59 th UIA CONGRESS Valencia / Spain October 28 November 1, 2015 FOREIGN INVESTMENT Saturday, October 31, 2015 Exchange Controls in International Money Transfers of Japan UIA 2015 Hirose Motoyasu (URYU & ITOGA) Ark Mori Bldg. 36F, 1-12-32 Akasaka, Minato-ku, Tokyo 107-6036, Japan Tel. +81-3-5575-7720 / Fax +81-3-5575-8297 hirose.motoyasu@uryuitoga.com
INTRODUCTION Since 1998, all the regulations on international money transfers have been lifted in Japan and thus any transfer of monetary funds to foreign countries from Japan, irrespective of the amount, is in principle permitted, with the limited exceptions enumerated in the Foreign Exchange and Foreign Trade Control Law 1 (hereinafter, the FEL ). Foreign exchange controls have certainly been moving towards deregulation in favor of foreign investors. The vast majority of exceptionally remaining foreign exchange regulations derive from the need for materializing the cross-border security alliance through international cooperation and/or protection of national economy and industries, along with the restrictions on foreign capital ratio in certain industries. In addition to the aforementioned concerns, there has been, as in many western countries, all the more impending awareness of the requirement for countermeasures against crime-related flow of monetary funds, namely, money laundering, to block any transfer of funds to/for sensitive destinations and/or objectives over the past decade, which are more prone to be influenced by diplomacy, under the pressure, in particular, of the OFAC Regulations of the United States. Strengthened controls do apply in this context, driven by a sequence of amendments to the laws relating to the control of monetary transactions which risk the transfer and veiling of criminal proceeds. Japanese major financial institutions, having been unable to effectively assess the actual degree of risk and possible consequences, take fairly conservative and prudent approach in assessing the final destination and usage of funds transferred to certain sensitive countries: the wiring of funds, statutorily permitted at least from literal interpretation of the applicable rules, could be frustrated or heavily scrutinized by the bank for fear of small but potentially serious risk of consequential revelation of abetting or veiling any activities which could threaten the cross-border security. Here is the overview, in the following four sections, of the current statutory rules and enforcement practices in Japan in respect of the exchange controls in international money transfer. 1. Reporting Requirements Applicable to the Wiring of Funds to Foreign Destinations 1 This is the principal statute which sets forth basic rules pertaining to the control of foreign trade and exchange (Law No. 228 of 1949, as amended). 1
2. EXCEPTIONS Requirements for Governmental Approval for Diversified Reasons 3. Progressively Reinforced Legislations and Enforcement Against Money Laundering 4. Supplementary OFAC Regulations Extra-territorial application of U.S. law 1. Reporting Requirements Applicable to the Wiring of Funds to Foreign Destinations The following reporting requirements apply to the wiring of monetary amounts beyond certain thresholds from Japan to any foreign countries. a Declaration to the Ministry of Finance by the Remitter In principle, remittance and/or receipt of JPY30 million 2 (approx. 220,490 Euros 3 ) or more to/from a foreign bank requires ex-post notification to the relevant Minister in charge of the transaction (i.e. Ministry of Finance) via the Japan Bank in accordance with the prescribed formalities 4. This is mere notification and thus no permission is required, irrespective of the amount of transfer. b Declaration to the Tax Office by the Bank 2 This reporting requirement may be exempted even beyond this threshold under certain circumstances (Article 18-4, Paragraph 1, Item 3 of the Foreign Exchange Ordinance (Cabinet Ordinance No. 260 of 1980, as amended; hereinafter FEO ); and Article 1, Paragraph 2 of the Cabinet Ordinance Concerning Report of Foreign Exchange Transactions, etc. (Ordinance of Ministry of Finance No. 29 of 1998, as amended; hereinafter, the FET Report Ordinance )). For example, when a resident in Japan withdrawing funds of more than JPY30 million from a foreign bank account opened under his/her own name for the purpose of appropriating such withdrawn funds to payments addressed to another Japanese resident, this reporting requirement will not apply (Article 1, Paragraph 2, Item 1 (i) of the FET Report Ordinance). The threshold of this notification requirement will be raised to JPY100 million per month in respect of the payment for funding construction work in a foreign country and/or any other costs relevant thereto (Article 1, Paragraph 2, Item 1 (v) of the FET Report Ordinance). 3 The exchange rate derives from the mean of the T.T.C. and T.T.S published by the Bank of Tokyo-Mitsubishi UFJ Ltd.as of August 31, 2015 (1 Euro = JPY 136.06). 4 See Article 55 of the FEL, Article 18-4, Paragraph 1 of the FEO and Articles 1 and 2 of the FET Report Ordinance. The notification must be addressed to the Japan Bank by the 20 th day of the calendar month following the effective date of the payment. To ensure flexibility and rapidity of amendments by the government in response to the ongoing concerns about diplomacy and cross-border security, the specific statutory rules are generally delegated to and set forth in the ministerial and/or cabinet ordinance. 2
