In this guidance column series for financial instrument business operators (FIBOs), Japan Asset Management Platform Group (JAMP) advises how to identify the “substantial owner” described in Article 4, Paragraph 4 of the Act on Prevention of Transfer of Criminal Proceeds (APTCP) and Article 11 of the Ordinance for Enforcement of APTCP.
Five years ago, Japan amended its Act on Prevention of Transfer of Criminal Proceeds to strengthen protections against money laundering. This summer, the Financial Action Task Force (FATF), an international agency which fights money laundering and terrorist financing, judged Japan’s safeguards a failure. As reported by Nikkei on July 3, 2021, “Japan failed to meet international anti-money laundering standards, exposing the limits of a vertically divided administration.” In the same way they hindered Japan’s efforts to combat coronavirus, institutional barriers impeding communication and cooperation among government agencies also weakened the nation’s efforts to combat money laundering. In response to FATF’s evaluation, the government has announced an inter-ministerial team to address deficiencies in Japan’s anti-money laundering measures.
Supervisory authorities are expected to strengthen their guidance on anti-money laundering measures soon. Meanwhile, to help FIBOs and others avoid running afoul of regulations, we turn to Japan Investment Advisers Association (JIAA)’s "Cases of violations of laws and regulations reported to JIAA, in which a violation of laws and regulations occurred due to inappropriate confirmation of the beneficial owner at the time of opening a corporate account.”
On October 1, 2016, APTCP, Japan’s money laundering statute, was revised to identify natural persons who fall under the category of a “substantial person” in control of a legal entity and to declare the particulars of such persons. In confirming a substantial owner, one must fully understand the definition. A natural person who holds more than 25% of the voting rights (shares, etc.) of a corporation, directly or indirectly, and is in a position to have a controlling influence on the business activities of the corporation falls under the category of a substantial person in control.
What does it mean that a substantial person in control directly or indirectly owns more than 25% of the voting rights of a corporation?
|Case 1.||30% of the voting rights of Company A is held by Company B. Mr. C, who holds more than 50% of the voting rights of Company B, indirectly controls 30% of the voting rights of Company A through Company B. Mr. C is also the substantial controlling party of Company A.
Only when Mr. C owns more than 50% of the voting rights of Company B does his stake count toward the calculation as indirect ownership. If Mr. C owns less than 50% of the voting rights of Company B, Mr. C is not the substantial owner of Company A.
|Case 2.||10% of the voting rights of Company A is held by Company B. Mr. C holds more than 50% of the voting rights of Company B and 20% of the voting rights of Company A. Mr. C is the substantial person in control of Company A because the sum of the 10% indirectly held through Company B and the 20% directly held of Company A would be 30%.
Only when Mr. C owns more than 50% of the voting rights of Company B is his stake included in the calculation as indirect ownership. If Mr. C owns less than 50% of the voting rights of Company B, Mr. C is not the substantial owner of Company A.
If the definition of "substantial owner" isn’t properly understood, the confirmation required by the revised APTCP could be deficient and in violation of the law. In fact, there have been cases of violations due to inadequate confirmation of the substantial owner at the time of opening a corporate account. For this reason, all relevant departments within a company should have the same understanding of the items required by the revised APTCP to confirm a “substantial person” and take measures to ensure nothing is omitted.
About JAMP: https://www.jamplatform.com/english/