirect ownership) Case 4 B Co D 51% 51% 20% 20% D Co D is deemed to be the UBO. (40% indirect ownership) A Co A Co 32

33 (Sheet 2) If the company is the State, government agency, local government, central bank, international organization, listed / registered company at stock exchange, or its subsidiary, such company is deemed to be a natural person in terms of judging UBO. D Non-UBO 51% C Co (Listed company) 51% B Co (Non-listed company) UBO A Co 26% 33

34 (Sheet 3) PEP: Politically Exposed Persons 1 A person who currently holds one of the following foreign important positions I. Head of State II. Position equivalent to Prime Minister / Minister of State / Senior Vice Minister III. Position equivalent to Chairman of the House of Representatives / Vice Chairman of the House of Representatives / Chairman of the House of Councilors / Vice Chairman of the House of Councilors IV. Position equivalent to Justice of the Supreme Court V. Position equivalent to Ambassador Extraordinary and Plenipotentiary / Envoy Extraordinary and Minister Plenipotentiary / Ambassador on Special Mission / Representative of the government / Plenipotentiary VI. Position equivalent to Chief of Staff, Joint Staff / Vice Chief of Staff, Joint Staff / Chief of Staff, Ground Force / Vice Chief of Staff, Ground Force / Chief of Staff, Maritime Force / Vice Chief of Staff, Maritime Force / Chief of Staff, Air Force / Vice Chief of Staff, Air Force VII. Executive of Central Bank VIII. Executive of a corporation in case a corporation is required to obtain the approval of national assembly for the budget 2 A person who held one of the positions of section 1 above in the past. 3 Spouse (including common-law spouse), parents, child, brother and sister, parents of spouse, child of spouse of the person who fall within the definition of section 1 or 2 above (see the chart below) father mother father mother Spouse (including commonlaw spouse) A person who holds/held the foreign important positions Brother and Sisters child child child 34

35 PEPs(Politically Exposed Persons) - current or former senior official in the executive, legislative, administrative, military, or judicial branch of a foreign government (elected or not) - a senior official of a major foreign political party - a senior executive of a foreign government-owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual - an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse's parents or siblings - any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate. Specified Business Operator transactions - Verify whether customers are PEPs - Obtain approval from senior management officer when entering into transactions - Verify the source of transaction - Enhanced ongoing monitoring Deficiencies pointed out by MER Customer (PEPs) No legal obligation No measures are taken under the Amended Act.

36 Foreign PEPs under Japanese Regulations 1 A person who currently holds one of the following foreign important positions I. Head of State II. Position equivalent to Prime Minister / Minister of State / Senior Vice Minister III. Position equivalent to Chairman of the House of Representatives / Vice Chairman of the House of Representatives / Chairman of the House of Councilors / Vice Chairman of the House of Councilors IV. Position equivalent to Justice of the Supreme Court V. Position equivalent to Ambassador Extraordinary and Plenipotentiary / Envoy Extraordinary and Minister Plenipotentiary / Ambassador on Special Mission / Representative of the government / Plenipotentiary VI. Position equivalent to Chief of Staff, Joint Staff / Vice Chief of Staff, Joint Staff / Chief of Staff, Ground Force / Vice Chief of Staff, Ground Force / Chief of Staff, Maritime Force / Vice Chief of Staff, Maritime Force / Chief of Staff, Air Force / Vice Chief of Staff, Air Force VII.Executive of Central Bank VIII.Executive of a corporation in case a corporation is required to obtain the approval of national assembly for the budget 2 A person who held one of the positions of section 1 above in the past. 3 A person spouse (including common-law spouse), parents, child, brother and sister, parents of spouse, child of spouse (see the attached sheet) 4 If the UBO of the corporation holds one of the positions of section 1, 2 or 3 above. 36

37 Foreign PEPs under Japanese Regulations 1 A person who currently holds one of the following foreign important positions I. Head of State II. Position equivalent to Prime Minister / Minister of State / Senior Vice Minister III. Position equivalent to Chairman of the House of Representatives / Vice Chairman of the House of Representatives / Chairman of the House of Councilors / Vice Chairman of the House of Councilors IV. Position equivalent to Justice of the Supreme Court V. Position Executives equivalent of to Ambassador International Extraordinary Organizations and (e.g. Plenipotentiary UN, IMF) / do Envoy not Extraordinary falls within and Minister the definition Plenipotentiary of Foreign / Ambassador PEPs under on Special Japanese Mission / Representative of the government / Plenipotentiary Regulations. VI. Position equivalent to Chief of Staff, Joint Staff / Vice Chief of Staff, Joint Staff / Chief of Close Associates, such as personal attorney and personal tax Staff, Ground Force / Vice Chief of Staff, Ground Force / Chief of Staff, Maritime Force / Vice Chief accountant, of Staff, Maritime do not fall Force within / Chief the of definition Staff, Air Force of Foreign / Vice PEPs Chief of Staff, Air Force under Japanese Regulations. VII.Executive of Central Bank VIII.Executive of a corporation in case a corporation is required to obtain the approval of national assembly for the budget 2 A person who held one of the positions of section 1 above in the past. 3 A person spouse (including common-law spouse), parents, child, brother and sister, parents of spouse, child of spouse (see the attached sheet) 4 If the UBO of the corporation holds one of the positions of section 1, 2 or 3 above. 37

