2006 JAPAN INCSR PART II

UNCLAS TOKYO 006575 SIPDIS SIPDIS STATE FOR INL, EAP/J JUSTICE FOR AFMLS, OIA, OPDAT TREASURY FOR FINCEN, EB/ESC/TFS E.O. 12958: N/A TAGS: KCRM EFIN KTFN SUBJECT: 2006 JAPAN INCSR PART II ¶1. (U) Japan is the world's second largest economy and a large and important world financial center. Although the Japanese government continues to strengthen legal institutions to permit more effective enforcement of financial transaction laws, Japan still faces substantial risk of money laundering by organized crime and other domestic and international criminal elements. The principal sources of laundered funds are drug trafficking and financial crimes: illicit gambling, loan-sharking, extortion, abuse of legitimate corporate activities, internet fraud activities, and all types of property related crimes, often linked to Japan's criminal organizations. The National Policy Agency (NPA) of Japan estimates the aggregate annual income from organized criminal organizations approximately $10 billion, $3.38 billion of which is derived from income from the trafficking of methamphetamines. (Note: This estimate is based on a figure last officially calculated in 1989, according to the National Police Agency, which no longer attempts official determinations, given their lack of confidence in the accuracy of such estimates.) ¶2. (U) U.S. law investigations periodically show a link between drug-related money laundering activities in the U.S. and bank accounts in Japan. The number of Internet-related money laundering cases is increasing. In some cases, criminal proceeds were concealed in bank accounts obtained through an Internet market. Laws enacted in 2004 now make online sales of bank accounts illegal. ¶3. (U) The Financial Services Agency (FSA) and the Ministry of Finance are working on measures, expected to be promulgated in 2006, to enable authorities to more closely monitor domestic and international money remittances. In a related move, the Cabinet Office published a counterterrorist action plan on December 10, 2004 that states Japan's intention to fully implement Financial Action Task Force (FATF) Special Recommendations on Terrorist Financing. ¶4. (U) On November 17, 2005, the Japanese government's headquarters for the Promotion of Measures Against Transnational Organized Crime and Other Relative Issues and the headquarters for International Terrorism agreed that relevant ministries would submit a bill to the 2007 ordinary session of the Diet to enhance compliance with the FATF Forty Recommendations and the FATF Nine Special Recommendations on Terrorist Financing. It is now expected that these recommendations will be enacted by June 2007, given the probable timing for the Anti-Money Laundering Law currently being drafted by the National Police Agency. ¶5. (U) Drug-related money laundering was first criminalized under the Anti-Drug Special Law that took effect July 1992. This law also mandates the filing of suspicious transaction reports (STR) for suspected proceeds of drug offenses, and authorizes controlled drug deliveries. The legislation also creates a system to confiscate illegal profits gained through drug crimes. The seizure provisions apply to tangible and intangible assets, direct illegal profit, substitute assets, and criminally derived property that have been commingled with legitimate assets. ¶6. (U) The narrow scope of the Anti-Drug Special Law and the burden required of law enforcement to prove a direct link between money and assets to specific drug activity limits the law's effectiveness. As a result, Japanese police and prosecutors have undertaken few investigations and prosecutions of suspected money laundering. Many Japanese officials in the law enforcement community, including Japanese Customs, believe that Japan's organized crime groups have been taking advantage of this limitation to launder money. ¶7. (U) Japan expanded its money laundering law beyond narcotics trafficking to include money laundering predicates such as murder, aggravated assault, extortion, theft, fraud, and kidnapping when it passed the 1999 Anti-Organized Crime Law (AOCL),which took effect in February 2000. The law also extends the confiscation laws to include the additional money laundering predicate offenses and value-based forfeitures. It also authorizes electronic surveillance of organized crime members, and enhances the suspicious transaction reporting system. ¶8. (U) The AOCL was partially revised in June of 2002 by the "Act on Punishment of Financing to Offences of Public Intimidation," which specifically added the financing of terrorism to the list of money laundering predicates. An amendment to the AOCL was submitted on February 20, 2004 to the Diet for approval, and remains under consideration. The amendment would expand the predicate offenses for money laundering from approximately 200 offenses to nearly 350 offenses, with almost all offenses punishable by imprisonment. ¶9. (U) Japan's Financial Services Agency (FSA) supervises public-sector financial institutions and securities transactions. The FSA classifies and analyzes information on suspicious transactions reported by financial institutions, and provides law enforcement authorities with information relevant to their investigation. Japanese banks and financial institutions are required by law to record and report the identity of customers engaged in large currency transactions. There are no secrecy laws that prevent disclosure of client and ownership information to bank supervisors and law enforcement authorities. ¶10. (U) To facilitate the exchange of information related to suspected money laundering activity, the FSA established the Japan Financial Intelligence Office (JAFIO) on February 1, 2000, as Japan's financial intelligence unit. Financial institutions in Japan forward suspicious transaction reports (STRs) to JAFIO, which analyzes and disseminates STRs as appropriate. At the end of 2005, Japan announced plans to transfer JAFIO from the FSA to the National Policy Agency, possibly in June of 2007, pending the successful passage of the new Anti-Money Laundering Law. ¶11. (U) In 2005, JAFIO received 98, 935 STRs, up slightly from the 95, 315 STRs received in 2004. During the same period, the National Police Agency received 66,812 STRs, up from 64, 675 in 2004. The NPA estimates that 2006 will see JAFIO receive over 100,000 STRs. In 2005, some 86 percent of the reports were submitted by banks, 7 percent by credit cooperatives, 4.6 percent from the country's large postal savings system, 1.2 percent from non-bank money lenders, and almost