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Japan FSA banks on AI to bust money laundering

Japan FSA banks on AI to bust money laundering

MONDAY, February 08, 2021
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The Financial Services Agency (FSA) plans to roll out an artificial intelligence system that can detect fraudulent money transfers at financial institutions nationwide as early as fiscal 2021 in an effort to strengthen measures against money laundering, The Yomiuri Shimbun has learned.

The move is aimed at preventing the opening of bank accounts by antisocial forces and thwarting the transaction of funds suspected of being tied to criminal organizations.

The FSA will particularly encourage that the envisaged system is adopted by those regional banks that have outdated money laundering defenses.

The agency has spent several hundred million yen in funding from the New Energy and Industrial Technology Development Organization (NEDO) to develop the system and has been conducting trial runs during fiscal 2020 with NEC Corp., the Japanese Bankers Association and KPMG Azsa LLC.

It will compile a report on the tests in March. Discussions will be held in fiscal 2021 onward on the specifics of the system’s usage fees and operational structure.

In the envisaged system, AI will check financial institutions’ transaction data, monitoring newly opened accounts and money transfers. It will detect unusual transactions, such as repeated transfers to a specific account in a short period of time or sudden withdrawals of large amounts of cash. The system could also flag persons suspected of illegal activity and notify relevant financial institutions.

According to the National Police Agency, a record 440,492 transactions were reported in 2019 on suspicion of being connected to money laundering and other similar crimes, about 1.5 times more than in 2010.

There has been no end to cases of bank accounts being opened with leaked personal information and used for fraud.

Megabanks and other large financial institutions have been stepping up protocols to verify user identification and rushing to create systems that will prevent fraudulent remittances. However, regional and shinkin banks — which tend not to have the same level of resources at their disposal — are thought to have fallen behind the times. Many financial institutions still perform user identification and fraud checks manually.

The FSA aims to reduce the burden on financial institutions by sharing access to its planned system.

Insufficient anti-money laundering measures pose a real liability to banks. In the past, a U.S. subsidiary of Mitsubishi UFJ Financial Group, Inc. was slapped with huge fines and civil penalties by U.S. authorities for inadequate compliance with anti-money laundering laws.

In 2008, the Financial Action Task Force (FATF), a group mainly comprising financial and police authorities from Japan, the United States and Europe, rated Japan’s anti-money laundering measures as the lowest among the seven industrialized nations.

As the FATF began reviewing Japan again in 2019, the introduction of the new AI system is also intended to improve Japan’s credibility on the global stage.