The global compliance environment is undergoing rapid change, and Japan is at the forefront of this evolution. The Financial Services Agency (FSA) has set high expectations for foreign bank branches and securities firms operating in Japan. The FSA’s June 2025 findings provide a blueprint for what “good” looks like in the management of compliance risk, operational risk, and anti-money laundering and counter-financing of terrorism (AML/CFT). For compliance officers, these changes demand sharper oversight, closer collaboration across the three lines of defense, and investment in better technology and data practices.

Compliance Framework Evolution in Foreign Financial Institutions

A robust compliance framework begins with a clear risk assessment methodology. Most foreign institutions in Japan have moved away from siloed approaches, instead favoring integrated assessments that consider both inherent and residual risks. This integration makes compliance not just a back-office function, but a strategic business priority. Increasingly, compliance departments perform their own risk assessments or use tools like Risk and Control Self-Assessment (RCSA), where business lines self-evaluate but are challenged by compliance and risk teams. This dual approach ensures that risks aren’t just identified, but are properly owned and managed by the business.

Risk assessment feeds directly into the formulation of compliance plans, which lay out the monitoring, testing, and training activities for the year ahead. The compliance department is responsible for ensuring that these plans reflect group-wide priorities, local legal requirements, and the results of recent risk assessments. Any incidents, such as potential breaches or control failures, are escalated promptly. Reporting is not a formality—management committees receive regular updates on both activities and incidents, and remediation plans are tracked until fully implemented.

Advancing Operational Risk and Non-Financial Risk Management

Foreign financial institutions in Japan are no longer treating compliance risk as an isolated silo. There’s a marked shift toward viewing compliance, operational risk, and other non-financial risks as a unified field of concern. Several groups have merged compliance risk management with operational risk management, recognizing that failure in one can lead to lapses in another.

This integrated approach has practical implications. Teams are being expanded, and there is increased coordination between compliance, operational risk, and other control functions. Institutions are digitizing non-financial risks, quantifying risk metrics, and unifying the way data is collected and analyzed across business lines. These steps make it easier to spot emerging threats, ensure a consistent response to incidents, and allow management to make more informed decisions.

Technology plays a crucial role. Many institutions are investing in platforms that centralize regulatory obligations for each country in which they operate. These systems are updated automatically as new laws or guidance are published. The process of monitoring regulatory change is thus systematic and ongoing, reducing the risk of missing a critical update.

Strengthening the Three Lines of Defense Model

Japan’s FSA expects institutions to rebalance their three lines of defense model so that business lines (the first line) take more ownership of risk, and compliance or risk teams (the second line) focus on challenging and oversight rather than direct control. Some institutions are shifting traditional second-line responsibilities into the business, such as certain monitoring tasks, while keeping oversight functions squarely in the hands of compliance or risk.

This is not just a structural change, but a cultural one. Risk ownership must live in the business, not just in control functions. To make this work, compliance departments must provide clear guidance, train business line staff, and test effectiveness through ongoing monitoring. Regular challenge sessions—where compliance questions business decisions, product launches, or control changes—are a growing trend.

The aim is not to offload compliance, but to ensure that those closest to the risk are responsible for managing it. Meanwhile, the second line acts as an independent challenger, ensuring that risks are recognized and mitigated at the right level. This rebalancing also frees up compliance teams to focus on thematic reviews, scenario testing, and emerging risks, rather than being bogged down in day-to-day process checks.

Enhancing AML/CFT and Trade Surveillance

Japan’s regulatory scrutiny of AML/CFT controls continues to rise, reflecting broader global trends. Foreign branches have responded by strengthening both their know your customer (KYC) processes and transaction monitoring systems. This is especially important for payment service providers and funds transfer agents, which are seen as higher-risk sectors.

One major trend is the use of automated systems to monitor for transactions that may breach economic sanctions or trigger money laundering red flags. Many branches now have the ability to halt suspicious remittances automatically, pending investigation. These controls are regularly tested and tuned to stay ahead of changing criminal typologies and evolving international sanctions regimes.

Trade surveillance is another area of focus. Foreign banks and securities firms in Japan conduct surveillance using both global and local scenarios, reflecting the dual nature of their risk exposures. Communication monitoring and transaction surveillance go hand in hand, ensuring that both insider trading and market manipulation are detected and addressed.

Product Governance and Customer Protection

Product governance and customer-centric conduct have emerged as major themes for regulators. For complex products like structured bonds, firms are required to run reviews through the compliance department and present them to a new product committee. These processes help ensure that the risks are well understood, that distribution is appropriate for target markets, and that conflicts of interest are managed.

Efforts to prevent conflicts of interest are also evolving. Recent cases of regulatory action have prompted firms to update their frameworks, add new control measures, and review disciplinary cases as learning opportunities.

Regular staff training underpins these efforts. Compliance teams are rolling out targeted training on topics like market abuse, AML/CFT, customer protection, and product governance, often leveraging e-learning modules to ensure consistency across global and local teams.

Reporting, Remediation, and Management Oversight

Transparency and accountability are central themes in the Japanese compliance model. When suspected violations are identified, the compliance department escalates the matter both within the local entity and up to the group level. After causes are identified, a remediation plan is put in place and followed up until all actions are complete.

Management receives regular reports not only on incidents, but on the overall status of compliance activities, emerging risks, and the effectiveness of controls. This information enables boards and management committees to challenge the adequacy of resources, direct additional investment where needed, and fulfill their oversight obligations under Japanese law and global best practices.

The Role of Regulatory Change Management

Keeping up with regulatory change is an ongoing challenge. Leading foreign institutions in Japan are developing dedicated systems for systematically recording and updating legal and regulatory obligations. Automated alerts, workflow tools, and regular reviews of external regulatory sources help ensure nothing falls through the cracks.

Regulatory change management is not just about staying compliant. It is a key enabler of business agility, ensuring that institutions can respond quickly to new products, changing customer needs, and emerging risks without fear of regulatory breach.

Conclusion: Key Takeaways for Compliance Leaders

Japan’s FSA has set a high bar for compliance and operational risk management in foreign bank branches and securities companies. Institutions that succeed are those that invest in integrated compliance frameworks, rebalance risk ownership within the business, and deploy technology to centralize and streamline risk management processes.

Key priorities going forward include:

• Ensuring the compliance framework is dynamic, forward-looking, and tied to business strategy
• Embedding risk ownership and accountability at the business line level
• Investing in robust regulatory change management and data quality improvement
• Strengthening AML/CFT and trade surveillance systems, particularly in high-risk business lines
• Fostering a culture of challenge, transparency, and learning from both successes and failures

By embracing these principles, compliance officers and management can not only meet Japanese regulatory expectations but also drive business value and resilience in an increasingly complex risk environment.

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Related Links

• FSA: Financial Services Agency of Japan – English Homepage
• Japan’s Act on Prevention of Transfer of Criminal Proceeds
• FATF Guidance: National Risk Assessment
• Basel Committee: Principles for Operational Resilience
• International Organization of Securities Commissions (IOSCO) Compliance Resources

Other FinCrime Central Articles About Japan

• Japan’s FSA Exposes Major AML Failures at AEON Bank
• Japan’s Shift to Chip-Based Identity Will Reshape Customer Onboarding
• Japan’s progress in strengthening measures to tackle money laundering and terrorist financing

Source: Financial Services Agency of Japan

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