Further to our November 2017, December 2017 and March 2018 updates and the launch of the self-regulatory body by 16 FSA-registered cryptocurrency exchanges ('The Japan Virtual Currency Exchange Association'), increasing pressure and tighter rules are being applied to cryptocurrency exchanges by the Japanese Financial Services Agency (the "FSA").
At the end of April 2018, the FSA issued another 'administrative punishment order' to a Tokyo-based cryptocurrency exchange, Minnano Bitcoin (in this case, a business improvement order). This resulted from an on-site inspection by the FSA prompted by Minnano Bitcoin's own risk management report filed with the FSA. The FSA found issues with the exchange’s “compliance with laws and regulations and proper operation of the business", in particular it was concerned that Minnano was “not performing appropriate verification at the internal audit” stage. Minnano Bitcoin was required to comply with the order and submit a further written report by 14 May.
The FSA is also pushing cryptocurrency exchanges to de-list/drop anonymous 'Altcoins' (in particular, Monero (XMR), Zcash (ZEC), and Dash (DASH)), which are thought to be favoured by criminals due to their difficulty to trace. For example, it is very difficult, if not impossible, to identify the recipients of cryptocurrencies such as Monero via a blockchain or any other public ledger. This anonymity is thought to make the coins ideal for money laundering and other criminal activity. At an FSA-led working group meeting of experts on virtual currency on 10 April, Moero and Dash were identified as highly problematic and the group suggested that any exchanges dealing with those currencies should not be allowed to gain FSA-registered status.
Falsification of data scandals
Continuing a common theme from our previous updates, more Japanese companies have been found to be falsifying data and financial statements.
As reported in our April update, the FSA launched an investigation of Suruga Bank Ltd. The FSA investigation results revealed that 11 branches of Suruga Bank made loans based on falsified data. Suruga Bank's own internal investigations also concluded that more than 10 members of staff were aware of the fraudulent practice. Lawyers of the victims of the fraud have announced an intention to bring criminal actions (in addition to civil actions) against Suruga Bank. It is believed that the FSA is likely to impose an administrative sanction on Suruga Bank. On 15 May, Suruga Bank's president apologised at a news conference to those affected by the fraudulent loans and admitted that documents were falsified, and also to other improprieties in the “share house” project. However, he did not provide further details as to who gave the orders for employees to do so.
Similarly, 17 cases of falsification of loan documentation receipts submitted to guarantee agencies have been uncovered during an internal audit of Michinoku Bank. Michinoku Bank has previously received 3 administrative sanctions, but this latest revelation indicates that efforts to strengthen internal controls are not sufficiently effective. Michinoku Bank has reportedly taken disciplinary action against 7 employees, including the section chief, but no criminal charges have been brought.
The results of the investigations into carmaker Subaru's falsification of data were submitted to the Ministry of Land, Infrastructure Transport and Tourism ("MLIT") on 27 April 2018. The report revealed that data was systematically manipulated at the direction of the supervisors of the inspectors, confirming that the fraud was committed at an organizational level and revealing problems deep-rooted in the company's corporate culture. The report highlighted how Subaru employees re-wrote fuel economy and emissions data for over 900 vehicles since 2012. Subaru's headquarters were subsequently dawn-raided by the MLIT on 16 May.
Update on Japan's new plea bargaining system
Further to our update in March, prosecutors and companies are gearing up to the launch of the new plea bargaining system on 1 June 2018. Under the new system, suspects and defendants will be rewarded with leniency if they cooperate by providing information/evidence in resolving another person’s crimes or give depositions against partners in crime. The prosecutor’s office has suggested that the first plea bargaining cases in Japan will likely involve economic crimes, such as bribery, embezzlement or accounting fraud. However at a news conference held on 26 April with the chief justice of the Supreme Court, concerns were raised about how judges can accurately determine the trustworthiness of the suspect’s information used in another person’s trial. Another problem with the new system is how a reduction in a suspect’s sentence will be calculated in relation to the information/assistance they have provided. It therefore remains to be seen precisely how this system will work in practice.
FSA overseas remittance survey at regional banks
The FSA has announced plans to conduct overseas remittance checks and introduce reporting requirements at regional banks in Japan, in order to reinforce and strengthen its monitoring on anti-money laundering measures. Regional banks have been identified as having insufficient systems and checks in place. The Financial Action Task Force ("FATF"), a Paris-based intergovernmental body set up to fight illegal financial transactions and terrorist financing, has previously highlighted that Japan’s measures against money laundering are insufficient and do not meet internationally recognised standards. The FATF is due to review Japan's anti-money laundering measures in 2019 and this announcement by the FSA is likely to be an attempt to address certain aspects of FATF's criticisms in advance of this review.