Ready or Not: Time For Action, Says Japan’s FSA
The time for encouragement appears to be coming to an end — Japan’s banks need to adopt more advanced technology and data analytics to compete on the global stage.
In a recent article, we looked at some of the steps that the Japanese government was taking to encourage Japan’s banks to adopt more advanced data analytics across business lines, including compliance.
It seems, however, that encouragement can only go so far, and now it’s time for action. In the latest move by Japan’s Financial Services Agency (FSA) to ensure the country’s financial services are competing on the global stage, a March 2024 deadline has been set to fully comply with its Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) guidelines.
Issued in 2018, and updated in early 2021, the guidelines require financial institutions to implement a risk-based approach to AML/CFT, in line with the Financial Action Task Force recommendations.
The latest revisions are focused on risk management with regards to products and services, in particular how suspicious transactions are referenced to past reports for improved assessments.
In a recent notice issued on its website, the FSA said it had discovered numerous problems at financial institutions during the inspection process.
“There may be cases where we will take measures including administrative measures based on laws and regulations,” it said.
Plans to crackdown on money laundering ramped up in 2013, after the Bank of Tokyo-Mitsubishi agreed to pay US$250 million to the New York State Department of Financial Services. The fine had been issued due to the bank’s role in funneling billions of U.S. dollars to rogue and terrorist nations, including Iran, Sudan, and Burma.
The Department of Financial Services stated that the Japanese financial giant had been involved in 28,000 violations from 2002 to 2007, aiding nearly $100 billion in fund transfers involving Iran alone.
Half a decade later, in 2019, a money laundering spike was attributed to international criminal networks using bank accounts in Japan.
Despite having the world’s third largest economy and an almost unrivaled reputation for technological innovation, there has been significant room for improvement in the Japanese financial services sector for some time.
Indeed, in 2008, the Financial Action Task Force, an intergovernmental organization founded to develop policies to combat money laundering, rated Japan’s anti-money laundering measures as the lowest among the seven most industrialized nations. It cited:
- Incomplete criminalization of terrorist financing
- Lack of satisfactory customer due diligence requirements and other obligations in the area of preventive measures applicable to the financial and non-financial sectors
- Incomplete mechanism for the freezing of terrorist assets
Fast-forward 13 years, and there is clearly still work to be done. In fact, alongside the recently set deadline, the FSA recently announced plans to utilize AI to detect fraudulent money transfers at financial institutions nationwide.
Clearly, it is in the best interest of Japan’s banks, and its regulators, for there to be clear, strict laws and frameworks to act as guardrails to ensure banks operate compliantly. Technology is an integral part of the process, and can be used to make sure everything is kept on track.
If Japan’s financial services sector wants to compete on the global stage, and ensure its banking practices are in line with the rest of the world, then it needs to embrace the benefits that behavioral AI and machine learning can bring. Crucially, if regulators are exploring ways of utilizing AI to enable them to quickly and accurately detect incidents of money laundering, then financial firms need to follow suit and use the technology to identify other forms of non-compliance, such as market abuse or collusion.
With the right AI-enhanced surveillance solution, firms can proactively identify non-compliant behavior quickly and accurately, thereby avoiding disruptions to business continuity, lawsuits, media scandals, fines, executive dismissals, and employee churn. Such data analytics can also be used to gain actionable insights into how employees communicate and collaborate.
The third benefit awaiting Japanese banks that implement AI-enhanced technology lies in the potential to make laser-focused, tailor-made training programs based upon the insights generated by their data.
For example, a modern surveillance solution can enable organizations to identify specific compliance deficiencies, and then tailor training programs in order to minimize further infractions relating to those deficiencies.
With stricter laws, and AI-enhanced regulation on the horizon, there is a world of risks and rewards awaiting Japan’s banks. A world that will be opening up, whether Japan’s banks are ready or not, in 2024.