TERRORIST FINANCE: IMPLICATIONS OF JAPAN,S POOR

S E C R E T SECTION 01 OF 04 TOKYO 000199 SIPDIS TREASURY TFI: WALLWORK, EDDY, GRANT; TREASURY IA: FOSTER, WINSHIP; STATE EAP: MURRAY E.O. 12958: DNG: CO 01/22/2019 TAGS: KCRM ECON KNNP SNAR PTER PINS EFIN IR JA SUBJECT: TERRORIST FINANCE: IMPLICATIONS OF JAPAN,S POOR FATF REVIEW TOKYO 00000199 001.2 OF 004 Classified By: CDA James P. Zumwalt for reasons 1.5 (b) and (d). ¶1. (S) Summary: The Financial Action Task Force,s (FATF) mutual evaluation of Japan,s illicit finance safeguards and countermeasures gives the country low marks that should be a call to action for Japanese government, financial regulatory, and financial institutions. The exhaustive assessment of Japan,s illicit finance regime reveals an apparatus that bests only UAE, Greece, Turkey and Qatar among all 25 countries subject thus far to FATF,s peer review process. The multilateral nature of FATF,s findings and their shock value for the Japanese provide an ideal opportunity for the USG and other partners to engage Japan on tQe weaknesses in an effective, constructive manner. Overview of Japan,s FATF Review -------------- ¶2. (C) Japan,s terrorist finance and money laundering safeguards and countermeasures underwent a comprehensive, on-site FATF mutual evaluation March 5-12, 2008. Similar to Japan,s last assessment in 1997-98, FATF measured Japan's legal and compliance frameworks against FATF,s &40 98 Recommendations representing the global standard of Anti-Money Laundering/Counter Terrorist Finance (AML/CFT) policies and practices. ¶3. (S) FATF,s detailed findings are important in evaluating where Japan stands among other member countries in terms of overall AML/CFT fitness. Japan,s FATF review included four marks of &Compliant,8 19 &Largely Compliant,8 15 &Partially Compliant,8 ten &Non-Compliant8, and one &Non-Applicable.8 Measured by an Embassy-constructed simple composite weighted scoring system (Compliant = 3, Largely Compliant = 2, Partially Compliant = 1, Non Compliant = -1, Not Applicable = 0; Japan scores 55 out of 147; U.S. scores 99; mean score 75.8),of the 25 countries thus far subject to a FATF mutual evaluation, Japan outperforms only UAE, Greece, Turkey, Greece and Qatar, and is bested by Russia, Mexico, and China. The findings raise serious misgivings regarding both: (a) Japan,s ability to effectively address illicit finance issues; and (b) the government of Japan,s oft-professed intent to transform Tokyo into a global financial center under the Financial Services Agency (FSA),s Better Markets Initiative. Authorities Need More Resources -------------- ¶4. (C) FATF concluded that, while taking into account that Japan enjoys a low domestic crime rate and a police force aware of money laundering schemes, &more training and investigatory resources are needed for AML/CFT law enforcement authorities.8 For example, although FATF found a steadily increasing number of suspicious transaction reports (STR) from financial institutions to the National Police Agency (NPA),s Japan Financial Intelligence Center (JAFIC) since its establishment (in 2000 originally at the FSA),Japan,s ability to process the raw data is questionable. FATF,s evaluators found &a very small number of analysts. (C)onsidering the large and increasing number of STRs received and to be received in the coming years(there are some concerns about the extent and quality of the analyses undertaken.8 FATF recommended the government of Japan &increase its human resources involved in STR analysis8, and lamented that FATF was &unable to determine whether the statistics maintained by various agencies in Japan are comprehensive or systematically accumulated, because not all agencies appear to do so.8 (Note: When asked about the FBI,s inability to access JAFIC,s thousands of STR records on anything but a case by case basis, NPA officials were adamant that their relationship with their U.S. counterpart FINCEN was &outstanding8 and &no impediment8 to the flow of critical information, and NPA would not consent to the release of any STR data to other U.S. law enforcement agencies. End Note.) Financial Institution Due Diligence Weak -------------- ¶5. (C) Japan,s ten non-compliant results included four scoQs of non-compliance specific to financial institutions: customer due diligence; transaction monitoring requirements; TOKYO 00000199 002.2 OF 004 internal policies and procedures; and risk recognition requirements. The report notes financial institutions in Japan are not explicitly required to &adopt and maintain an AML/CTF control system8, including a requirement to conduct customer identification when &there is a suspicion of money laundering or terrorism finance.8 Nor are Japanese firms obliged to &determine whether a respondent institution has been subject to money laundering or terrorist enforcement action.8 Alarmingly, FATF found there are no Japanese laws or regulations that ensure Japanese financial firms pay special regard to or employ countermeasures in the instance of relationships or transactions with &jurisdictions which either do not or insufficiently apply the FATF recommendations.8 Concerns About Customs -------------- ¶6. (S) Insufficient attention to bulk cash movements prompted FATF to conclude: &Customs only focuses on smuggling and trafficking control and does not have AML/CTF enforcement capabilities.8 FATF reports: &Customs have never encountered an example of concealed cash being moved through the Japan border,8 and &Japan Customs do not share information or intelligence with the FIU (financial intelligence unit).8 The Ministry of Finance (MOF) confirms this situation, which underscores Tokyo Embassy Immigration and Customs Enforcement officials, characterization that Japan,s Customs &do not have a law-enforcement mentality,8 and suggests Japan,s borders are unnecessarily porous to the physical movement of cash and other moveable assets. ¶7. (C) FATF is also critical of Japan,s prosecutors, who &only prosecute when they are almost certain of conviction. The low number of convictions in money laundering cases(has a negative effect on the overall effectiveness of the criminalization of money laundering.8 FATF noted the number of convictions in money laundering cases &seems low compared to the size of the Japanese economy, an acknowledged problem with the consumption