Japan's Anti-Money Laundering Rules: What Responsibilities Do Lawyers Have as Gatekeepers?

Japanese Attorney at Law - Bengoshi L.L.

• 6 min read

Money laundering, the process of disguising the illicit origins of criminal proceeds, poses a significant threat to the integrity of global financial systems and facilitates further criminal activity. Internationally, there has been a concerted effort to combat money laundering (ML) and terrorist financing (TF), with lawyers increasingly recognized as "gatekeepers" who are strategically positioned to prevent or detect such illicit activities. In Japan, while lawyers (bengoshi) are integral to this effort, their anti-money laundering (AML) responsibilities are structured in a unique way that seeks to balance international expectations with the foundational principle of lawyer-client confidentiality.

The Global Context: FATF and the Gatekeeper Role

The Financial Action Task Force (FATF), an inter-governmental body, sets international standards and promotes the effective implementation of legal, regulatory, and operational measures for combating ML/TF. FATF recommendations identify lawyers, accountants, and other "Designated Non-Financial Businesses and Professions" (DNFBPs) as crucial gatekeepers. Key FATF recommendations for these professionals typically include:

  1. Customer Due Diligence (CDD): Identifying and verifying the identity of clients.
  2. Record Keeping: Maintaining records of transactions and CDD information.
  3. Suspicious Transaction Reporting (STR): Reporting suspicious transactions to relevant authorities.
  4. Internal Controls: Implementing AML policies, procedures, and training within their practices.

The "gatekeeper" concept rests on the premise that these professionals, in the ordinary course of their business, may encounter transactions or client activities that could be linked to ML/TF.

Japan's Legislative Framework and the "Gatekeeper Problem"

Japan's primary AML legislation is the Act on Prevention of Transfer of Criminal Proceeds (犯罪による収益の移転防止に関する法律, Hanzai Shūeki Iten Bōshi Hō, commonly abbreviated as Hanshūhō). This Act aims to implement FATF standards. However, a critical issue arose during its legislative process concerning lawyers: the potential conflict between a mandatory STR obligation and the lawyer's deeply entrenched duty of confidentiality (shuhi-gimu, 守秘義務), as stipulated in Article 23 of the Lawyers Act (弁護士法) and Article 23 of the Basic Rules of Professional Conduct for Lawyers.

The Japan Federation of Bar Associations (JFBA) strongly argued that compelling lawyers to report suspicious client activities to authorities would fundamentally undermine the trust essential for the lawyer-client relationship. If clients feared their lawyers might become informants, they would be less likely to seek candid legal advice, potentially hindering rather than helping overall legal compliance.

Reflecting these concerns, the Hanshūhō, as enacted in 2007, adopted a distinctive approach for lawyers. While it acknowledges the need for lawyers to participate in AML efforts, it does not impose a general suspicious transaction reporting (STR) obligation on them. Instead, Article 12, Paragraph 1 of the Hanshūhō provides that specific AML measures for lawyers, such as CDD and record-keeping, are to be detailed in the rules established by the JFBA.

This decision represents Japan's attempt to reconcile the gatekeeper role with the paramount importance of lawyer-client confidentiality, a cornerstone of legal practice.

The JFBA's AML Regulations: A Unique Approach

In response to the Hanshūhō, the JFBA established the Regulations Concerning Verification of Client Identity and Record Keeping, etc. (依頼者の本人特定事項の確認及び記録保存等に関する規程 – "AML Regulations"). These regulations outline the specific AML duties for Japanese lawyers, focusing on preventative measures.

1. Customer Due Diligence (CDD) / Know Your Customer (KYC):
Japanese lawyers are required to conduct CDD when undertaking certain types of legal work, known as "Specified Transactions" (tokutei torihiki, 特定取引). These include, but are not limited to:

  • Acting as an agent or intermediary in the purchase or sale of real estate or business entities.
  • Managing client assets, including bank accounts or other financial assets (above a certain monetary threshold).
  • Creating or managing companies, trusts, or similar legal arrangements.
  • Preparation or execution for a client of certain financial or real property transactions.
    The CDD process involves verifying the identity of the client (individual or corporate) using official documents and, in the case of corporate clients, identifying beneficial owners under certain conditions. Lawyers must also understand the purpose of the engagement and the nature of the client's business.

2. Record Keeping:
Lawyers must create and maintain records of the CDD performed and of the specified transactions undertaken for a prescribed period (typically five years after the conclusion of the transaction or relationship).

3. Internal Controls and Training:
Law firms are encouraged to establish internal policies, procedures, and training programs to ensure compliance with these AML regulations.