The financial institution handling the transfer of JPY1 million (approx. 7,350 Euros 5 ) or more to a foreign destination (not the party instructing the relevant wire transfer) must report the transaction to the Tax Office 6, which constitutes part of the measures to facilitate revelation of tax evasion. Consequently, given the simplicity of the applicable regulations, high amount of remittance to/from foreign countries will not practically pose any obstacle to foreign investors 7. 2. EXCEPTIONS Requirements for Governmental Approval for Diversified Reasons Without prejudice to the aforementioned liberalization of ongoing international money transfers, certain payments made to a specified range of persons or for objectives designated as threatening the cross-border security are nonetheless subject to the authorization of the relevant ministry 8. a Payment to Specified Destinations for Objectives Threatening Cross-Border Security 9 To enable flexible amendments to the scope of such designated persons, the specific details are to be fixed by the Minister of Foreign Affairs 10. The criteria are to be harmonized with the blacklists made by other developed countries, namely the U.S and European countries 11. For example, the restricted destinations of payment include (not exhaustive) 5 The exchange rate derives from the means of the T.T.C. and T.T.S published by the Bank of Tokyo-Mitsubishi UFJ Ltd.as of August 31, 2015 (1 Euro = JPY 136.06). 6 This report should mention the name and address of the remitter as well as the amount of remittance (Article 4, Paragraph 1 of the Act on the Filing, etc. of the Reports of Overseas Remittance to Ensure Adequate Imposition of the Inland Tax (Law No. 110 of 1997, as amended)). The tax authorities may make written enquiries to the remitter in respect of the relevant transaction. The remitter s response to these enquiries is voluntary and thus not mandatory. 7 For this reason, there is no practical need for breaking a single payment in smaller parts under normal circumstances. Repetition of remittance of smaller amounts (i.e. less than JPY1 million) to the same destination without reasonable justification could trigger, in the eyes of the financial institution, suspicion of money laundering and could consequently result in supplementary verifications and/or reporting to the authorities. 8 See Article 16, Paragraphs 1 and 3 of the FEL and Article 6, Paragraph 2 of the FEO. The procedures for requesting governmental authorization are set forth in Article 6-2, Paragraph 4 of the FEO. 9 See Article 16, Paragraph 1 of the FEL and the List of Payments Requiring Authorization of the Ministry of Finance under the Article 16, Paragraph 1 of the FEL (Announcement No. 97 in March 1998 of the Ministry of Finance; hereinafter, FEL16I Announcement, as amended by the Announcement No.111 dated April 5, 2013 of the Ministry of Finance). 10 These regulations target payments (i) from Japan to foreign countries (irrespective of whether the payer is a resident in Japan); and (ii) from a resident of Japan to a non-resident of Japan (wherever the payment is made). 11 See Article 1 (ii) of the FEL 16I Announcement. 3
- Persons relating to Taliban; - High-ranking officials of the former administration of the Republic of Liberia; - Violators of the measures against the export of weapons to the Democratic Republic of the Congo; - Persons involved in the activities of missiles or mass-destruction weapons in the Democratic People's Republic of Korea (hereinafter, the DPRK ); - Persons involved in the nuclear development or transport of nuclear weapons in the Islamic Republic of Iran (hereinafter, Iran ); or - For the purpose of contributing to the activities relating to the nuclear weapons, missiles or other mass-destruction weapons of the DPRK. To note, the scope of regulations is delimited by the (i) attribution of the recipient of payment; and/or the (ii) objective of the payment (as in the last example above). b Payment for Outward Investment in Specified Industries 12 This regulation applies to the payments made with a view to funding certain categories of business activities conducted by non-japanese associations or any other form of entities (i.e. objective and industry test). The targeted industries include- - Fishing industry; - Manufacturing of leather or leather-related products; - Manufacturing of weapons; - Manufacturing of facilities relating to the fabrication of weapons; and - Manufacturing of drugs 3. Progressively Reinforced Legislation and Enforcement Against Money Laundering In Japan, the Act on Prevention of Transfer of Criminal Proceeds 13 (hereinafter, the APTCP ) serves as the principal 14 statutory rules which set forth preventive measures against the transfer of proceeds, whether within Japan or abroad, to third parties which are susceptible of veiling funds or proceeds appropriated to or deriving from serious criminal activities. 