117TH INTERNATIONAL SEMINARPARTICIPANTS’ PAPERS

THE SUSPICIOUS TRANSACTION REPORTING SYSTEM AND
ITS EFFECTIVE USE
Tatsuo Ueda *I. INTRODUCTION
The countermeasures against money
laundering in Japan have just started inrecent years. One of the most importantpillars among them is the Suspicious
Transaction Reporting (STR) system.
However, unfortunately, the STR system
in Japan has not been utilized effectively
yet. In this presentation, the current
situation of the Japanese STR system andalso its effective use will be examined andstudied.
II. SUSPICIOUS TRANSACTIONREPORTING (STR) SYSTEM AND
FINANCIAL INTELLIGENCE UNIT
(FIU)
A. STR System
The Suspicious Transaction Reporting(STR) system is the principle mechanism
to fight against money laundering. It is
designed to use information reported byfinancial institutions for investigations ofmoney laundering and predicate offences,and to prevent crime organizations fromabusing financial services. Its purpose isto get useful financial information
concerning money laundering fromfinancial institutions, to utilize theinformation for actual investigations andto maintain confidence in financial
institutions and the overall financial
system.
Article 54 of the Anti-Organized Crime
Law provides that “any bank or otherfinancial institution ... shall promptly* Narcotics Control Officer, Kanto-Shinetsu Regional
Bureau of Health and Welfare, Japan

report to the Minister in charge ... when it
is deemed that there is a suspicion that theproperty received by such financial
institution ... is crime proceeds.” This
Article is the basis of the Japanese STR
system. In short, this system requests
financial institutions to report suspicious
persons and their financial activities to law
enforcement authorities. The law
enforcement authorities will utilize suchinformation as a clue for their actual
criminal investigation.
Figure. 1 Flow Chart of the STR
SystemFinancial Institutions
Suspicious Transaction
ReportFinancial Intelligence Unit
Useful Information
Law Enforcement Authorities

The STR system is not a system that was
introduced only in Japan. This system isrecommended internationally as theeffective mechanism to prevent and detectmoney laundering.
The 40Recommendations of the Financial Action
Ta s k F o r c e ( FAT F ) , w h i c h i s t h einternational standard for anti-money
laundering measures, states as follows:
Recommendation 14
Financial institutions should pay
special attention to all complex,
unusual large transactions, and all
unusual patterns of transactions,which have no apparent economic orvisible lawful purpose. The
background and purpose of suchtransactions should, as far as possible,

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be examined, the findings establishedin writing, and be available to help
supervisors, auditors and law
enforcement agencies.
Recommendation 15
If financial institutions suspect thatfunds stem from a criminal activity,
they should be required to report
promptly their suspicions to thecompetent authorities.
This concept is based on the actualitythat it is very difficult to chase the money
flow, once it enters the financial system.
Therefore, it is necessary for the law
enforcement authorities to get cooperation(in short, information) from financial
institutions before (or when) illegal money
enters the financial system. Financial
institutions are expected to play a role of afirst barrier against illegal money, as theycan examine such financial transactions
from the viewpoint of their expertise. The
cooperation from financial institutions isessential to detect money laundering. In
this connection, in the case of Japan, there
is no punishment for financial institutions
not submitting STRs. Since judgment byfinancial institutions of whether it issuspicious or not has ambiguity, it is
impossible to impose a punishment onthem.
As Japan is the one of the major financial
centers of the world, the introduction of the
STR system into the Japanese legal system
was strongly recommended by related
international anti-money laundering
forums. As illegal money can cross borders
easily, other countries that had alreadyintroduced strict anti-money laundering
measures, such as the USA and European
countries, had concerns that Japan would
become a safe haven for illegal money.
In 1992, the STR system was first
introduced into Japanese legislation by theenactment of the Anti-Drug Special Law.
However, at first, the introduction of thisnew system created a lot of criticism fromJapanese financial institutions. The pointof these issues was the relationshipbetween bank secrecy and STRs. As it was
obvious that bank secrecy should be
disclosed to related authorities in cases
where a transaction might be related to acertain crime, financial institutions had
resistance to submitting STRs, even after
the enactment of the Law.

Table 1. History of Japanese Countermeasures

412

Year
1992

Name of the Law
Anti-Drug Special Law

2000

Anti-Organized Crime Law

Countermeasures• Predicate offences: only drug crimes• STR system was introduced.
• Predicate offences: almost all organizedcrimes• Comprehensive STR system wasintroduced.
• FIU (JAFIO) was established.