none from insurance companies. In accordance with the FATF Forty Recommendations of 2003, the new Anti-Money Laundering Law will include a wider range of STR-regulated sectors, including lawyers, accountants, real estate agents, dealers in precious metals and stones, and certain types of company service providers. ¶12. (U) JAFIO concluded international cooperation agreements during 2004 with Singapore's Financial Intelligence Unit (FIU) and with FinCEN, establishing cooperative frameworks for the exchange of financial intelligence related to money laundering and terrorist financing. JAFIO already had similar agreements in place with the FIUs of the United Kingdom, Belgium, and South Korea. In terms of international information exchange on money laundering, in 2004, JAFIO received 74 requests for information from foreign FIUs and provided responses to 70 of the requests. Japanese financial institutions have cooperated with law enforcement agencies, including U.S. and other foreign government agencies investigating financial crimes related to narcotics. In 2003, the United States and Japan concluded a Mutual Legal Assistance Treaty (MLAT). Although Japan has not adopted "due diligence" or "banker negligence" laws to make individual bankers legally responsible if their institutions launder money, there are administrative guidelines that require due diligence. Japanese law protects bankers and other financial institution employees who cooperate with law enforcement entities. ¶13. (U) In April 2002, the Diet enacted the Law on Customer Identification and Retention of Records on Transactions with Customers by Financial Institutions (a "know your customer" law). The law reinforced and codified the customer identification and record keeping procedures that banks had practiced for years. The Foreign Exchange And Foreign Trade law was also revised so that financial institutions are required to make positive customer identification for both domestic transactions and transfers abroad in amounts of more than two million yen (approximately $16,950). Banks and financial institutions are required to maintain customer identification records for seven years. ¶14. (U) In 2004, the FSA cited Citibank Japan's failure to properly screen clients under anti-money laundering mandates as one of a list of problems that caused the FSA to shut down Citibank Japan's private banking unit. In February 2004, the FSA disciplined Standard Chartered Bank for failing to properly check customer identities and for violating the obligation to report suspicious transactions. ¶15. (U) The Foreign Exchange and Foreign Trade Law requires travelers entering and departing Japan to report physically transported currency and monetary instruments (including securities and gold weighing over one kilogram) exceeding one million yen (approximately $8,475),or its equivalent in foreign currency, to customs authorities. Failure to submit a report, or submitting a false or fraudulent one, can result in a fine of up to 200,000 yen (approximately $1,695) or six months' imprisonment. ¶16. (U) In response to the events of September 11, 2001 the FSA used the anti-money laundering framework provided in the Anti-Organized Crime Law to require financial institutions to report transactions where funds appeared either to stem from criminal proceeds or to be linked to individuals and/or entities suspected to have relations with terrorist activities. The 2002 Act on Punishment of Financing of Offenses of Public Intimidation, enacted in July 2002, added terrorist financing to the list of predicate offenses for money laundering, and provided for the freezing of terrorism-related assets. Japan signed the UN International Convention for the Suppression of the Financing of Terrorism on October 30, 2001, and became a party on June 11, 2002. After September 11, 2001, Japan has regularly searched for and designated for asset freeze any accounts that might be linked to all the suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee's consolidated list. ¶17. (U) Underground banking systems operate widely in Japan, especially in immigrant communities. Such systems violate the Banking Law and the Foreign Exchange Law. The police have investigated 35 underground banking cases in which foreign groups transferred illicit proceeds to foreign countries. The aggregate value of such transfers has amounted to 420 billion yen (approximately $3.5 billion) since the beginning of 1992. About 120 billion yen ($1 billion) have been illegally transferred to China and Korea, and about 90 billion yen ($762 million) to Peru. In November 2004, the Diet approved legislation banning the sale of bank accounts, in a bid to prevent the use of purchased accounts for fraud or money laundering. ¶18. (U) Japan has not enacted laws that allow for sharing of seized narcotics assets with other countries. However, the Japanese government fully cooperates with efforts by the United States and other countries to trace and seize assets, and makes use of tips on the flow of drug-derived assets from foreign law enforcement efforts, to trace funds and seize bank accounts. ¶19. (U) Japan is a party to the 1988 UN Drug Convention and has signed but not ratified the UN Transnational Organized Crime Convention. (Note: Ratification of this convention would require amendments to Japan's criminal code to permit charges of conspiracy, which is not currently an offense. Minority political parties and Japan's law society have blocked this amendment on at least three occasions.) Japan is a member of the Financial Action Task Force. JAFIO joined the Egmont Group of FIUs in 2000. Japan is also a member of the Asia/Pacific Group against Money Laundering. In 2002, Japan's FSA and the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission signed a nonbinding Statement of Intent (SOI) concerning cooperation and the exchange of information related to securities law violations. In January 2006 the FSA and the U.S. SEC and CFTC signed an amendment to their SOI to include financial derivatives. ¶20. (U) The government of Japan has many legal tools and agencies in place to successfully detect, investigate, and combat money laundering. In order to strengthen its money-laundering regime, Japan should stringently enforce the Anti-Organized Crime Law. Japan should also enact penalties for noncompliance with the Foreign Exchange and Trade Law, adopt measures to share seized assets with foreign governments, and enact banker "due diligence" provisions. Japan should also become a party to the UN Transnational Organized Crime Convention. DONOVAN