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Finance

Money-laundering watchdog gives Japan a failing grade

Tokyo's fragmented bureaucracy hindered effective response to 2008 review

Japanese 10,000 yen bank notes. The nation's measures to combat money laundering have been called insufficient by an international watchdog.   © Reuters

TOKYO -- Japan's measures to combat money laundering faces a failing grade from an international watchdog, Nikkei learned Friday, giving Tokyo yet another reason to knock down the walls of the country's compartmentalized bureaucracy.

In its plenary meeting late last month, the Financial Action Task Force decided to place Japan under enhanced follow-up, a classification for countries that have "significant deficiencies" or are making "insufficient progress," a source familiar with the situation said. The evaluation, set for release in August, follows a review in late 2019.

The group acknowledged progress by Japan since its last evaluation in 2008, noting that "measures to combat money laundering and terrorist financing are delivering results." But a lack of cooperation among different parts of the government has stymied legislation and regulations that could tackle the problem more effectively.

The FATF, which has 39 member countries and regions, issues what amount to binding recommendations on measures against money laundering and terrorism financing. The task force was established by the 1989 Group of Seven summit in Paris.

The task force is urging Japan to improve supervision of efforts by financial institutions to prevent money laundering, and apparently is calling for tougher administrative penalties as well as stronger punishments for those violating laws in this area.

Financial institutions still face challenges surrounding ongoing due diligence -- monitoring customers and their transactions for potential problems -- and awareness of money laundering risks in businesses such as mobile money transfer services.

In response to this latest evaluation, Tokyo plans to create a team that targets money laundering. It will be under the Cabinet Secretariat but involve other government bodies including the Financial Services Agency and the Justice Ministry. Japan also plans to submit legislation to parliament next year to impose tougher penalties.

Efforts against money laundering draw in a broad range of government agencies, and Japan's bureaucracy has long struggled to coordinate effectively. The Justice Ministry enforces legislation against terrorist financing. The National Police Agency is in charge of regulations around customer due diligence, while the Cabinet Office oversees nonprofits, a sector that could be abused to funnel money to criminal organizations.

After the FATF's unfavorable 2008 assessment, Japan faced pressure to impose tougher laws, but a lack of cooperation among agencies bogged down the process. The task force issued an unusual statement in 2014 expressing concern about Japan's "continued failure to remedy the numerous and serious deficiencies" in the report.

The silos separating government agencies have plagued Tokyo for many years, and reared their head again during the coronavirus pandemic. Poor communication between local governments and central authorities such as the health ministry hindered efforts to keep the virus from spreading.

Prime Minister Yoshihide Suga's administration has vowed to break down these barriers, and is taking steps in this direction with plans for a new digital agency and a children's agency that both cross established ministry boundaries. Similar measures will be essential to restoring international trust in Japan's money laundering countermeasures.

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