Hiroshi Ozaki joined the Financial Services Agency in Japan (JFSA) on February 1, 2018, as a director of the anti-money laundering/counter-terrorist financing (AML/CTF) policy office. This office was newly established in the JFSA on the same day to enhance control over the risk of money laundering and terrorist financing (ML/TF), in addition to establishing a more effective system to combat ML/TF in the Japanese financial industry.
Prior to joining the JFSA, Mr. Ozaki was a general manager of the financial crime prevention department of Sumitomo Mitsui Banking Corporation (SMBC) and began his career at Mitsui Bank in 1988. At Mitsui Bank, currently SMBC, he served in various sections in domestic and overseas offices such as New York, London and Dubai, in planning, marketing and compliance for more than 30 years.
Mr. Ozaki earned his Master of Business Administration from the New York University Stern School of Business. He has a bachelor’s of economics from the University of Tokyo and is a Certified Anti-Money Laundering Specialist (CAMS).
ACAMS Today: What are some of the measures you have applied to enhance the control of money laundering and terrorist financing in Japan?
Hiroshi Ozaki: JFSA issued Guidelines for AML/CTF (Guidelines) in February 2018, which underscore the importance of a risk-based approach (RBA) for AML/CTF and cover the current global standards for AML/CTF. The Guidelines require financial institutions (FIs) to conduct risk identification/assessment of all products and services, client types, channels, geographic factors and clients as well as client-groups of FIs by referring to the National Risk Assessment report and implementing risk mitigation measures commensurate to the risks.
JFSA is currently working with the FIs, related associations and related government entities in order to enhance the AML/CTF regime in Japan to meet the requirements, recommendations and standards set by the Financial Action Task Force (FATF).
AT: What are some of the challenges Japan faces in combating financial crime?
HO: The level of understanding and implementation of RBA of the AML/CTF regime in Japan has improved during the last 12 months in general. However, there is room for some FIs and a few financial segments to continue enhancing the understanding of risk and AML/CTF preventive measures. JFSA will push them up through on and off risk-based monitoring based on the comprehensive risk assessment of FIs.
I believe that the commitment and appropriate resource allocation by senior management is the key driver in fortifying an AML/CTF regime.
AT: Do you believe artificial intelligence (AI) in compliance programs can increase effectiveness or make them vulnerable to criminals?
HO: The deployment of new technology like AI may improve the effectiveness of the AML/ CTF regime or system. For example, applying AI in AML/CTF—especially for the suspicious transaction report (STR) submission process—may be able to enhance productivity through a decision-supporting function and visualization of the processes. AI may work for improving appropriate detection rate and decreasing the number of false positives, which is a major chal- lenge for firms to comply with AML/CTF laws and regulations.
Relying too much on AI, however, can make a compliance program vulnerable for criminals. First of all, in the application of AI the difficulty for the system to provide a suitable explanation for how it arrived to an answer is referred to as “the black box problem.” From the regulators’ perspective, it is very important to have strict requirements regarding explainability, determin- ism and ease of understanding of the models. Therefore, model governance, validation and documentation are more important than anything else. Firms need to explain clearly how the new models work and reproduce results with the same input data sets. Secondly, data itself is essential for running analytics—especially AI analytics—because it involves large volumes and different types of data. Data quality and completeness are critical issues because the full benefit of AI solutions can only be realized with complete and quality information. How data is stored, queried and processed will be a critical consideration in AI adoption. AI tools simply will not work well if the data and information is inaccurate, out of date or incomplete. Bad data results in weak predictions that are not trusted or that may provide a false confidence that wastes resources and misdirects corporate activities.
AT: What has Japan been doing to prepare for the fourth mutual evaluation later this year?
