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Finance

Japan fails in anti-money laundering and terror financing

Smaller banks, gold dealers and lawyers have low risk awareness, watchdog says

Gold bars are displayed by a dealer in Tokyo's Ginza district.   © Reuters

TOKYO -- Japan's safeguards against money laundering contain holes that can be exploited by criminal organizations and terrorist groups, an international watchdog warned Monday.

The Financial Action Task Force (FATF) has placed Japan in the "enhanced follow-up" classification, which essentially denotes a failing grade.

Although large Japanese financial institutions have a "reasonable understanding" of their money laundering and terror financing risks, some smaller ones only have a "limited understanding," the task force reported.

While Japanese financial institutions have made improvements in initial verification of account holders' identities and purposes, they need to do more to keep such due diligence ongoing and monitor transactions, according to the watchdog. The task force also called on regulators to take stronger action.

"Financial supervisors, including the JFSA [Japanese Financial Services Agency], have not made use of their range of sanctions to take efficient and dissuasive actions" against banks and other financial institutions, the FATF report said.

Outside the financial industry, the FATF points to a number of Japanese sectors, including precious-metals and gem dealers and lawyers, for their "low level of understanding" of the risk of money laundering and terror financing. Japan also has a limited understanding of the risk of nonprofit organizations being used to conceal illicit money flows.

Eighteen other countries share the designation of enhanced follow-up, including the U.S., China, South Korea, Australia, Switzerland and Mexico, according to Japan's Ministry of Finance. The FATF has classified eight jurisdictions in the regular follow-up group, a category that denotes the highest level of compliance. The list includes Italy, the U.K., Spain and Russia, according to the ministry.

Japan received the second-lowest rating on a four-tier scale for financial institutions' effectiveness against money laundering and terror financing. Although Japan avoided being labeled as a high-risk jurisdiction needing close scrutiny, the country will have to submit three reports on its improvement efforts to the FATF over the next five years.

If no progress is made over that period, Japan risks being named by the FATF for its slow response.

Made up of 39 member countries, regions and international organizations, the FATF issues recommendations on fighting money laundering and terrorist financing to more than 200 jurisdictions. The task force had previously singled out Japan for failing to make sufficient progress from the last assessment released in 2008.

In response to the latest findings, Tokyo has established a policy panel involving relevant government agencies. The FSA and the Bank of Japan central bank will conduct a nationwide assessment of risk awareness at local banks and other financial institutions.

The government will consider legal changes that would impose harsher penalties and expand the authority to investigate and prosecute money launderers. Because Western nations have taken strict measures against terrorism financing, Japanese financial groups operating overseas will likely face repercussions if they are seen as soft on money laundering.

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