117TH INTERNATIONAL SEMINARPARTICIPANTS’ PAPERS
B. Financial Intelligence Unit (FIU)In February 2000, the Anti-Organized
Crime Law was newly established in Japanand this law introduced a comprehensive
STR system. The scope of predicate offenceof money laundering was expanded toalmost all organized crimes. Based on thelaw, the Japan Financial Intelligence Office(JAFIO) was established in the Financial
Services Agency (FSA) as the Japanese
Financial Intelligence Unit (FIU). Whatis the FIU? The role of the FIU is:(i)to correct STRs from financial
institutions;(ii) to analyze STRs;(iii) to disseminate the results of theanalysis of STRs to law
enforcement authorities.
In other words, the role of the FIU is abridge between financial institutions andlaw enforcement authorities. The first FIU
in the world was the FinCEN (Financial
Crime Enforcement Network) in the USA,established in 1990. At present, more than
50 countries have FIUs; but the ministries
to which the FIUs belong differ among
these countries. In the case of the USA
and France, their FIUs belong to the
Department of Treasury or the Ministry of
Finance. On the other hand, in the case of
the UK, the FIU belongs to the Home
Office. In any case, the FIU is the central
national authority to act in the
aforementioned role, and it does not matter
where it belongs.
The absence of FIUs means that there
are no authorities to analyze STRs. Not
only is the introduction of the STR systeman essential instrument to fight againstmoney laundering but so is theestablishment of FIUs. Therefore, theestablishment of FIUs in Japan has also
been strongly requested by related
international anti-money laundering
forums. FIU is an essential unit in the STR
system. Regarding the STR system and

FIU, the United Nations Convention
against Transnational Organized Crime
requires member countries as follows;
Article 7, Paragraph 1: Each State Party:(a) Shall institute a comprehensive
domestic regulatory andsupervisory regime for banks andnon-bank financial institutions ...
which regime shall emphasize
requirements for customer
identification, record-keeping andthe reporting of suspicioustransactions;(b) ... shall consider the establishmentof a financial intelligence unit toserve as a national center for thecollection, analysis anddissemination of information
regarding potential moneylaundering.
III. CURRENT SITUATION OF THE
STR SYSTEM IN JAPAN
Figure 2 shows the transition of thenumber of STRs. Before 1999, the number
of STRs was very small. As I mentioned
before, the main reason for the small
number of STRs at that time was thereluctance of financial institutions todisclose bank secrecy. The following points
are considered as the reasons for that:(i)Lack of awareness about the STR
system by financial institutions.
(ii) Financial institutions could notjudge whether transactions wererelated to “drug crimes” or not,even when very suspicious.

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Figure. 2 Suspicious Transactions Reporting
8000
7000
7000
6000
5000
4000
3000
2000
1059
1000
0

12

17

6

4

5

9

13

1992

1993

1994

1995

1996

1997

1998

1999

2000

Source: Finandial Services Agency (The data in 2000 is provisional.)
The data shows a drastic increase in thenumber of STRs after the enactment of theAnti-Organized Crime Law in 2000. The
present number of STRs, several thousands
per year, is equal level to the number ofother developed countries. The JAFIO(Japan Financial Intelligence Office) in the
Financial Services Agency receives a large
number of STRs from many financial
institutions. At present, the JAFIO iscomposed of thirteen staff members, someof whom are dispatched from law
enforcement authorities such as the Police,
Public Prosecutor’s Office, and the Customs
and Narcotics Control Office. Others arefrom the Financial Services Agency. People
from the law enforcement authorities
function as experts in criminal
investigation; whereas, those from the
Financial Services Agency have the role offinancial experts.
JAFIO has its own database in which
enormous data on STRs can be stored.
JAFIO also has computer software to
analyze STRs. This software was originallydeveloped by JAFIO; it can automaticallyconnect related transactions with persons.

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JAFIO provides the results of their STRs
analysis to each law enforcement authority
every two weeks, in the form ofelectromagnetic data.
IV. PROBLEMS
Although the number of STRs is quite
large, the number of exposed cases ofmoney laundering in Japan has remained
small. In addition, there are no cases
where the results of analysis by JAFIO
have been used to instigate investigations
by law enforcement authorities. Thismeans that the STR system does notcontribute to law enforcement authorities
investigation nor do the law enforcement
authorities utilize the information obtainedby JAFIO. The following are my personalobservations of each organization.