12 See Article 16, Paragraph 3 and Article 23 of the FEL, Article 12 of the FEO and Article 21 of the Ministerial Ordinance Concerning Foreign Exchange (Ordinance No. 44 of 1980 of the Ministry of Finance, as amended) 13 This is more familiarly referred to as the Anti-Money Laundering Law. 14 There have been an increasing number of laws and regulations for similar objectives over the past two decades, targeting both domestic and international remittance of funds susceptible of abetting or veiling criminal activities, to harmonize Japanese domestic laws with the treaties ratified by Japan and international pressures. The regulations have been reinforced progressively, contrary to the general foreign exchange controls under the FEL. 4
These regulations target not only cross-border but also domestic transactions; however, they would take on all the more significance in cross-border transactions because international money transfer is, more often than not, misused as a device for concealing funds or proceeds relating to criminal activities. a History In 1990s, the preventive measures against the transfer of criminal proceeds focused on the proceeds which derive from illegal drug trafficking. The Drug Special Act 15, which was enforced in July 1992, criminalized the act of money laundering involving illegal drug trafficking and set forth requirements for reporting suspicious transactions. In February 2000, the Act for Punishment of Organized Crimes 16 was enforced, where the scope of punishable money laundering was enlarged from drug trafficking to other categories of serious crimes. In response to the internationally enhanced awareness of the need for prevention of terrorism, following the 9.11 incident in the U.S. in September 2001, the Law to Choke off Funds for Terrorism 17 was enforced in Japan, under which the act of provision and/or collection of funds for terrorism were criminalized. In January 2003, the Act on Identification by Financial Institutions 18 was enforced. Since then, opening of a bank account on behalf of another person (even if for a family member) is not allowed in Japan. In this context, the APTCP was first promulgated in March 2007 (fully enforced in March 2008 19 ). 15 The official name is the Act Concerning Special Provisions for the Narcotics and Psychotropic Drug Control Act, etc. and Other Matters for the Prevention of Activities Encouraging Illicit Conducts and Other Activities Involving Controlled Substances Through International Cooperation (Law No. 94 of 1991, as amended). 16 The official name is the Act for Punishment of Organized Crimes, Control of Crime Proceeds and Other Matters (Law No. 136 of 1999, as amended). 17 The official name is the Act for Punishment of Provision of Funds, etc. for Criminal Conducts for the Purpose of Threatening the Public, etc. (Law No. 67 of 2002, as amended). 18 The official name is the Act Concerning Confirmation of Identification of Customers, etc. by Financial Institutions, etc. and Prevention of Unauthorized Use of Deposit Account, etc. (Law No. 32 of 2002, as amended). The prohibition of unauthorized use of deposit account was initially beyond the scope of restrictions at the outset, which was subsequently added and the law name was also modified accordingly. 19 The Act on Identification by Financial Institutions was abolished and replaced with the APTCP, which sets forth more comprehensive and strict rules including those contained in the Act on Identification by Financial 5
The scope of regulations has been progressively enlarged and reinforced through frequent amendments over the past several years 20. b Outline of Obligations under the APTCP The APTCP sets forth certain obligations of financial institutions and other categories of traders 21 entering into a specified range of transactions 22 with customers to ensure that the identity of these customers is adequately verified 23 upon each transaction. They must also keep and maintain records of such verification process and the details of the relevant transaction for seven years 24. Furthermore, the traders becoming aware of any doubt of money laundering behind the funds Institutions. 20 The following are the major examples of added regulations under the APTCP. In March 2008 - Requirement for identification of customers, etc. by traders other than financial institutions. In May 2011 - Reinforced criminal sanctions against unauthorized assignment of bank deposit books. In April 2013 - Additional items to be confirmed for identification of customers; - Supplementary measures to ensure adequate identification procedures; and - Enlarged scope of targeted traders under the identification requirements; In November 2014 - Clarification of methods of identifying suspicious transactions; - Enhanced identification requirements for cross-border correspondent banking; and - Supplementary measures for the traders to ensure compliance with the APTCP. 