38 Measures to find Foreign PEPs Specified Operator may use any of the following measures depending on its scale and/or types of customers. 1. Commercial Data Base (e.g. Dow Jones, Thomason Reuters) 2. Public Information on Internet, etc. 3. Declaration by Customers (check box, capital structure chart) 38

39 Declaration Form of Foreign PEP Please check whether you fall within the definition of any of the following positions. No Yes If you select Yes, please describe about the position which you hold. 1 A person who currently holds one of the following foreign important positions I. Head of State II. Position equivalent to Prime Minister / Minister of State / Senior Vice Minister III. Position equivalent to Chairman of the House of Representatives / Vice Chairman of the House of Representatives / Chairman of the House of Councilors / Vice Chairman of the House of Councilors IV. Position equivalent to Justice of the Supreme Court V. Position equivalent to Ambassador Extraordinary and Plenipotentiary / Envoy Extraordinary and Minister Plenipotentiary / Ambassador on Special Mission / Representative of the government / Plenipotentiary VI. Position equivalent to Chief of Staff, Joint Staff / Vice Chief of Staff, Joint Staff / Chief of Staff, Ground Force / Vice Chief of Staff, Ground Force / Chief of Staff, Maritime Force / Vice Chief of Staff, Maritime Force / Chief of Staff, Air Force / Vice Chief of Staff, Air Force VII. Executive of Central Bank VIII.Executive of a corporation in case a corporation is required to obtain the approval of national assembly for the budget 2 A person who held one of the positions of section 1 above in the past. 3 Spouse (including common-law spouse), parents, child, brother and sister, parents of spouse, child of spouse of the person who falls within the definition of section 1 or 2 above (see the attached sheet) 39

40 Scope of Relatives of Foreign PEP father mother father mother siblings Spouse (including commonlaw spouse) A person who holds/held the foreign important position child child child * Neither grand father/grand mother nor grand sons / grand daughter of the person who holds/held the foreign important position falls within the definition of Foreign PEP. * Japanese citizen may falls within the definition of Foreign PEP because a spouse of the person may holds/held one of the foreign important position. 40

41 Domestic PEPs 2012 FATF Recommendations require financial Institutions to conduct customer due diligence for Domestic PEPs. Japan will only introduce customer due diligence for Foreign PEPs from October th Round Mutual Evaluation for Japan will be conducted in Mutual Evaluation Report will definitely point out the deficiencies for enhanced due diligence for Domestic PEPs. Therefore, Japan will be obliged to introduce enhanced Due Diligence for Domestic PEPs after

42 Other Amendments New Transactions requiring CDD Suspicious transactions, Structuring transactions Risk-based Approach National-based Risk Assessment Document: Report of Investigation on Risks of Transfer of Criminal Proceeds Specified Operator-based Risk Assessment Document: Risk Assessment Document 42

43 New Transactions requiring CDD 1. Transactions that require special attention when managing the customers Suspicious Transactions Transaction implemented in a way that is materially different from that of other transactions of a similar nature (Unusual Transactions) 2. Structuring transaction, dividing large amount of cash into smaller sums that fall below the threshold (e.g. JPY 2 million for cash transactions or JPY 100,000 for cash money transfer) to evade CDD. 43

44 Cases requiring CDD Japan FATF CDD Specified Transactions Entering into continuous transactions Large amount transactions When impersonation is suspected CDD Listed in Reference Cases of Suspicious Transactions Operators virtually pay Attention to unusual Transactions. Unusual Transactions Complex, unusual large or patterns of transactions, that have no apparent or visible economic or lawful purpose FATF CDD STR Suspicious Transactions CDD Operator may not leak the information to submit suspicious transaction report (STR). If CDD is conducted when the transaction is suspicious, the customer will note the operator has/will submit STR. No CDD is required under current Japanese Regulations

45 Structuring Threshold transaction amount which divide requiring CDD or not. Transaction exceeding threshold CDD required Transaction below threshold CDD not required Customer Due Diligence FATF Japan 1 and amount 2 Threshold Threshold = time divided 45

46 Risk-based Approach Japan FATF High Risk Transactions (very limited) Enhanced Due Diligence (EDD) High Risk Transactions Enhanced Due Diligence (EDD) Customer Due Diligence (CDD) Medium Risk Transactions Customer Due Diligence (CDD) Low Risk Transactions No CDD Lower Risk Transactions Reduced Due Diligence (RDD) Risk will be changed by taking into consideration of risk-reduced measures. 46