117TH INTERNATIONAL SEMINARPARTICIPANTS’ PAPERS
Table 2. Number of Exposed Cases of Money Laundering
Year
1992
Number of exposed cases0of money laundering

1993
1

1994
0

1995
2

1996
2

1997
0

1998
2

1999
1

Source: National Police Agency

A. Financial Institutions
As I mentioned before, after theenactment of the Anti-Organized Crime
Law, the predicate offences of money
laundering were expanded to almost allorganized crimes. However, Japanesefinancial institutions may misunderstandthe new Law. They seem to be underpressure to submit STRs, even if there is“little” suspicion. The original idea of the
STR system is that financial institutions
carry out first screening of suspicioustransactions. STR should be submitted to
JAFIO only when “really” suspicious.
According to what I have heard from mycolleagues in JAFIO, the quality of STRs
is still low. Therefore, the rapid increasein the number of STRs submitted fromfinancial institutions does not necessarily
present a good sign.
The Post Offices are also included infinancial institutions under the Law, andthey have a duty to submit STRs. However,until now, there have been only 2 cases of
STRs from Post Offices since 1990. This
extremely small number clearly showstheir negative stance against the STR
system. The Postal Service still has
difficulties concerning the disclosure ofcustomer’s secrecy.
B. JAFIO
The JAFIO in the Financial Services
Agency also has some problems. STRs are
submitted from financial institutions in theform of a paper or document on floppy disc.
If on a floppy disc, JAFIO can easily store
the information in their database.
However, according to what I have heard

from my colleagues in JAFIO, 90% of the
STRs are still submitted in the form of apaper. As the total number of staff in the
JAFIO is only thirteen, the manual storingof such an enormous number of STRs into
their database is a heavy burden for
JAFIO.
The analysis of STRs by JAFIO is also
insufficient. For this reason, JAFIO
analyzes only information contained in the
STRs submitted by financial institutions.
In other words, their present methodologyof analysis is carried out only from the pointof financial aspects.
As I mentioned before, the original
concept behind the JAFIO is as a bridge
between financial institutions and law
enforcement authorities, and JAFIO has
the role of providing high-quality
information about money laundering to law
enforcement authorities. For their mission,
not only financial analysis but also criminal
analysis has to be carried out.
However, JAFIO is not authorized tocarry out their own investigations nor
official inquiries to financial institutions.
During the drafting of the Bill of the AntiOrganized Crime Law, there was a
discussion that such power should be given
to the JAFIO. As a result, JAFIO was not
given such power because it was consideredthat only law enforcement authorities
should carry out such “criminal”
investigations, in compliance with criminal
procedures not administrative procedures.
As JAFIO is itself an administrative
organization, not a law enforcement

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organization, its powers are limited.
It is necessary to analyze STRs to checksuspicious persons against existing
criminal databases. FinCEN in the USA
can access various governmental databases
to analyze STRs. However, JAFIO cannot
access related national or local databases,
such as criminal records, drivers license
records etc. The reason for this is simple.
JAFIO is not a law enforcement
organization. Under such conditions,
JAFIO cannot attach additional
informational value to STRs submitted
from financial institutions. The JAFIO,
with its present power, cannot provide
high-quality information about money
laundering to the law enforcement
authorities. Presently, the JAFIO cannot
attach additional information to theiranalyses, which is limited to correcting
STRs from financial institutions andputting STRs in order.
C. Law Enforcement Authorities
As I mentioned before, JAFIO provides
the results of their analyses of STRs to eachlaw enforcement authority every two
weeks, in the form of electromagnetic data.
In the case of the Narcotics Control
Department (NCD), the results of theiranalysis are stored in NCD’s databaseserver, and every Narcotics Agent canaccess the data through an intranet.
However, access to it still remains at a low
level. In the case of the Police, the National
Police Agency (NPA) receives data from
JAFIO in the first instance, and the NPA
distributes the data to each Prefectural
Police Headquarters.
The biggest problem that law
enforcement authorities have is the lackof interest in the STRs. It seems that manylaw enforcement officers still do not know
about the STR system and the existence of
JAFIO. Though this situation might becompounded by the low-quality of analysis