21 See Article 2, Paragraph 2 of the APTCP. Such categories include traders handling financing lease, credit cards and jewel and precious metals. Service providers in the telecommunication industry, real-estate transaction specialists and legal professionals (lawyers, chartered accountants and tax lawyers) are also included in these categories. The specific regulations applicable to lawyers are set forth in the Rules of Japan Federation of Bar Associations. 22 These transactions are defined in Article 4, Paragraph 1 of the APTCP as the Designated Transactions ( tokutei torihiki in Japanese), which include, most typically, (i) opening of a deposit account; (ii) wire transfer of JPY100,000 or more; and (iii) cash transaction of JPY2 million for financial institutions (in the case of (iii), subject to additional verification of assets and revenues of the parties). 23 See Article 4 of the APTCP. For a natural person, the identification procedures include a request for presentation of his/her original driving license and/or health insurance card and for declaration of his/her profession and purpose of the transaction. For a corporate entity, the confirmation process is comprised of two levels: (i) the corporate register, the corporate seal certificate, the articles of association stating the contents of business and the identity of substantial owner of the corporate entity, for identification of the corporate entity itself; and (ii) the identity of the natural person in charge of the transaction within such corporate entity. For electronic transactions on the website and for temporary foreign visitors in Japan, special rules will apply. 24 See Articles 6 and 7 of the APTCP. Supplementary notification requirements will apply to financial institutions (i.e. reporting of the customer s identity and bank account details to the foreign bank receiving the funds; Article 9 of the APTCP). 6
received from their customers (hereinafter, the suspicious transactions ) must report that effect to the supervising governmental bodies 25. In Japan, this reporting obligation has been proactively performed by the financial institutions over the years 26, which has also revealed and led to prosecution of a wide variety of crimes 27, whether directly relevant to money laundering or not. c Recent Reinforcement of Domestic Regulations Although the APTCP has progressively been amended to reinforce the scope of targeted traders and their substantive obligations as well as the procedures to ensure compliance therewith, the Financial Action Task Force on Money Laundering (hereinafter, the FATF ) remained skeptical about the leniency of Japanese domestic laws and enforcement practices. For instance, the APTCP lacked express statutory rules about customer due diligence, cross-border correspondent banking and programs against money laundering and terrorist financing, which had been expressly prescribed in the FATF recommendations 28. In June 2014, the FATF further announced Japan s insufficient legislative measures against money laundering, thereby urging the Japanese government to tighten the current regulations and enforcement procedures in this area. In response to these international pressures, to note, the most recent amendment of the APTCP 29 provides for the following: i) Method of Screening Suspicious Transactions The criteria of being suspicious being vague and subjective, the National Public Safety 25 See Article 8 of the APTCP. For clarification of the test of suspicious transactions, also see c.i) of this report below. The reports are ultimately transferred and collected by the National Public Safety Commission of Japan, which may, as necessary, communicate the relevant information to foreign security authorities (Article 13 of the APTCP). 26 According to the Annual Report on Prevention of Transfer of Criminal Proceeds in 2014 of the National Police Academy of Japan, Division of Prevention of Transfer of Criminal Proceeds, 377,513 suspicious transactions were reported in 2014 (97.2% of the reports (366,779 transactions) derived from financial institutions). The reported cases have increased by 39%, compared to the year 2009. 27 The number of criminal cases where this report of suspicious transactions served as a clue to clearance in 2014 in Japan was as follows: fraud (828 cases); illegal immigration (74 cases); forgery (27 cases); illegal drugs (27 cases); and money laundering (16 cases) and others. 28 See Recommendations 5, 7 and 15 of the FATF Recommendations, respectively. 29 This amended APTCP was published on November 27, 2014. The new regulations referred to in (i) were enforced on that day; while the rest will come into force on a date separately fixed by the ministerial ordinance (no later than two years after publication). 7
