VZCZCXYZ0012
PP RUEHWEB

DE RUEHKO #6575/01 3200813
ZNR UUUUU ZZH
P 160813Z NOV 06
FM AMEMBASSY TOKYO
TO RUEATRS/TREASURY DEPT WASHDC PRIORITY
RUEAWJA/JUSTICE DEPT WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 8366

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