4. The "Persuade and Withdraw" System (No STRs):
This is the most distinctive feature of Japan's AML regime for lawyers, designed to prevent ML without mandating STRs:

  • Careful Examination of Engagement Purpose (AML Regulations, Art. 6): Upon receiving a request for legal services, lawyers must carefully examine the client's attributes, the nature of the requested services, and other circumstances to assess whether the purpose of the engagement might involve the transfer of criminal proceeds.
  • Prohibition on Accepting ML-Tainted Engagements (AML Regulations, Art. 6(2)): If, as a result of this examination, the lawyer concludes that the client's purpose is indeed the transfer of criminal proceeds, they must not accept the engagement.
  • Post-Engagement Discovery of ML Purpose (AML Regulations, Art. 7): If a lawyer discovers after accepting an engagement that the client's purpose involves the transfer of criminal proceeds:
    • They must first explain to the client that such a purpose is illegal.
    • They must then endeavor to persuade the client to abandon the illicit purpose and not proceed with it.
    • If the client does not heed this persuasion and persists with the illicit objective, the lawyer must withdraw from the representation.

This "persuade and withdraw" mechanism places the onus on the lawyer to actively prevent their services from being used for ML, using their advisory role and, if necessary, terminating the relationship, rather than acting as a direct informant to state authorities.

Ethical Prohibitions Beyond Specific AML Rules

Independent of the JFBA's AML Regulations, a lawyer's general ethical duties also prohibit involvement in money laundering. Article 14 of the Basic Rules of Professional Conduct states: "Lawyers must not encourage or utilize fraudulent transactions, violence, or other illegal or improper acts." Knowingly assisting a client in laundering money would be a clear violation of this rule and could lead to severe disciplinary sanctions, including disbarment, as well as potential criminal liability under laws such as the Act on Punishment of Organized Crimes and Control of Crime Proceeds. Even inadvertent involvement due to gross negligence could be deemed "conduct unbecoming a lawyer" (Lawyers Act, Art. 56(1)).

The Dilemma of Handling Already-Received Suspected Funds

A particularly challenging scenario arises if a lawyer has already received funds from a client (e.g., as a retainer or for a transaction) and subsequently develops a strong suspicion that these funds are criminal proceeds. The "persuade and withdraw" model addresses future actions, but what about funds already held?

  • Returning the funds to the client or a third party at the client's direction could, in some circumstances, expose the lawyer to accusations of aiding in the laundering or concealment of criminal proceeds (e.g., under Article 10 of the Organized Crime Punishment Law).
  • Refusing to return the funds could lead to civil claims from the client for unjust enrichment or breach of mandate, as well as disciplinary complaints.

This difficult situation underscores the critical importance of robust upfront CDD and diligent examination of the purpose of the engagement before accepting funds or undertaking specified transactions, as mandated by Article 6 of the AML Regulations. Prevention is key.

Implications for Businesses, Especially in Cross-Border Contexts

For businesses, particularly those involved in cross-border transactions or operations, these Japanese AML rules for lawyers have several implications:

  1. Expect CDD Procedures: When engaging Japanese lawyers for transactions covered by the AML Regulations (e.g., significant M&A, real estate deals, establishment of Japanese entities, management of substantial assets), businesses should be prepared to provide necessary identity verification documents for themselves and potentially for their beneficial owners.
  2. Understanding the Lawyer's Scrutiny: Be aware that Japanese counsel has an affirmative duty to carefully consider the purpose of the engagement. They may ask detailed questions to understand the transaction's nature and legitimacy.
  3. No STRs, but Potential for Withdrawal: While Japanese lawyers generally do not file STRs, if they develop a conviction that the engagement's purpose is illicit and cannot persuade the client to desist, they are ethically and regulatorily bound to withdraw. This could impact ongoing matters.
  4. Confidentiality Maintained (vis-à-vis STRs): The absence of a general STR obligation for lawyers means that sensitive information shared with Japanese counsel for legitimate legal advice is less likely to be proactively reported to authorities by the lawyer due to mere suspicion, compared to jurisdictions with mandatory STRs for lawyers. However, this does not preclude authorities from seeking information through other legal channels if wrongdoing is suspected independently.

Conclusion

Japan's AML regime for lawyers represents a considered attempt to fulfill international gatekeeper expectations while fiercely protecting the traditional professional value of lawyer-client confidentiality. Instead of mandating suspicious transaction reports, the system places a strong emphasis on preventative measures: rigorous customer due diligence for specified transactions and a unique "persuade and withdraw" obligation if a lawyer determines an engagement is intended to facilitate the transfer of criminal proceeds.

For businesses, this means being prepared for thorough identity verification when engaging counsel for certain types of work and understanding that their Japanese lawyers have a proactive duty to scrutinize the purpose of the representation. While this approach aims to preserve the sanctity of confidential legal consultations, it also underscores the lawyer's role in refusing to be an unwitting or witting instrument in illicit financial activities, ultimately contributing to the integrity of the legal and financial systems.