HO: After publishing Guidelines, JFSA has been taking the following measures to enhance the AML/CTF regime in Japan and to prepare for the mutual evaluation:
- An annual AML/CTF data return from each FI as of March 2018, December 2018 and March 2019, and risk-based on- and off-site monitoring in accordance with ML/TF risk assessment results based on these returns
- Requiring FIs to conduct gap analysis between as-is and to-be, along with Guidelines and prepared action plans to fill in the gaps as of May 2018
- Thematic review of domestic and cross-border remittances as of May 2018
- An interim monitoring report on AML/CTF current status and challenges as of August 2018
- Over 100 outreach sessions for the last 12 months
- Public-private partnership conferences for AML/CTF since April 2018
- Amendment of red flag indicators for STRs as of April 2019
- Regular exchanges of supervisory views with foreign competent authorities
AT: How has the anti-financial crime environment in Japan changed since you first began in this field?
HO: The understanding of RBA for AML/CTF has progressed significantly in the financial sector in Japan since the issuance of Guidelines on February 2018 and the above-mentioned action plans to enhance AML/CTF programs are appropriately controlled and implemented by many FIs.
However, the efforts by the private and public sectors in Japan have to continue because the nature of AML/CTF is not a static process but a dynamic one.
AT: What steps would you recommend to FIs in developing AML capacity and competency requirements?
HO: In order to develop AML capacity and competency requirements, it is key to incorporate the plan-do-check-act cycle in the AML/CTF programs of FIs and enhance their programs on an ongoing basis.
Specifically—after establishing and imple- menting the AML/CTF programs—it is vital for FIs to evaluate the effectiveness of the programs while considering residual risks. It is useful to consider internal information, whistleblowing reports and questions from employees. If the effectiveness evaluation of an AML/CTF program identifies possibilities of further improvements, FIs should change and improve their programs by reforming risk identification, evaluation and mitigation measures. It should be noted that senior management’s proactive involvement in the cycle is essential for appropriate resource allocation from the firm-wide point of view. FIs may establish robust risk-management meeting global standards by continuously implementing this cycle.
I believe that in order to make the above-mentioned tasks happen, it is critical that senior management show its strong commitment and leadership to all its employees and other stakeholders.
AT: How has the culture of compliance evolved in Japan?
HO: FIs in Japan tended to focus excessively on technical compliance with AML/ CTF laws and regulations. Following such situations, JFSA issued Guidelines and required FIs to apply RBA as the minimum standard for FIs participating in Japan’s financial system. After the issuance of Guidelines, the understanding of RBA for AML/CTF has made much progress in Japan’s financial sector. JFSA continues to facilitate such positive trends in AML/CTF of Japanese FIs by an optimal combination of risk-based on- and off-site monitoring.
Again, the commitment and leadership by senior management, such as “tone at the top,” is critical.
AT: On which emergent AML/CTF threats should the financial services industry increase its focus?
HO: Many FIs are proactively addressing the introduction of new technologies to improve convenience for their customers. On the other hand, it should be noted that such technologies could help criminals as well if misused.
When handling new products and services, or conducting transactions using new technologies, it is important for FIs to analyze and assess their ML/TF risks before offering such products and services and taking appropriate mitigation measures if necessary.
AT: In your opinion, what will the anti-financial crime landscape look like five years from now in Japan?
HO: FIs in Japan are tackling and establishing effective AML/CTF programs considering the FATF on-site visit coming this fall. However, even after the FATF on-site visit, FIs should, as a matter of course, keep their motivation and continuously improve their AML/CTF programs to meet the global moving target for AML/CTF as FATF’s follow-up process will continue for at least five years.
Five years from now, Japan will be in the final process of FATF’s follow-up assessment. JFSA and FIs, taking into account the mutual evaluation results, will exert effort for further enhancing the AML/CTF regime in Japan.
Also, I have a dream that the efforts of both sides, private and public, as well as new technologies would make fintech/regtech/supervisory technology (suptech) work together and build a new ecosystem to make the AML/CTF regime more effective and efficient in Japan’s future. I hope our efforts will make the world a better place in the end.