0. UIA 60th Budapest Congress Workshop – Challenges and opportunities for legal profession International Trade Control & Compliance Perspective of Japan -
29 October 2016
URYU & ITOGA
Motoyasu HIROSE かに

1. International Money Transfer Regulations - Domestic and International
Foreign Exchange and Foreign Trade Control Law (the “FTL”; Law No. 228 of 1949)
Principle : No regulations (since 1998)
Exceptions : Prior approval of the Ministry of Finance, etc.
Cross-Border security concerns
Protection of national Industries
Anti Money-Laundering Act (Law No. 22 of 2007)
Frequent amendments towards reinforcement
Influenced by international pressures
Strengthened ID confirmation and reporting requirements
OFAC Regulations (Extraterritorial: U.S.)
Extraterritorial application of U.S. sanctions laws
Japanese banks are sensitive to OFAC Regulations かに

2. Structure of Applicable Rules - Multi-layer sanctions laws
OVERSEAS
(Country X)
JAPAN
Japanese
Corporation
Money Transfer
Japanese Law
- FTL
- Anti-Money Laundering Act
Country X’s Local Laws
Extraterritorial Application of
Third Country Laws
i.e. - U.S. OFAC regulations かに

3. Practical Issues and Behaviors of Japanese Corporations (1)
Compliance Management
Japan has “civil-law” system. Every compliance rule derives from written texts of law, setting forth “dos” and “don’ts” precisely in the form of a “manual”.
“Common-law” based compliance rules (namely US/UK) require self-discipline and voluntary elaboration, maintenance and development of a device to ensure compliance. This is sometimes puzzling for Japanese corporations under civil-law.
Tendency
They all know that “compliance” is a critical issue.
But they are often ignorant of how to enforce it, especially when it involves application of foreign laws. かに

4. Practical Issues and Behaviors of Japanese Corporations (2)
This risks, on the contrary, impeding revelation of possible misconducts within the corporation.
Example of a Japanese mega bank sanctioned in the U.S. after money transfers to Iran, for breach of record-keeping obligations under New York law, not for breach of OFAC regulations.
Consequences
Japanese corporations tend to be overly protective.
As a result, this could generate risk of unconscious violation of other compliance rules. かに

5. Practical Issues and Behaviors of Japanese Corporations (3)
Decision-Making and Information-Sharing Process
It is important to establish a consistent flow of reporting and decision-making (compliance judgment) inside the company.
How and where in the corporation should the “red-flag” issues be consulted with?
Key Point
Negotiators in transactions (and accounting manager as well) are not decision-makers.
Upper management in the headquarters is amazingly ignorant of what is going on in the “front” of deals. かに

6. FTL Rules – Outward Money Transfer - Liberalization of foreign wire transfer
Principle
No authorization is required.
No restriction on the amount
Ex-Post Notification Requirement to Japan Bank
Remittance or receipt of JPY30 million (EUR ) or more
A number of exemptions even beyond this threshold
Declaration to Tax Office (for Financial Institutions)
International money transfer of JPY1 million (EUR8.770) or more
Possibility of ex-post enquiries from the tax office to the remitter (response is voluntary)
Practically, no obstacle remains for high-amount settlement from Japan to foreign countries.

7. Exceptional Regulations under FTL - Concerns of security and protection of domestic industries
Requirement for Prior Governmental Authorization (Art.16)
Cross-border security
Exhaustive list is announced by the Ministry of Finance (frequently amended)
Conformity to the SDN List of the U.S. and European regulations
Persons (entities) and objectives relating to the recent terrorism or war are targeted (“attribution” and “objective” test).
Protection of domestic industries
Examples
Fishing industry
Manufacture of Leather-related products
Manufacture of Drugs
Moving towards reinforcement

8. Anti-Money Laundering Law (1) - For both domestic and international transactions
History of Japan’s Anti-Money Laundering Laws
In 1990s, focus was on proceeds from drug trafficking
2000 – Act for Punishment of Organized Crimes
Targeted offenses were enlarged to encompass various serious crimes
2002 – Law to Choke Off Funds for Terrorism
In response to “9.11” in the U.S.
Sanctions against funding terrorism
2003 – Act on Identification by Financial Institutions
Strengthened identification requirements for bank transactions
2008 – Anti Money Laundering Law
Progressive amendments towards reinforcement
Targeted traders were enlarged from banks to various business operators
Criticism from the FATF for being lenient

9. Anti-Money Laundering Law (2) - Further amendments towards reinforcement
Responding to FATF recommendations (future amendments)
Methods of Screening Suspicious Transactions
To be more objective, National Public Safety Commissions of Japan issues annual guidelines to follow.
Japanese banks are rather proactive in reporting suspicious transactions to the authorities ( reports in 2014).
These reports contributed to detection of criminal offenses (i.e. 828 fraud cases in 2014).
Tightened Controls for Cross-Border Correspondent Banking
Obligations of the bank to monitor foreign currency traders in respect of their customer identification systems.
Strengthened Governance Structure for Compliance
Traders are required to establish written internal rules of customer identification.
Traders must appoint a person responsible for customer identification.

10. OFAC Regulations (1) - Extraterritorial application of the U.S. laws
Restrictions under OFAC Regulations
Freezing of assets of Specially Designated Nationals and blocked persons (“SDN”), threatening national security.
Financial institutions must ensure that no SDN is involved in the money transfers.
Targets of OFAC Regulations in Japan
Not only Japanese branches of U.S. banks or Japanese banks with U.S. branches, but also Japanese local banks (for transactions in U.S. Dollars) are targeted.
Transactions in U.S. Dollars pass through U.S. banks under OFAC Regulations. Non-compliance will lead to freezing of customer’s assets.
Japanese banks are extremely sensitive to the involvement of SDN behind the transactions.
Practice of Japanese Banks
Money transfer to certain sensitive destinations is scrutinized and delayed. Without sufficient demonstration of being “white”, the money transfer will be refused. かに

11. OFAC Regulations (2) - Extraterritorial application of the U.S. laws
Recent Charges against Japanese Megabank U.S. Branch
Violation of record-keeping obligations (undue deletion of money transfer data to sanctioned countries)
Settlement with the New York Department of Financial Services for payment of USD250 million
Conservative Approach Taken by Japanese Banks
White transactions sometimes face difficulties when “apparently” sensitive destinations are involved.
Problems
Frequent amendment of SDN List
Potentially disguised identity of SDN
Difficulty of withdrawal of funds in case of subsequent revelation of violation

12. Thank you for your attention!
29 October 2016
URYU & ITOGA
Motoyasu HIROSE かに