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