Administrative Action Case for a Funds Transfer Service Provider (September 2, 2022)
This article is the English translation of a post published in Japanese on March 3, 2023.
Funds transfer service providers may be subject to administrative actions by the relevant Financial Bureau. Below are recent administrative action cases against funds transfer service providers.
On September 2, 2022, the Kanto Financial Bureau issued a business improvement order to a funds transfer service provider based on the provisions of Article 55 of the Payment Services Act. The contents of the business improvement order are as follows:
Contents of the Business Improvement Order
(1) To take necessary measures for the operation of the business regarding the following items to ensure proper and reliable execution of funds transfer business:
Establishment of management control systems (including the establishment of internal control systems and internal audit systems).
Establishment of compliance systems.
Establishment of external contractor management systems.
Establishment of money laundering and terrorist financing risk management systems.
(2) To submit a business improvement plan (including specific measures and implementation timing) by October 3, 2022, and to commence its implementation immediately after submission.
(3) After the implementation of the above (2), to report the progress and implementation status every three months until the completion of the business improvement plan, with the first submission due by the end of October 2022.
What were the reasons for the administrative action?
Details of the Administrative Action
According to the Kanto Financial Bureau, the results of an on-site inspection by the Financial Services Agency identified significant issues in the management control systems, external contractor management systems, and money laundering/terrorist financing risk management systems as follows:
(1) Management Control Systems The board of directors did not function properly due to insufficient involvement from the management team, and the internal control and internal audit systems were not adequately established. This led to insufficient system establishment necessary for the proper and reliable execution of the funds transfer business, resulting in the identified deficiencies in the systems described in (2) and (3).
(2) External Contractor Management Systems The company outsourced most of its major operations, such as transaction confirmation processes, to its parent company and others. However, the oversight of re-outsourcing and further outsourcing was inadequate, and there was no verification that the contractors were performing the tasks properly and reliably. It became clear that the necessary measures to ensure proper and reliable performance of outsourced tasks as prescribed in Article 50 had not been taken.
(3) Money Laundering/Terrorist Financing Risk Management Systems The company did not sufficiently establish appropriate money laundering and terrorist financing risk management systems in line with its business expansion, leading to violations of the Act on Prevention of Transfer of Criminal Proceeds. Specifically, violations occurred due to unverified transaction purposes and occupations. Additionally, there were deficiencies in the procedures for making judgments on suspicious transactions and inadequate responses required by the guidelines on money laundering and terrorist financing measures.
What impact does this have on funds transfer service providers and businesses wishing to apply for funds transfer business registration?
My clients and I have actually experienced “External Contractor Management Systems.” When a business hoping to apply for funds transfer business registration was planning to outsource most of its operations to its parent company, the Kanto Financial Bureau emphasized questions such as “Can your subsidiary truly instruct and supervise the appropriate business operations of the parent company?” and “How do you guarantee that?” I recall a discussion with an official mentioning that there had been a case of a funds transfer service provider that outsourced most of its operations to a parent company and managed its external contractors improperly. Administrative actions not only supervise existing funds transfer service providers but also affect the review process for applications for funds transfer business registration.
Referencing public information about administrative actions can be beneficial for existing funds transfer service providers and businesses wishing to register for the funds transfer business. Please consider this information as a reference.
Interpreting Administrative Actions Against Funds Transfer Service Providers (March 2023)
This article is the English translation of a post published in Japanese on March 13, 2023.
#Press Release
The Kanto Financial Bureau announced on December 2, 2022, that it had revoked the registration of FSR Holdings Inc. (hereinafter referred to as “the Company”) as a funds transfer service provider. The reason is that the business location of the registered office could not be confirmed.
#Regulatory Explanation
According to Article 56, Paragraph 2 of the Payment Services Act, if the location of a funds transfer service provider’s office or the whereabouts of its representative is unclear, the Prime Minister may revoke its registration. Specifically, if the Prime Minister cannot confirm the location of the funds transfer service provider’s office or the whereabouts of its representative, this fact is to be announced according to the procedures prescribed by a Cabinet Order. If there is no claim from the relevant funds transfer service provider within 30 days from the date of announcement, the Prime Minister can revoke the registration of the funds transfer service provider.
#Expert’s Perspective
The case where the registration of a funds transfer service provider was revoked because the location of the registered office could not be confirmed. Funds transfer service providers have their main office locations registered and made available to the public. From the authorities’ point of view, this regulation is natural. If the location of the registered office cannot be confirmed, it raises doubts about whether the business actually exists. Additionally, it prevents the authorities from conducting necessary inspections (under Article 54 of the Payment Services Act, authorities can inspect the offices and other facilities of funds transfer service providers). Furthermore, without this regulation, some fraudulent funds transfer service providers could obscure the locations of their offices and the whereabouts of their representatives to evade regulation.
Regarding this case, it is doubtful whether the company’s business actually existed. Typically, businesses subject to administrative penalties issue some statements, but none could be confirmed in this case. While a website believed to belong to the company exists, there appears to be no evidence of the business being operated. Moreover, the authorities usually contact the business before imposing an administrative penalty and set a 30-day period for claims after the announcement, yet the issue was not resolved.
The revocation of a funds transfer service provider’s registration is not limited to cases where the location of the office or the whereabouts of the representative is unclear. The registration can also be revoked if the business meets the criteria for registration denial confirmed at the time of registration (Article 40, Paragraph 1 of the Payment Services Act), obtained registration through fraudulent means, operates as a type I funds transfer business without adhering to the approved business implementation plan, or violates the Payment Services Act, orders based on this Act, decisions based on these orders, or conditions attached to the approval. Funds transfer service providers need to maintain a compliance posture and operate their businesses according to legal requirements, not just at the time of registration but continuously thereafter.
