Japan’s AML policies remain work in progress

Money laundering comes a close second to gambling addiction when it comes to reasons for opposing casinos in Japan, with local media stoking fears that the country’s organized crime gangs plan on using IRs to legitimize the proceeds from crime.

In a pamphlet explaining why they are against casinos, the Japan Federation of Bar Associations, in fact, listed money laundering first among its reasons.

The Constitutional Democratic Party of Japan, which emerged out of the October 22 general elections as the largest opposition political party, included an anti-casino stance as one of its formal election promises, explaining, “We are against the legalization of casinos, which will worsen public security by vastly widening the social costs of gambling addiction and by creating hotbeds for money laundering.”

These opponents might be exaggerating the risks of money laundering at the anticipated Japanese IRs, but their concerns do not seem to be entirely misplaced. Japan is not necessarily on the cutting edge of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) policies.

In fact, the Financial Action Task Force (FATF)—the primary international organization set up to contend with money laundering—in June 2014 issued an unusual statement calling on Japan “to enact adequate anti-money laundering and counter terrorist financing legislation,” stating that they were “concerned by Japan’s continued failure to remedy the numerous and serious deficiencies identified in its third mutual evaluation report.”

Among other highlighted issues, FATF criticized Japan’s “lack of satisfactory customer due diligence requirements and other obligations in the area of preventive measures applicable to the financial and non-financial sectors.”

The FATF statement commanded the attention of Japanese policymakers, and by the end of 2014 the Act on Prevention of Transfer of Criminal Proceeds (originally enacted in 2008) was amended.

Several years before that, in November 2005, the Japanese government had decided to transfer the primary responsibility for combating money laundering from the Financial Services Agency to the National Public Safety Commission, which oversees the powerful National Police Agency. The main reason for doing so was the increasing understanding that business organizations other than banks—for example, real estate companies, dealers in precious stones, etc.—could also be utilized in money laundering schemes.

The Japan Financial Intelligence Center (JAFIC) was created within the National Police Agency’s Organized Crime Department to be the administrative and enforcement agency for the nation’s AML/CFT policies.

In regard to casinos, the Experts’ Committee that advised the government this summer did include one member—the lawyer Masayuki Watanabe of Miyake & Partners, who has studied the issue of money laundering. His report was essentially a Japanese translation of the key points from the March 2009 FATF report titled Vulnerabilities of Casinos and Gaming Sector.

The complexities of preventing money laundering put the Japanese government off the idea of permitting junkets. Their initial analysis is that the junket sector is a high risk proposition in terms of money laundering, and so most likely there will be a blanket ban on junkets, at least initially.

As for the Japanese media, they continue to point insistently at another risk—the yakuza risk.

Last December, the Asahi Shimbun put it this way: “Yakuza gangs are rubbing their hands with glee after Japan moved to legalize casino gambling.” According to this report, Japanese gangsters are already dreaming up ways that they could use the new casino industry for their own benefit. One such gangster helpfully explained to the reporter, “With proceeds from crimes, we can buy loads of chips at cash-converting counters, then use a small number of chips for only a few gambling games… After that, we can convert the rest of the chips to clean money.”

Another scenario making the rounds in the pages of the domestic press is the possibility that yakuza gangs may infiltrate the casinos themselves, sending in younger members as double agents who can scan for vulnerabilities and open up illicit revenue streams for their gangs.

While issues of organized crime are hardly unique to Japan, it is thought that the yakuza will prove highly motivated in getting their foot in the door at the new legalized casinos. It doesn’t help that Osaka (where the first large-scale IR is likely to open) is also one of the well-known centers of yakuza activities.

A final point to note is that the National Police Agency, which is mandated to enforce the laws against money laundering through its Japan Financial Intelligence Center, is not regarded as the most transparent or accountable organization, neither at home nor abroad.

Last year the US Department of State issued a report which included the following assessment: “Japan should develop a robust program to investigate and prosecute money laundering offenses, and require enhanced cooperation by the National Police Agency with its counterparts in Japan and foreign jurisdictions. The government should release the number of money laundering convictions. Japan also should provide more training and investigatory resources for AML/CFT law enforcement authorities.”

Clearly, these policies remain a work in progress.