Commission will annually publish, upon analysis and investigation of the trends and actual cases of transfer of criminal proceeds in recent times, the Report on Assessment of Risk of Transfer of Criminal Proceeds 30. The traders under the APTCP rules must refer to this report when evaluating the suspicious nature of the transaction and also follow any other criteria fixed by their supervising governmental agency. ii) Tightened Controls for Cross-Border Correspondent Banking The financial traders under APTCP rules and handling the cross-border correspondent banking 31 (repeated exchange transactions with currency traders located outside the territory of Japan) must also take measures to ensure that such foreign currency traders have and are effectively enforcing adequate internal systems of customer identity confirmation. iii) Compliance Governance Structure The traders under the APTCP rules must establish written guidelines in respect of and further appoint a person responsible for compliance with the procedures for customer identification required under the APTCP. 4. Supplementary OFAC Regulations Extraterritorial Application of the U.S. Law In addition to the aforementioned foreign exchange controls under these Japanese domestic laws, Japanese financial institutions handling the wiring of money to any foreign countries, irrespective of whether they have branch offices in the U.S. or not, must comply with the U.S. law under certain circumstances (particularly if the settlement is made in U.S. dollars). Japanese major banks are particularly sensitive to the extraterritorial application and unintended violation of the applicable U.S. law 32. In 2013, one of the Japanese megabanks was accused by the U.S. authorities for violation of the U.S. sanctions laws and entered into a settlement with the New York State on the grounds of 30 hanzai shueki iten kiken-do chosa sho in Japanese. 31 This type of cross-border corresponding banking contracts will facilitate settlement of funds even if the remitter has no bank account in the country of remittance destination. 32 U.S. laws have been known for extensive extraterritorial application to and rigorous enforcement against non-u.s. corporations in respect of the transactions which do not, on the face of it, involve any U.S.-related parties. Another well-known example of extraterritorial application of the U.S. law is the Foreign Corrupt Practices Act 1977. Japanese corporations have been keen to this issue recently. UIA held two seminars in Tokyo, Japan about this issue consecutively in July 2014 and July 2015 (more broadly, about how to deal with companies in crisis). 8
deletion of wire transfer information relating to the remittance to Iran and other sanctioned countries 33. a Outline of the Basis for Regulations The Foreign Asset Control Regulations of the U.S. provides that the President has the power to designate and publish the list of states, natural persons and corporate entities as threatening national security (the Specially Designated Nationals and blocked persons ; abbreviated as the SDN List ) and to freeze their assets in the U.S. territory. U.S. citizens and residents are under the obligation to freeze their assets, and non-compliance with these regulations will be subject to hefty sanctions. These regulations are enforced by the Office of Foreign Asset Control, which administers the Economic and Trade Sanctions Program (hereinafter, the OFAC Regulations ). Non-U.S. financial institutions (i.e. Japanese banks) with U.S. branches must also comply with the OFAC Regulations. The OFAC Regulations do not squarely apply to Japanese local banks without U.S. branches; however, when the remittance takes place in U.S. dollars, the funds would unavoidably pass through U.S. financial institutions under the OFAC Regulations. Consequently, such Japanese local banks would be required to make sure that none of the parties involved in the transaction appears in the SDN List 34. b Scope of Remittance Unaccepted by Japanese Banks To ensure compliance with the OFAC Regulations, the following is the list of unacceptable remittance instructions set forth by one of the megabanks in Japan 35. These restrictions apply to 33 The Japanese bank was charged and agreed to pay USD250 million to New York Department of Financial Services for alleged deletion of information pertaining to the 28,000 remittances of USD100 billion (in USD) in aggregate from 2002 to 2007 on the wire transfer used by the U.S. authorities for monitoring the transfer of funds to sanctioned countries. The ground for sanctions consisted, strictly speaking, not in violation of laws against remittance to sanctioned countries themselves but in the bank s non-compliance with the New York banking laws for record-keeping. In 2014, the same bank subsequently agreed to pay USD315 million for misleading U.S. regulators about transactions to such sanctioned countries as Iran, Sudan and Myanmar (Source: Reuters News of June 20, 2013; and The Japan Times News of November 19, 2004). The bank also agreed to one-year compliance monitoring. 34 Unexpected freezing of the funds of customers by the intermediary U.S. bank would risk such Japanese local bank being liable for the customer. 35 This list was published as of January 2015, which is subject to changes. 9