416

by the JAFIO, law enforcement authorities
should gain more interest in theinformation forwarded by the JAFIO.
As Japanese anti-money laundering
measures have just started, law
enforcement authorities still seem not to
be interested in money laundering, or they
do not still have enough expertise to carryout money laundering investigations.
V. PROPOSALS TO SOLVE THESE
PROBLEMS
The following are my proposals toimprove the present STR system in Japanand the activities of the JAFIO.
A. Financial Institutions
The STRs submitted from financial
institutions are the basis of the STR
system. Therefore, the quality of STRs isvery important. As I mentioned before, thenumber of STRs from financial institutions
might be sufficient, but its quality is still
low. To improve the quality, I propose thefollowing measures.
1. Increase Attention to Money
Laundering Prevention
As the countermeasures against money
laundering in Japan have just started inrecent years, the attention paid by financial
institutions to money laundering detection
or prevention is still inadequate. To
enhance their attention, the authorities
concerned should provide education aboutmoney laundering and its
countermeasures. Seminars for financial
institutions should be improved so thatthey will be able to better understand theirimportant role in money laundering
prevention. Not only financial authorities
but also law enforcement authorities
should be involved in such seminars.

117TH INTERNATIONAL SEMINARPARTICIPANTS’ PAPERS
2. Improve the Quality of STRs
In the seminar, law enforcement
authorities have to provide current
information about money laundering forthem. For example, actual cases of money
laundering, including the modus operandi
of money laundering abusing legal
financial systems, should be introduced inseminars, whereby financial institutions
can better understand their obligations androle in such transactions.
3. Involvement of the Post Office
The Post Office is a major and importantfinancial institution in Japan. Theirinvolvement in countermeasures againstmoney laundering is crucially important.
Like private financial institutions,seminars concerning money laundering fortheir staff are necessary to enhance theirattention to money laundering. In
addition, the Post Office should establish
a central unit for anti-money laundering
activities. Their lack of attention or drive,
due to the nature of the Post Office as anationalized organization, will cause
crucial damage to nationalcountermeasures against money
laundering.
B. JAFIO
The JAFIO is the most importantorganization in the Japanese anti-money
laundering scheme. Their reinforcement
is essential to improve the current situationof money laundering Japan.
1. S t r e n g t h e n i n g o f H u m a n
Resources of the JAFIOThe human resources of the JAFIO
should be reinforced. As the lack ofattention to the issues of money launderingin the Financial Services Agency (FSA)
itself, the position of the JAFIO is lessappreciated. Therefore, sufficient humanresources are not allocated to the JAFIO
within the FSA. However, as money
laundering damages the confidence ofJapanese financial systems, the FSA
should allocate more people to the JAFIO.
In addition, as users of information from
JAFIO, law enforcement authorities should
dispatch more people to JAFIO.
2. Power of Investigation to the
JAFIOPower of investigation is necessary for
JAFIO to effectively carry out theiranalysis. With such, the JAFIO will be able
to get the necessary, complementary
information from financial institutions. In
addition, the JAFIO should be able toobtain information related to crimes, suchas personal criminal records from law
enforcement authorities. Thus, JAFIO
would be able to carry out high-quality
analysis of STRs and provide useful
information to law enforcement authorities
for their investigation. Needless to say, the
JAFIO itself is not a law enforcement body,
but a minimum power of investigation isnecessary to improve the ability of its
analysis.
C. Law Enforcement Authorities
1. Enhance their Attention to Money
LaunderingFirst, like financial institutions, theirattention to money laundering is stillinsufficient. Law enforcement authorities
are required to study money-laundering
investigations and also examine theeffective use of JAFIO information.
Therefore, each law enforcement authority
should more actively conduct educational
programs for their officers, to improve theirexpertise on money laundering.
In addition, the distribution of JAFIO
information to each law enforcement
authority must be improved. Information
should be accessed by or distributed to all
the law enforcement officers. These
measures will contribute to the elevationof anti-money laundering awareness in all
law enforcement officers.

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All law enforcement authorities should
contact JAFIO more actively. Theirrequests or inquiries to JAFIO are expected
to contribute to the close relationshipbetween law enforcement authorities andthe JAFIO. Regular meetings between law
enforcement authorities and the JAFIO
should be held more frequently.
VI. CONCLUSION
In Japan, the countermeasures againstmoney laundering have just started andfruitful outcomes have not yet been seen.
Though it might be too early to judge thepresent STR system, several problems
have already appeared. The STR system
is a key mechanism of thecountermeasures; thus the improvement of
the STR system will boost the nationwide
anti-money laundering movement.

418