47 Risk-based Approach under 2012 FATF Recommendations 1st Step National Government shall evaluate and assess the degree of the risks of transactions for all financial institutions and non-financial institutions and issues a report every year. Japanese Government issues Report of Investigation on Risks of Transfer of Criminal Proceeds ( National-based Risk Assessment Report ) every year. 2nd Step Each financial institution and non-financial institution shall evaluate and assess the degree of the risks of its own transactions. Each financial institution and non-financial institution in Japan shall investigate into and analyze its own transactions and record the results thereof with focus on degree of risks that may be involved money laundering ( Corporate-based Risk Assessment Report ) 47

48 Risk Assessment under National-based Risk Assessment Report Ultra High Risk High risk Potentially High Risk * Risks will be increased depending on the situation of transactions, attributions of customers or other factors. [Nation or Region] Iran, North Korea [Nation or Region] Myanmar, Algeria [Customer] Anti-social forces (e.g. Boryokudan) Non-resident Foreign PEPs Corporation whose substantial controller is not evident Customers who use identification documents without photos [Forms of Transactions] Transaction without any face-to-face contact Cash Transactions [Bank] Deposit account, deposit transactions, exchange transactions, safe-deposit, bills, checks [Insurance company] Savings-based insurance [Financial Exchange Business Operators (e.g. securities firms, investment corporations), Commodity Exchange Business Operators] Investment in stock, bonds, investment trusts, etc., investment in commodities) [Trust Bank, Trust Company] Trust [Money Lender] Lending [Fund Transfer Operator] Fund transfer business [Foreign Exchange Operator] Foreign exchange service [Finance Lease Operator] Finance Lease [Credit Card Operator] Credit Card [Real Estate Business Operator] Real Estate

49 Internal Control System 1. Up-to-date the information concerning the matters confirmed through CDD; 2. Implementation of education and training for the employees; 3. Preparation of Internal Rules for CDD; 4. Appointment of persons as Supervisors for CDD; 5. Preparing for Corporate-based Risk Assessment Report and review and amend it if necessary; 6. Collect the information that is necessary for implementation of CDD and organize and analyze such information, taking into consideration of the contents of Corporate-based Risk Assessment Report ; 7. Scrutinize the confirmation records and transaction records on a continuous basis, taking into consideration of the contents of Corporate-based Risk Assessment Report ; 8. If the transaction falls within the definition of high risk transactions, an approval from Supervisor is required upon conducting transaction; 9. When the information is collected, organized and analyzed pursuant to the provision of Item 6 above with respect to the high risk transactions, to record, or prepare records, of the results thereof and retain the same with the relevant confirmation records or transaction records; 10. To take measures necessary in order to employ, as the employees to engage in the business operations, persons with ability necessary for appropriate implementation of CDD; and 11. To provide necessary audit for appropriate implementation of the Measures of CDD. Item 3 through Item 11 will be added under the new regulations. Risk-based approach is made clear

50 Risk Classification under Japanese AML High Risk Medium Risk Low Risk Risk Classification CDD Other CDD A case of a specified transaction conducted on a continuous basis that accompanies a suspicion of impersonation A case of a specified transaction conducted on a continuous basis that accompanies a suspicion that the matters of CDD are misrepresented A specified transaction with a person residing in Iran or North Korea A specified transaction conducted with a foreign PEP Transactions that require special attention when managing the customers Suspicious transaction A transaction implemented in a way that is materially different from that of other transactions of a similar nature Transactions that are considered to be highly suspicious of money laundering by taking into consideration the contents of National Risk Evaluation Report Specified transactions other than above mentioned transactions Transactions other than the above mentioned transactions (including transactions that are permitted for simplified CDD) Enhanced Due Diligence (The same in the case of the second or subsequent transaction) Ordinary CDD (The same in the case of the second or subsequent transaction.) No CDD (*) Ordinary CDD Nil (*) No CDD(*) Confirmation by Supervisor whether any suspicious matter is involved in the transaction Approval from Supervisor when executing the transaction (*) except in case where the transaction requires special attention when managing the customers (i.e. suspicious transactions, unusual transactions) 50

51 Measures for judging Suspicious Transaction Types of Transaction Common Measures Additional Measures Transaction with new customer Transaction with current customer Broad-sense High Risk Transaction Taking into consideration of the result of CDD, forms of transaction and other factors; Taking into consideration of the National-based Evaluation Report Comparison with the general form of transactions; Comparison with the past transactions with the same customer; and Consistency with the matters of confirmation upon conducting transactions Scrutinizing the confirmation records and transaction records Scrutinizing the confirmation records and transaction records Supervisor s confirmation whether there are any suspicious points in the transaction 51