all the transactions involving U.S. financial institutions 36, U.S. citizens and corporations and U.S. residents as well as settlements in U.S. dollars. i) Cases where either (a) the domicile of the parties 37 ; or (b) the relevant countries or regions 38, etc. of the transaction includes Iran, the Republic of Sudan, the Republic of Cuba, the DPRK, Syria, Crimea, or the Republic of the Union of Myanmar (hereinafter, Myanmar ) 39 ; or ii) Cases where the terrorists, the traffickers of drug or mass-destruction weapons or the multinational criminal organizations designated as such by the U.S. government are involved. c Conservative Approach Taken by Japanese Financial Institutions In practice, Japanese financial institutions tend to be very conservative and prudent when identifying the parties involved in the transaction with reference to the SDN List, meaning that they will generally interpret the SDN List more broadly, mainly for the following reasons. i) Frequent Amendments of the SDN List Due to the frequent amendments of the SDN List, Japanese financial institutions, especially local banks unfamiliar with cross-border transactions, may have difficulty identifying the up-to-date SDN List. ii) Potentially Disguised Identity of the SDN (Difficulty of Identification) The persons appearing on the SDN List would highly likely disguise their identity by using fake names or acting through third parties. Therefore, Japanese banks would have, at least potentially, another practical difficulty in identifying the real parties involved behind the transactions. 36 U.S. branches of Non-U.S. financial institutions and non-u.s. branches of U.S. financial institutions are also included. 37 The parties here will encompass the remitter, the recipient, the importer, the exporter, the consignee, the bank handling the relevant transaction, the vessel company, the airline or the vessel or aircraft used for transportation. 38 The countries and regions here will encompass the country of origin, shipment, landing or ship registry. 39 The restrictions on Myanmar are limited to the transactions involving the Defense Department or armed forces or organizations of Myanmar. 10
iii) Difficulty of Withdrawal of Remittance in Case of Ex-Post Revelation of Violation Should the transferred funds be frozen under the OFAC Regulations, whether the alleged violation thereof was intentional or inadvertent, such funds will not be refunded to the remitter unless the OFAC determines, based upon the proof provided by the remitter, that the relevant transaction does not fall under any of the prohibitions under the OFAC Regulations, which practically requires onerous and time-consuming process. The Japanese banks are very reluctant to get involved in such process, which would certainly lead to disputes with customers. Whenever doubtful, Japanese financial institutions would make supplementary enquiries and requests for submission of identification documents which they consider to satisfy their identification requirements, failing which the relevant remittance instruction could ultimately be refused 40. CONCLUSION Japan s foreign exchange controls with a view to protecting trade and national economy have been almost repealed and thus all international money transfer is generally free; however, new laws and regulations which derive from cross-border security concerns, accelerated by the international pressures, have been strengthened over the past two decades. The applicable laws and regulations must be considered in two levels: both national and extraterritorial; and the effects of the latter are, needless to say, less predictable for Japanese traders. Whilst their risk awareness has been catching up with the global standards by virtue of such new regulations, Japanese financial institutions have been knee-jerk about white and thus non-restricted transactions simply involving certain sensitive destinations (associated with somewhat negative image), partially due to their bureaucracy and tendency to retreat to safe ground. Consequently, money transfers from Japan to foreign countries for normal and (at least statutorily) permitted transactions have been occasionally delayed or inhibited. How should we, when proceeding with the cross-border transfer of funds, reconcile the opposing needs, for prevention of abetting or veiling criminal activities in accordance with the global standards and at once for lifting unpredictable or ungrounded hindrance of money transfers deriving from legitimate cross-border transactions in favor of foreign investors? This appears 40 The author of this report has assisted a client, as an attorney, wishing to wire funds to a legitimate recipient in one of the sensitive countries in convincing the bank that such wiring neither falls under any prohibited transactions under the OFAC nor Japanese domestic laws or regulations. 11
to be a question in common with airport security. Financial institutions as well as governmental agencies should be all the more knowledgeable about the real problems behind the regulations as well as more effective screening methods, at the level both of legislation and enforcement practices. -END- 12