Over the last several years, South Asia's growth has far outpaced that of any other country, and digitization has been a critical driver of this progress. However, criminal activity has grown substantially as well, with Japan being the primary target. Fraudsters frequently target banks and other financial organizations for crimes like money laundering and terrorist financing. Every year, two to five percent of global GDP is laundered, according to the UNODC. Due to the growing digitalization and acceptance of cryptocurrencies, e-wallets, and payment platforms, Japan has become a key contributor to this statistic over time. As a result, improved AML compliance in Japan is an urgent requirement. Now, Japan's Financial Service Agency (FSA) has launched new and enhanced Anti-Money Laundering (AML) systems, which will go into effect in FY 2021.
First and foremost, it is essential to understand what Japan's laws say regarding money laundering and terrorist financing, as well as what the new AML compliance program means for banks and financial organizations.
What is the New AML System in Japan?
The Japanese Financial Services Agency (FSA) has announced that a new Anti-Money Laundering system would be implemented in the fiscal year 2021. For more effective risk management and greater compliance with the regulations, Japan's new AML compliance program will be built on artificial intelligence algorithms.
Japan is taking all necessary measures to combat financial crime. The FSA in Japan has proposed a new anti-money laundering system for the same reason. Artificial intelligence models will be used in the project to achieve improved levels of accuracy and better compliance with the FSA's requirements. The new method necessitates cutting-edge technology capable of screening all business prospects in the shortest amount of time while also ensuring that the findings are accurate. It is, however, challenging to create a solution that can conduct several risk assessment procedures. As a result, a continuous AML process using hundreds of artificial intelligence models can be beneficial.
Risk-Based Strategy for AML and CFT in Japan
Money laundering is carried out in three phases, with each level increasing the difficulty of tracing the source of illegal money. Banks and other financial institutions must take the required procedures to identify suspected money laundering and terrorist financing operations, according to the paperwork underpinning Japan's risk-based approach. Furthermore, financial institutions must take effective action to tackle these actions.
Because of the growth in financial crime in Japan, the Financial Service Agency has developed structured standards for identifying, assessing, and mitigating the risk of money laundering and terrorist financing. Specific steps have been made mandatory, while others have been recommended to keep firms in this industry safe.
Actions to Consider When Identifying Risk
Financial institutions must take the following steps to detect ML/TF threats, according to the FSA:
- Assess the risks connected with the products or services supplied, as well as the types of transactions, nations, client qualities, geographic transaction areas, and any other relevant variables.
- During the thorough examination, examine the results of the national risk assessment while also taking into account regional characteristics of the business region, the environment, and other factors.
- Risk assessment measures must consider the direct and indirect links between transactions and FATF-designated high-risk countries and territories.
- Before introducing any new products or services, assess the ML/TF risks. Additionally, transactions involving modern technologies will also be evaluated.
Risk Reduction Models for FIs in Japan
Under the risk-based approach, all financial institutions must check their clients' identities, and if any threats are detected, appropriate risk mitigation measures must be implemented.
Customer Due Diligence (CDD) is a must-do procedure that cannot be skipped. Before onboarding, a high-risk customer, a bank, or a financial institution must do Enhanced Due Diligence (EDD) checks. At the same time, Simplified Due Diligence (SDD) might be sufficient if minor risks are recognized with a customer.
Technology has offered plenty of benefits and simplified corporate processes. Improved technology is currently being employed to build solutions that are commensurate with the ever-increasing number of fraudulent actions. Financial institutions must create better techniques to combat fraudsters, who have become increasingly sophisticated in their work. This very reason has prompted Japanese regulators to design a new anti-money laundering and counter-terrorist financing system that uses artificial intelligence to detect, analyze, and minimize the danger of money laundering and terrorist funding. With the help of advanced programs that are conducted by AI, Japanese financial institutions will be able to effectively implement the AML/CTF systems.