of(drugs and a well-known organized crime problem.8 Furthermore, Japan continues to operate in a legal environment where Japanese law does not &provide for punishment of conspiracy to launder money.8 Can Japan Respond Effectively to UNSC Designations? -------------- ¶8. (S) FATF evaluators were particularly critical of Japan,s capacity to freeze terrorist assets effectively: &Japan has established a(process (that) does not cover (i) the potential for domestic funds being available, unless attempted transactions in foreign currency, with a non-resident of Japan, or overseas transactions are undertaken or (ii) other support by residents for listed terrorist entities and individuals; and does not allow Japan to freeze terrorist funds without delay.8 FATF,s conclusion that &there is no obligation on financial institutions to freeze funds and other assets in relation to any Security Council Resolutions or to examine and give effect to the actions initiated under the freezing mechanisms of other jurisdictions,8 seriously undermines U.S. designation efforts. These observations, coupled with subsequent FATF findings of &gaps in the implementation of the UNSCRs 1267, 1373 and successor resolutions,8 suggests Japan,s ability to effectively meet frequent U.S. requests for asset seizure remains underdeveloped. ¶9. (S) In the case of terrorist finance and weapons proliferation designations, the government of Japan invariably prefers to enact any asset seizure under the auspices of UN resolutions; notifications of U.S.Qomestic designations are met with polite interest, but without any concrete action. While the latter posture appears to stem from on a combination of Japan,s unwillingness to take measures without the legal coverage of a UNSCR resolution and an ongoing lack of official secrets protection, an inability to respond effectively to 1267 and 1373 designations implies that Japan,s capacity to control illicit finance flows of any kind is significantly impaired. FATF,s conclusion that &Japan has not yet implemented Recommendation(7(on(cross-border correspondent banking8 further undermines the utility of the numerous designations TOKYO 00000199 003.2 OF 004 Japan has been asked to act on over the past 24 months, including a series of Iran-related measures. GOJ Response: &Shock8, &Harsh8, &Unreasonable8, &Unbelievable8 -------------- ¶10. (S) Although the poor FATF review spurred Japan,s Cabinet Office to call for the November 2008 formation of an interagency task force including MOF, NPA, FSA, the Ministry of Justice, MOFA and METI, no single ministry leads the group. Officials at MOF, NPA, and FSA all had strong negative opinions of FATF,s findings. An NPA official said &we were shocked by the results.8 Finance Ministry staff agreed the assessment was &too harsh." Personnel at FSA found the results &unreasonable8 and &unbelievable.8 When pressed to describe the task force,s priority issues, JAFIC,s chief superintendant remarked, &all findings are an equal priority.8 ¶11. (S) Comment: GOJ officials, comments on the FATF report are troubling. While JAFIC further confessed that &the police are not accustomed to financial system8 complexities, financial regulators at FSA were quick to point out that FATF,s findings &did not reflect on the FSA,8 but on the agencies responsible for specific findings of non-compliance. As FSA officials complained that FATF,s assessment was &based only on laws and requirements((N)ot on effectiveness,8 MOF officials bemoaned FATF,s overemphasis on &methodology, not on legal requirements." This contradictory impression may reflect the fractured nature of the task force, which has already been segmented into agency-specific working groups. When asked if Japan would move quickly to address the findings of non-compliance with a series of legislative and regulatory fixes as Australia did within a year of its own unflattering FATF report, the most definitive response from any official was &the government of Japan is still at the stage of discussing how to best respond.8 When asked if FATF,s findings could provide a compelling basis for their agencies to ask the Cabinet Office or the Diet for the additional resources or legal changes needed to meet Japan's multilateral commitments, no GOJ official endorsed such an approach. ¶12. (S) A Ministry of Finance official seconded to FATF (please protect) since last year was withheld from the review process on his home country and is bound by confidentiality agreements, but offered unsolicited insights into Japan,s response to the FATF review. Confirming &the ratings were not as good as people expected,8 he suggested that &Japanese banks take this result more seriously.8 On the other hand, &the real problem lies within the ministries, especially the lack of a leading ministry((I) think this is a good chance to empower MOF, but senior officials are very conservative and they sometimes feel uncomfortable that MOF is involved in AML/CTF issues.8 The FATF official laments, &MOF doesn,t get it.8 Recommendations -------------- 13.(S) There are no immediate remedies for the shabby state of Japan,s illicit finance regime. However, given the multilateral nature of FATF,s findings, and Japan,s commitment to meet the standards of FATF membership and a follow-on evaluation due for 2010, Japan,s underwhelming FATF evaluation provides an ideal opportunity to engage Japan on specific measures designed to combat illicit finance while more effectively addressing concerns of mutual concern, including non-proliferation finance and UNSC resolutions. Given the GOJ,s hesitant initial steps, senior level engagement on a number of fronts could be fruitful. Framing our engagement in the context of overall structural reform and meeting multilateral commitments, the USG could urge the creation of individual tax-payer identification numbers to alleviate customer due diligence concerns, offer training and further support to our ongoing border and customs cooperation, and suggest the establishment of an annual expert-level government to government illicit finance dialogue. These steps could be taken in addition to ongoing efforts to address Japan,s AML/CTF shortfalls, including addressing the obvious need for an analog to the Official TOKYO 00000199 004.2 OF 004 Secrets Act and the need for a lead agency on illicit finance. End Comment. ZUMWALT